Some of the world’s most powerful governments, financial institutions and high net worth individuals kept an eye on the Hong Kong stock exchange on Friday, October 29 as the once-awesome American International Group (AIG) put its Asian ‘crown jewels’ up for sale to the public - in the region from where the multinational originated more than 90 years ago and towards which the winds of financial power now appear to be shifting.
AIA Group, as it will now be known, emerged at the end of the first day a record 17% up on its initial public offering (IPO) price, having raised a record of US$20.5 billion – the largest ever for an insurance company and the third largest IPO in the world this year. “The IPO is a critical turning point for AIA and we are delighted that it has been so positively received by investors around the world,” beamed Mark Tucker, CEO of AIA, at the listing ceremony declaring independence after a protracted, sometimes ugly battle for credibility if not survival, and reinventing AIA as a potentially unique Asian-based and Asian-focussed financial services player.
The parents seemed pleased as well: AIG was finally returning something to the US (or New York) Federal Reserve Bank in repayment for its US$182 billion bail-out at the apex of the financial crisis just over two years ago; together with the yet-to-be signed US$16.2 billion sale of American Life Insurance Company (Alico), another overseas life insurance operation that is heavily represented by a cash-cow business in Japan – to MetLife, now the leading US insurer – it looks like AIG could pull off its Herculean repayment burden largely on the back of Asia. This may seem like a suitable reflection of the shifting balance of financial power from West to East perhaps, although a glance at the list of investment banks on the payroll for yet another lucrative recapitalization of the financial sector after the collapse – in which they themselves were complicit – might suggest that Wall Street has given up little of its fund-raising power, least of all in Asia.
AIG is only another in a series of post-crisis Western insurers having to sell off Asian assets and often pull out of the region altogether in an attempt to restore their balance sheets at home; rarely has another IPO been possible, but shareholdings in joint ventures in countries from Taiwan and Australia to China and India have been vacated and often filled by hungrier, more innovative foreign insurers or smaller domestic insurance players – and recently by banks in Asia too.
That is why the IPO boom should be followed by a similar bonanza in Asian insurance merger and acquisition activity, believe investment bankers in the region, although the successes are likely to be matched by not infrequent failures at the regulatory level.
In Taiwan, which also has a separate AIG presence outside of the AIA umbrella, Nan Shan Life, Taiwan’s third-rated life insurer, has been embroiled all year in a struggle with the authorities over its US parent’s attempts to sell it off to a consortium comprising Chinese battery maker, China Strategic, and Primus Holdings, a boutique financial holding company led by former Citi head of investment banking, Robert Morse. The authorities in Taiwan detected the hand of mainland China in the bid – a suspicion denied by the consortium, but since made more likely by the presence of China Strategic CEO Raymond Or () in a Chinese group believed to have looked at a straight strategic acquisition of both AIA assets and its rival Prudential.
Regulators were pouring too over the insurance deal in Australia. In November, they finally approved a second bid by AMP, a local financial services group, for AXA Asia Pacific’s insurance assets having previously blocked a bid by National Australian Bank on anti-competition grounds.
Also, foreign insurers are cutting down their shareholdings in joint ventures in India and China (where they feel restricted by limits on their capitalization or geographical reach) in exchange for becoming part of a company that is going somewhere, especially now that Asian insurers, and increasingly banks too, are flexing their muscles and putting into action plans to become regional if not international financial services conglomerates – with the convenient backing of both their regulators and shareholders.
Ironically, AIA finds itself best positioned to play seller or buyer, the local or regional card, now that it has a pan-Asian franchise and presence in 15 separate markets (and a leading role in six of them). Its nearest rival is Prudential of the UK, whose failed attempt to buy the distressed Asian assets of AIG earlier this year opened the door to the second, successful shot at an IPO.
Purest play
“The IPO will establish a new identity, allowing it [AIA] to explore acquisitions with the potential retreat of global insurers,” says Patricia Cheng, vice-president and financial services analyst at CLSA, one of the only houses that commented on the company in the lead up to the IPO. “We expect a turnaround upside, but its biggest rivals are actually local plays and banks.”
Despite the record numbers in the end, however, AIA wasn’t “a screaming buy”, as Cheng had said. It is not the perfect China story super fast growth stock that is Asia for many investors, but it is a bang-on proxy for the broad insurance business across different jurisdictions in the region.
Or put another way, AIA should “focus investor attention on the Asian life insurance sector as the first pan-Asian pure play, [offering] a more diverse range of investment options than single-country exposure”, says Chris Esson, insurance analyst at Credit Suisse. The AIA listing helped lift the sector’s representation on stockmarket indices which in itself widened the net to drag in a whole lot more index-tracking investors. Esson sees insurance in Asia as “a generational growth story”: the continued development of Asia’s tiger economies should underpin solid GDP growth, rising household incomes and deepening capital markets that are expected to support robust growth for Asian life insurers of a bottom-up estimate for the region of 11.5% to 21.6%.
AIA was valued at 1.32 times price to embedded value, while China Life and Ping An Insurance, the world’s largest insurers that are still growing much faster, trade at 2.38 and 2.6 times embedded value estimated for 2010, while the 2010 doyen of the mature Asian markets, Dai-ichi Life Insurance and Samsung Life Insurance, trade at a measly 0.37 times and 1.11 times forecast 2010 embedded value respectively, according to a Merrill Lynch report published in September.
European insurers are valued at an average of 0.8 times embedded value, which puts the wider Asian market in perspective and explains why surviving European and American life insurance companies – along with the more adventurous of the Japanese and Korean insurers – are surveying the insurance landscape in the region to identify those assets that are in play – with the Chinese giants standing behind them with a big bag of cash but a discernible nervousness about putting their own name to an acquisition in what is, after all, a less than wholly understood, rock solid or even stable asset class. Just thinking about what two dozen hot shots in AIG’s financial products division managed to do must make for understandable caution, especially among leaders of state-owned financial institutions.
All in all, though, thus far, the AIA listing was a perfect way to top a string of hugely significant domestically-focussed IPOs launched in Japan, Korea and China within the last year that have seen insurance companies burst out of the shadows of the larger banking system in Asia to become one of the most substantial constituent groups in the current global equity universe.
China leading
The 2005/2006 coming out of China’s financial sector in the historic IPOs from what are now the two world-leaders, China Life and Ping An Insurance, set the stage for the even grander triumphs of its three biggest banks. It was also China that revived the market for the first time since the financial crisis in December 2009, when China Pacific Insurance (Group), China’s third largest life insurer, launched a US$3.1 billion Hong Kong IPO in December 2009 via CICC, Credit Suisse, Goldman Sachs and UBS, and it will be China that provides much of the action going forward.
The Hong Kong listing followed an earlier US$4.1 billion IPO in Shanghai but with those shares gaining 134% last year (compared to the Shanghai Composite Index’s 80% rise) the offshore offering was designed, says one equity capital markets banker, mainly to rope in international insurance heavyweights Allianz of Germany, Europe’s largest insurer, and Japan’s Mitsui Sumitomo, as well as give private equity firm, the Carlyle group, a six times return on a US$800 million investment – if it hadn’t been locked in for another year.
Then the Korean stockmarket reopened for big ticket offerings after a moribund decade: Korea Life, the second-ranked domestic insurer, stormed ahead with a US$1.5 billion deal despite dreadful market conditions in February. Arranged by Credit Suisse, Goldman Sachs and J.P. Morgan, Korea Life was determined to get to market early; it was priced below the indicative level only to be massively oversubscribed in an early sign of the unpredictable nature of the nascent insurance market. Samsung Life Insurance then scorched its way to a record US$4.4 billion IPO in May that had Koreans going insurance crazy as domestic investors swamped the international tranche that Goldman Sachs, J.P. Morgan and Deutsche Bank were arranging.
Taiyang Life, the fourth-ranked player, had listed last year in an experimental move designed at tapping investor demand for sophisticated insurance products – which the introduction of corporate pensions this year was expected to bring in by freeing up the retained savings of Korean firms – ahead of the big boys. Third-rated Kyobo Life is due to tap the market too within a few months, which means the bulk of the sector will have gone public within one year, creating a national insurance sector asset class out of almost nothing. “We expect that the recent listing of life insurers will enhance capitalization and financial flexibility,” says Eunice Tan at Standard & Poor’s in Singapore. “We expect the public listing to propel the sector’s growth as well.”
And it won’t end there: foreign companies, not least AIA, according to CEO Tucker, have vowed to add to the competition, while smaller insurers are beginning to pile on the pressure as the listed firms look to use their funding in overseas expansion, including acquisitions, in a demonstration of the value-added competition that is driving insurers across the region.
That was why Dai-ichi Mutual Life Insurance stirred Japan Inc out of the doldrums in April with a US$11.1 billion-equivalent fundraising that – apart from being the largest equity offering in the world since Visa Inc’s US$19.7 billion IPO two years earlier – was the country’s largest for more than a decade, even accounting for the sum total of IPOs over the last five years.
Dai-ichi Life Insurance, as it is now called, is shifting to a holding-company structure that will employ international accounting standards, and it is targeting China, where it has set up offices in Beijing and Shanghai and hopes to start selling insurance by 2012. Its first step was the de-mutualization and listing that persuaded hordes of new account holders to invest in a tired, old cradle-to-grave household name trying to reinvent itself as fast-growth Asian hot stock. But it was not long before disillusionment set in, as the stock fell 25% in three months stirring up shareholder activists demanding a more aggressive foreign business strategy. The Japanese are not lacking resources and have started acquiring assets in Southeast Asia, India and even China.
Untapped demand
“A fair number of multinationals and Asian insurers, particularly from Japan, do view the Asian emerging economies as a major market for them to develop and further grow their business,” says PricewaterhouseCoopers’ partner Sridharan Nair. “Asia is an attractive market for insurers in view of the relatively under-insured population.” Life insurance penetration across Asia was 4.4% in 2009, according to a Sigma Swiss Re report. Most analysts see 10% to 15% growth for life insurers in Asia; while China and India are looking at a compound growth rate of over 20% in the next few years. “Asian banks too are increasingly looking to buy insurers as a way to further their market share and spur business growth,” says Nair. “This is partly due to the greater appetite of insurers for M&A activities, since on balance the insurance sector has come out of the financial crisis better than the banking sector.”
“The Japanese and Korean deals highlight both the huge untapped demand for Asian insurance stocks and the lack of alternative investment vehicles, especially when the authorities clamp down on property speculation,” says a head of equity capital markets at an international investment bank in Hong Kong. “Both were dominated by domestic buyers and the largest equity offerings within their countries for more than a decade. But they also show the unpredictable nature of valuing Asia’s largely unknown insurance sector as an asset class.”
South Korea, in particular, is proving difficult to gauge the correct price for an insurance stock – for investment banks, analysts and investors. Korea Life, for example, had to price at 8,200 won (US$7.24) – below an indicative range floor of 9,000 won suggested to Koreans but at the level demanded by foreign investors. Here was early proof of the difficulty that everybody was having in coming to grips with an insurance company in terms of equity valuation.
So too when Samsung Life shares soared 9% on the first day despite the downward trend in the local stockmarket, but soon slipped below the initial price as part of an overall plunge in the local stockmarket and an overseas bond market sell off. Thousands of new converts to shareholding had become fed up with the low but stable price of their investment and were joining media campaigns attacking the company and demanding that they boost earnings by investing in developing countries’ insurance prospects. Such is the cycle of the search for growth – as taken to its colossal and absurd global conclusion by Prudential in its bid to treble growth in AIA operations in Asia by charging high margins, cutting labour cost and all the other cutting edge management drives – that governments don’t readily welcome it.
The issues seen in the last 12 months from Japan, Korea and China make up big figures even for the global equity markets; for the fledgling market of listed Asian insurers the world of the investor had been turned on its head. And there’s still India to come. The Indian market is dominated by Life Insurance Corp of India, the state-owned life insurer, which up until the last decade was the only insurance company permitted in India’s heavily regulated and closed financial sector. But a growing private sector is on the verge of publicly listing equity for the first time – pending an increase in foreign investment limits from 26% to 49% which should spark considerable consolidation and drive for capital replenishment among insurers.
Among the top private players that are bidding to become the first Indian insurance to list is HDFC Standard Life – or rather HDFC. The joint venture between mortgage lender HDFC and Standard Life was rebranded in November without the presence of the 184 year old British firm in its title. Despite that, the plan is for Standard Life to increase its stake to 49% when it is allowed to.
Most insurance companies are either making losses or have slowed down expansions in the absence of funds so they can at least report profits, say investment bankers. The reason for this seeming paradox is that insurance companies are like young tigers that need red meat to grow into fine animals – that is the analogy of Gerry Grimstone chairman of Standard Life, who was in India to see his company’s name taken out of the joint venture. “Any new insurance company requires capital,” he says. “Our company is now very close to the tipping point where it no longer requires capital from its promoters for its existing business models.” HDFC Standard Life Insurance, in the three months up to the end of September, lost 645 million rupees (US$14.1 million) compared to 414 million rupees a year earlier.
“The enabling bill is in parliament and expected to pass by year end,” says Deepakh Parekh, chairman of HDFC at the rebranding. “The entire insurance industry is waiting for that to happen.” Reliance Life has been talking to foreign players about buying a 10% to 15% and then listing the remaining 10% portion, according to statements made to Indian media by directors. Swiss Re was reported to be interested. Prudential-ICICI , the leading player, is another IPO contender.
China provides a perfect contrast in the shape but not the substance of Standard Life’s joint venture strategy. It is about to become one of the few foreign insurers to own a stake in a domestic Chinese insurance company, but that involves giving up half its stake in a joint venture Heng An Standard Life (HASL) that it has operated with state-owned investment agency Teda International in Tianjin for the last seven years.
Selling your shares in exchange for a smaller role in a larger company might sound like a sad retreat from the US$100 billion-plus market. But maybe it is more an acceptance of realities. If Standard Life’s joint venture with Bank of China comes off, HASL will no longer be restricted in the business it can write and it acquires a massive distribution network across China – just like that.
The plan is for Bank of China to acquire 50% of HASL, buying 25% stakes from both parties. Chief executive officer, David Nish, who took over the Edinburgh-based pensions and insurance giant in January after it revealed it was close to a deal, was part of the biggest UK government delegation to pay tribute in Beijing in November led by David Cameron, the UK Prime Minister, with several other Cabinet ministers and corporate bigwigs.
Mother of all insurers
China will unleash more of its insurance companies in the next year. Next up will be Taikang Life, in which Goldman Sachs is set to buy Axa’s holding, and China Reinsurance Group, with both valued at around US$7 billion; after them several dynamic expanding smaller firms are hoping to persuade the regulator to approve their bids for going public.
They had better get a move on it, because the ultimate prize or challenge – for the government at least – is around the corner. China has set in motion plans to complete the first stage of the corporatization and recapitalization of its own insurance sector by approving the listing of the People’s Insurance Company of China (PICC), its largest non-life insurer and parent of China Life and many others – having been established as the vehicle for the nationalization of the insurance sector in 1949 which involved confiscating foreign assets, which included those of AIG in China (with whom it went on to have a more positive relationship following the opening up of China in the 1980s). A listing will help PICC to support the rapid expansion of its subsidiaries, (it is fast expanding another life company, having given up China Life in the 1990s), while maintaining a solvency ratio that will satisfy the regulator’s minimum requirement of above 100%.
Solvency will be a crucial stipulation for an insurer in getting approval to secure the IPO funding it probably requires if it is to move to the next stage of its rapid growth. The smaller insurance companies have been taking market share off the market leaders that had all the advantages handed them by the government when it sought to kick-start the industry in the1990s, but the danger for those dynamic middle-tier players is that they need to keep growing at that pace to retain the support of investors, distribution partners and the strict and pro-active regulator, China Insurance Regulatory Commission, that governs the market primarily with a mind to its long term development. China offers investors extra rewards and challenges to other markets in Asia and further diversification for an asset class that may be too young and historically unproven to have been clearly defined.
“It’s a great equity story, but those looking at the credit side are a little concerned,” says Sally Yim, vice-president at Moody’s Investors Service in Hong Kong. “Some of the Chinese insurance companies that want to list are growing so fast, but they are financing all that required growth by issuing large amounts of subordinated debt, which means they have to keep growing even faster to pay it all back.”
Investment banks in Asia are perceptibly inexperienced in advising the insurance industry. “It is staggering if you consider how few listed insurers there were in the region a year ago,” says one bank analyst, who cannot even talk to the media about the insurance sector because her bank was working on the AIA IPO, and like many has had it added to her work remit. “To be honest, it has been quite hard work for everybody getting up to speed on an entire new financial sector that used to be hidden within the banks in our coverage. That’s what has made them so hard to value, especially finding comparables across borders, and having to factor in aspects like their role in the nation’s consciousness, and the regulator’s view of them in the general scheme of things.”
And many investors, especially in the domestic markets – perhaps like new customers – see insurance pretty well entirely as exposure to rising middle-class incomes in the region and with few other attractive investment options available (especially in China) they are classifying insurance stocks in the broader retail asset class, say analysts. That is partly why the high street banks are so keen to rope in insurers the same they would auto manufacturers and the like, for something to pack into the wealth management products they offer, as a form of hire purchase. It is also why the foreign insurers have been so slow to catch on to the guanxi-led approach to referral business in China.
With regulators clamping down on solvency protection and non-core assets in financial holding companies, they are encouraging some insurers to sell and others to raise capital. Governments in the region believe the development of comprehensive long-term insurance systems will help them catch up with runaway demographic problems and hope the wider distribution of insurance products can help compensate for the unequal distribution of wealth and lack of social security that have become by-products of their surging economic growth models. Looking at their financial systems, they want to smooth over the barriers between – and redefine the roles of – the banking sector and insurance.
The business of insurance is becoming more complex,” says Mary Trussell, an insurance advisory services partner at KPMG in Hong Kong. “This is partly due to product innovation, but also the result of insurance groups entering other areas of financial services, entering new markets and seeking new partnerships and alliances to distribute their products.”
Regulators are increasingly focusing on their risk management – “as a way to capture opportunity, as well as to guard against difficulties and losses” and the direction of progress is becoming quite clear: it is following the example of the banking sector in the years after the introduction of Basle II. “Those who start their enterprise risk management journey early will not only show a more favourable image of their company to the regulators, rating agencies and investors but may also have the opportunity to influence the shape of regulation in this area,” recommends Trussell.
That is why the AIA sale was expected to have important ramifications for the Chinese insurance sector: “It could provide the Chinese insurers with an opportunity to expand into the rest of the region, and tell us something about how major international insurance companies see opportunities in China,” predicted one financial services consultant before the listing.
That was the hope – that it could prise open the stasis that solidified the sector since the financial tsunami. But it hasn’t; or rather it has highlighted the caution that Asia’s financial heavyweights have exercised when buying up another country’s assets.
“AIA is now potentially that rare thing – a genuine multinational financial services player rooted in the fast-growing East that doesn’t have to worry about being held back in the West,” says an investment banker in Hong Kong. “That is something that might make the established players over here think about, when defining themselves as Asian or global or whatever, and assume they speak for the region or sector while reporting to their shareholders and head office back home.”
AIA has the past to match its vision: it is after all the only foreign insurer with a wholly-owned licence to operate in China. Shanghai is where the original company actually began in 1919 and was soon occupying an office on the Bund next to HSBC, Chartered Bank, the Japanese and Russian finance houses and the rest. It is still there and may compete with the descendants of the first two names for the privilege of listing on the Shanghai Stock Exchange.
Apart from being the only international life insurance company operating (and the market leader among them) without the restrictions a joint venture involves, it is also a substantial shareholder in PICC, which it helped in its transformation from being the state warehouse of China’s insurance agreements in 1949 into what is now China’s largest non-life insurer. PICC’s own IPO will bring it all back home, and could be said to wrap up Beijing’s first (and probably final) stage of the liberalization of its insurance sector.
And now China is ready to join the party on the investment side: “Having been slow off the mark shortly after the financial crisis, Chinese financial institutions are ready to buy the assets on offer,” says one investment banker in Hong Kong. The financial tsunami caught everybody unawares by its speed and thoroughness, but nothing shows better how unprepared Chinese companies were for grasping the mantle of international market leadership. How could China Life and Ping An, or the largest banks in the world sit on the sidelines when a British company was handed AIA, largely thanks to its ‘presence’ across the region, an accident of its imperial history?
The answer is that Ping An lost its appetite for foreign ventures, having had its fingers burnt buying into Fortis just before the financial crisis unravelled. Back when Prudential stepped in earlier in the year, China Life was in discussions to buy AIA as strategic investors but was too slow to act. A few months on, down the road, they seemed to be ready for the challenge of buying a rare Asian ‘string of pearls’ insurance operation.
Different Chinese groups, the largest financial institutions backed by state funds and private equity-fronted private shareholdings, including Hong Kong companies, were looking at AIA again since Prudential dropped out: China Life, with an amalgam of business partners, including its own asset management arm and the Foshan group, the country’s largest private equity firm included, baulked at the asking price. They are believed to have now turned their sights on Prudential’s Asian assets instead. To add to the irony, AIA’s new boss, Mark Tucker, has made little secret of his desire to gobble up some of them too, now the IPO has furnished the new Asian company with a fat war-chest to drive ownership back to the West and become the undisputed heavyweight insurance champion of Asia.
At a time when the axis of financial power is shifting from the developed and deteriorating world towards emerging Asia – but before the battle formations and allegiances, as well as the parameters and features of the new financial landscape have been fully formed, that puts it at the top table of financial players in Asia. And its listing might have prised open the stasis that has seemingly gripped the potentially immense inward and outward investment flow of insurance and banking capital market and merger and acquisition (M&A) activity in the wider China story.
With the distinctions blurring between insurance companies and other parts of the financial services industry, the future path is very much open to all-comers – both Chinese insurers seeking to expand out of the Middle Kingdom as well as foreign firms trying to make some money out of all their efforts in the country where, nearly 10 years after WTO accession, they are left with a less than 5% market share in most products – and that is dwindling!
AIA Group, as it will now be known, emerged at the end of the first day a record 17% up on its initial public offering (IPO) price, having raised a record of US$20.5 billion – the largest ever for an insurance company and the third largest IPO in the world this year. “The IPO is a critical turning point for AIA and we are delighted that it has been so positively received by investors around the world,” beamed Mark Tucker, CEO of AIA, at the listing ceremony declaring independence after a protracted, sometimes ugly battle for credibility if not survival, and reinventing AIA as a potentially unique Asian-based and Asian-focussed financial services player.
The parents seemed pleased as well: AIG was finally returning something to the US (or New York) Federal Reserve Bank in repayment for its US$182 billion bail-out at the apex of the financial crisis just over two years ago; together with the yet-to-be signed US$16.2 billion sale of American Life Insurance Company (Alico), another overseas life insurance operation that is heavily represented by a cash-cow business in Japan – to MetLife, now the leading US insurer – it looks like AIG could pull off its Herculean repayment burden largely on the back of Asia. This may seem like a suitable reflection of the shifting balance of financial power from West to East perhaps, although a glance at the list of investment banks on the payroll for yet another lucrative recapitalization of the financial sector after the collapse – in which they themselves were complicit – might suggest that Wall Street has given up little of its fund-raising power, least of all in Asia.
AIG is only another in a series of post-crisis Western insurers having to sell off Asian assets and often pull out of the region altogether in an attempt to restore their balance sheets at home; rarely has another IPO been possible, but shareholdings in joint ventures in countries from Taiwan and Australia to China and India have been vacated and often filled by hungrier, more innovative foreign insurers or smaller domestic insurance players – and recently by banks in Asia too.
That is why the IPO boom should be followed by a similar bonanza in Asian insurance merger and acquisition activity, believe investment bankers in the region, although the successes are likely to be matched by not infrequent failures at the regulatory level.
In Taiwan, which also has a separate AIG presence outside of the AIA umbrella, Nan Shan Life, Taiwan’s third-rated life insurer, has been embroiled all year in a struggle with the authorities over its US parent’s attempts to sell it off to a consortium comprising Chinese battery maker, China Strategic, and Primus Holdings, a boutique financial holding company led by former Citi head of investment banking, Robert Morse. The authorities in Taiwan detected the hand of mainland China in the bid – a suspicion denied by the consortium, but since made more likely by the presence of China Strategic CEO Raymond Or () in a Chinese group believed to have looked at a straight strategic acquisition of both AIA assets and its rival Prudential.
Regulators were pouring too over the insurance deal in Australia. In November, they finally approved a second bid by AMP, a local financial services group, for AXA Asia Pacific’s insurance assets having previously blocked a bid by National Australian Bank on anti-competition grounds.
Also, foreign insurers are cutting down their shareholdings in joint ventures in India and China (where they feel restricted by limits on their capitalization or geographical reach) in exchange for becoming part of a company that is going somewhere, especially now that Asian insurers, and increasingly banks too, are flexing their muscles and putting into action plans to become regional if not international financial services conglomerates – with the convenient backing of both their regulators and shareholders.
Ironically, AIA finds itself best positioned to play seller or buyer, the local or regional card, now that it has a pan-Asian franchise and presence in 15 separate markets (and a leading role in six of them). Its nearest rival is Prudential of the UK, whose failed attempt to buy the distressed Asian assets of AIG earlier this year opened the door to the second, successful shot at an IPO.
Purest play
“The IPO will establish a new identity, allowing it [AIA] to explore acquisitions with the potential retreat of global insurers,” says Patricia Cheng, vice-president and financial services analyst at CLSA, one of the only houses that commented on the company in the lead up to the IPO. “We expect a turnaround upside, but its biggest rivals are actually local plays and banks.”
Despite the record numbers in the end, however, AIA wasn’t “a screaming buy”, as Cheng had said. It is not the perfect China story super fast growth stock that is Asia for many investors, but it is a bang-on proxy for the broad insurance business across different jurisdictions in the region.
Or put another way, AIA should “focus investor attention on the Asian life insurance sector as the first pan-Asian pure play, [offering] a more diverse range of investment options than single-country exposure”, says Chris Esson, insurance analyst at Credit Suisse. The AIA listing helped lift the sector’s representation on stockmarket indices which in itself widened the net to drag in a whole lot more index-tracking investors. Esson sees insurance in Asia as “a generational growth story”: the continued development of Asia’s tiger economies should underpin solid GDP growth, rising household incomes and deepening capital markets that are expected to support robust growth for Asian life insurers of a bottom-up estimate for the region of 11.5% to 21.6%.
AIA was valued at 1.32 times price to embedded value, while China Life and Ping An Insurance, the world’s largest insurers that are still growing much faster, trade at 2.38 and 2.6 times embedded value estimated for 2010, while the 2010 doyen of the mature Asian markets, Dai-ichi Life Insurance and Samsung Life Insurance, trade at a measly 0.37 times and 1.11 times forecast 2010 embedded value respectively, according to a Merrill Lynch report published in September.
European insurers are valued at an average of 0.8 times embedded value, which puts the wider Asian market in perspective and explains why surviving European and American life insurance companies – along with the more adventurous of the Japanese and Korean insurers – are surveying the insurance landscape in the region to identify those assets that are in play – with the Chinese giants standing behind them with a big bag of cash but a discernible nervousness about putting their own name to an acquisition in what is, after all, a less than wholly understood, rock solid or even stable asset class. Just thinking about what two dozen hot shots in AIG’s financial products division managed to do must make for understandable caution, especially among leaders of state-owned financial institutions.
All in all, though, thus far, the AIA listing was a perfect way to top a string of hugely significant domestically-focussed IPOs launched in Japan, Korea and China within the last year that have seen insurance companies burst out of the shadows of the larger banking system in Asia to become one of the most substantial constituent groups in the current global equity universe.
China leading
The 2005/2006 coming out of China’s financial sector in the historic IPOs from what are now the two world-leaders, China Life and Ping An Insurance, set the stage for the even grander triumphs of its three biggest banks. It was also China that revived the market for the first time since the financial crisis in December 2009, when China Pacific Insurance (Group), China’s third largest life insurer, launched a US$3.1 billion Hong Kong IPO in December 2009 via CICC, Credit Suisse, Goldman Sachs and UBS, and it will be China that provides much of the action going forward.
The Hong Kong listing followed an earlier US$4.1 billion IPO in Shanghai but with those shares gaining 134% last year (compared to the Shanghai Composite Index’s 80% rise) the offshore offering was designed, says one equity capital markets banker, mainly to rope in international insurance heavyweights Allianz of Germany, Europe’s largest insurer, and Japan’s Mitsui Sumitomo, as well as give private equity firm, the Carlyle group, a six times return on a US$800 million investment – if it hadn’t been locked in for another year.
Then the Korean stockmarket reopened for big ticket offerings after a moribund decade: Korea Life, the second-ranked domestic insurer, stormed ahead with a US$1.5 billion deal despite dreadful market conditions in February. Arranged by Credit Suisse, Goldman Sachs and J.P. Morgan, Korea Life was determined to get to market early; it was priced below the indicative level only to be massively oversubscribed in an early sign of the unpredictable nature of the nascent insurance market. Samsung Life Insurance then scorched its way to a record US$4.4 billion IPO in May that had Koreans going insurance crazy as domestic investors swamped the international tranche that Goldman Sachs, J.P. Morgan and Deutsche Bank were arranging.
Taiyang Life, the fourth-ranked player, had listed last year in an experimental move designed at tapping investor demand for sophisticated insurance products – which the introduction of corporate pensions this year was expected to bring in by freeing up the retained savings of Korean firms – ahead of the big boys. Third-rated Kyobo Life is due to tap the market too within a few months, which means the bulk of the sector will have gone public within one year, creating a national insurance sector asset class out of almost nothing. “We expect that the recent listing of life insurers will enhance capitalization and financial flexibility,” says Eunice Tan at Standard & Poor’s in Singapore. “We expect the public listing to propel the sector’s growth as well.”
And it won’t end there: foreign companies, not least AIA, according to CEO Tucker, have vowed to add to the competition, while smaller insurers are beginning to pile on the pressure as the listed firms look to use their funding in overseas expansion, including acquisitions, in a demonstration of the value-added competition that is driving insurers across the region.
That was why Dai-ichi Mutual Life Insurance stirred Japan Inc out of the doldrums in April with a US$11.1 billion-equivalent fundraising that – apart from being the largest equity offering in the world since Visa Inc’s US$19.7 billion IPO two years earlier – was the country’s largest for more than a decade, even accounting for the sum total of IPOs over the last five years.
Dai-ichi Life Insurance, as it is now called, is shifting to a holding-company structure that will employ international accounting standards, and it is targeting China, where it has set up offices in Beijing and Shanghai and hopes to start selling insurance by 2012. Its first step was the de-mutualization and listing that persuaded hordes of new account holders to invest in a tired, old cradle-to-grave household name trying to reinvent itself as fast-growth Asian hot stock. But it was not long before disillusionment set in, as the stock fell 25% in three months stirring up shareholder activists demanding a more aggressive foreign business strategy. The Japanese are not lacking resources and have started acquiring assets in Southeast Asia, India and even China.
Untapped demand
“A fair number of multinationals and Asian insurers, particularly from Japan, do view the Asian emerging economies as a major market for them to develop and further grow their business,” says PricewaterhouseCoopers’ partner Sridharan Nair. “Asia is an attractive market for insurers in view of the relatively under-insured population.” Life insurance penetration across Asia was 4.4% in 2009, according to a Sigma Swiss Re report. Most analysts see 10% to 15% growth for life insurers in Asia; while China and India are looking at a compound growth rate of over 20% in the next few years. “Asian banks too are increasingly looking to buy insurers as a way to further their market share and spur business growth,” says Nair. “This is partly due to the greater appetite of insurers for M&A activities, since on balance the insurance sector has come out of the financial crisis better than the banking sector.”
“The Japanese and Korean deals highlight both the huge untapped demand for Asian insurance stocks and the lack of alternative investment vehicles, especially when the authorities clamp down on property speculation,” says a head of equity capital markets at an international investment bank in Hong Kong. “Both were dominated by domestic buyers and the largest equity offerings within their countries for more than a decade. But they also show the unpredictable nature of valuing Asia’s largely unknown insurance sector as an asset class.”
South Korea, in particular, is proving difficult to gauge the correct price for an insurance stock – for investment banks, analysts and investors. Korea Life, for example, had to price at 8,200 won (US$7.24) – below an indicative range floor of 9,000 won suggested to Koreans but at the level demanded by foreign investors. Here was early proof of the difficulty that everybody was having in coming to grips with an insurance company in terms of equity valuation.
So too when Samsung Life shares soared 9% on the first day despite the downward trend in the local stockmarket, but soon slipped below the initial price as part of an overall plunge in the local stockmarket and an overseas bond market sell off. Thousands of new converts to shareholding had become fed up with the low but stable price of their investment and were joining media campaigns attacking the company and demanding that they boost earnings by investing in developing countries’ insurance prospects. Such is the cycle of the search for growth – as taken to its colossal and absurd global conclusion by Prudential in its bid to treble growth in AIA operations in Asia by charging high margins, cutting labour cost and all the other cutting edge management drives – that governments don’t readily welcome it.
The issues seen in the last 12 months from Japan, Korea and China make up big figures even for the global equity markets; for the fledgling market of listed Asian insurers the world of the investor had been turned on its head. And there’s still India to come. The Indian market is dominated by Life Insurance Corp of India, the state-owned life insurer, which up until the last decade was the only insurance company permitted in India’s heavily regulated and closed financial sector. But a growing private sector is on the verge of publicly listing equity for the first time – pending an increase in foreign investment limits from 26% to 49% which should spark considerable consolidation and drive for capital replenishment among insurers.
Among the top private players that are bidding to become the first Indian insurance to list is HDFC Standard Life – or rather HDFC. The joint venture between mortgage lender HDFC and Standard Life was rebranded in November without the presence of the 184 year old British firm in its title. Despite that, the plan is for Standard Life to increase its stake to 49% when it is allowed to.
Most insurance companies are either making losses or have slowed down expansions in the absence of funds so they can at least report profits, say investment bankers. The reason for this seeming paradox is that insurance companies are like young tigers that need red meat to grow into fine animals – that is the analogy of Gerry Grimstone chairman of Standard Life, who was in India to see his company’s name taken out of the joint venture. “Any new insurance company requires capital,” he says. “Our company is now very close to the tipping point where it no longer requires capital from its promoters for its existing business models.” HDFC Standard Life Insurance, in the three months up to the end of September, lost 645 million rupees (US$14.1 million) compared to 414 million rupees a year earlier.
“The enabling bill is in parliament and expected to pass by year end,” says Deepakh Parekh, chairman of HDFC at the rebranding. “The entire insurance industry is waiting for that to happen.” Reliance Life has been talking to foreign players about buying a 10% to 15% and then listing the remaining 10% portion, according to statements made to Indian media by directors. Swiss Re was reported to be interested. Prudential-ICICI , the leading player, is another IPO contender.
China provides a perfect contrast in the shape but not the substance of Standard Life’s joint venture strategy. It is about to become one of the few foreign insurers to own a stake in a domestic Chinese insurance company, but that involves giving up half its stake in a joint venture Heng An Standard Life (HASL) that it has operated with state-owned investment agency Teda International in Tianjin for the last seven years.
Selling your shares in exchange for a smaller role in a larger company might sound like a sad retreat from the US$100 billion-plus market. But maybe it is more an acceptance of realities. If Standard Life’s joint venture with Bank of China comes off, HASL will no longer be restricted in the business it can write and it acquires a massive distribution network across China – just like that.
The plan is for Bank of China to acquire 50% of HASL, buying 25% stakes from both parties. Chief executive officer, David Nish, who took over the Edinburgh-based pensions and insurance giant in January after it revealed it was close to a deal, was part of the biggest UK government delegation to pay tribute in Beijing in November led by David Cameron, the UK Prime Minister, with several other Cabinet ministers and corporate bigwigs.
Mother of all insurers
China will unleash more of its insurance companies in the next year. Next up will be Taikang Life, in which Goldman Sachs is set to buy Axa’s holding, and China Reinsurance Group, with both valued at around US$7 billion; after them several dynamic expanding smaller firms are hoping to persuade the regulator to approve their bids for going public.
They had better get a move on it, because the ultimate prize or challenge – for the government at least – is around the corner. China has set in motion plans to complete the first stage of the corporatization and recapitalization of its own insurance sector by approving the listing of the People’s Insurance Company of China (PICC), its largest non-life insurer and parent of China Life and many others – having been established as the vehicle for the nationalization of the insurance sector in 1949 which involved confiscating foreign assets, which included those of AIG in China (with whom it went on to have a more positive relationship following the opening up of China in the 1980s). A listing will help PICC to support the rapid expansion of its subsidiaries, (it is fast expanding another life company, having given up China Life in the 1990s), while maintaining a solvency ratio that will satisfy the regulator’s minimum requirement of above 100%.
Solvency will be a crucial stipulation for an insurer in getting approval to secure the IPO funding it probably requires if it is to move to the next stage of its rapid growth. The smaller insurance companies have been taking market share off the market leaders that had all the advantages handed them by the government when it sought to kick-start the industry in the1990s, but the danger for those dynamic middle-tier players is that they need to keep growing at that pace to retain the support of investors, distribution partners and the strict and pro-active regulator, China Insurance Regulatory Commission, that governs the market primarily with a mind to its long term development. China offers investors extra rewards and challenges to other markets in Asia and further diversification for an asset class that may be too young and historically unproven to have been clearly defined.
“It’s a great equity story, but those looking at the credit side are a little concerned,” says Sally Yim, vice-president at Moody’s Investors Service in Hong Kong. “Some of the Chinese insurance companies that want to list are growing so fast, but they are financing all that required growth by issuing large amounts of subordinated debt, which means they have to keep growing even faster to pay it all back.”
Investment banks in Asia are perceptibly inexperienced in advising the insurance industry. “It is staggering if you consider how few listed insurers there were in the region a year ago,” says one bank analyst, who cannot even talk to the media about the insurance sector because her bank was working on the AIA IPO, and like many has had it added to her work remit. “To be honest, it has been quite hard work for everybody getting up to speed on an entire new financial sector that used to be hidden within the banks in our coverage. That’s what has made them so hard to value, especially finding comparables across borders, and having to factor in aspects like their role in the nation’s consciousness, and the regulator’s view of them in the general scheme of things.”
And many investors, especially in the domestic markets – perhaps like new customers – see insurance pretty well entirely as exposure to rising middle-class incomes in the region and with few other attractive investment options available (especially in China) they are classifying insurance stocks in the broader retail asset class, say analysts. That is partly why the high street banks are so keen to rope in insurers the same they would auto manufacturers and the like, for something to pack into the wealth management products they offer, as a form of hire purchase. It is also why the foreign insurers have been so slow to catch on to the guanxi-led approach to referral business in China.
With regulators clamping down on solvency protection and non-core assets in financial holding companies, they are encouraging some insurers to sell and others to raise capital. Governments in the region believe the development of comprehensive long-term insurance systems will help them catch up with runaway demographic problems and hope the wider distribution of insurance products can help compensate for the unequal distribution of wealth and lack of social security that have become by-products of their surging economic growth models. Looking at their financial systems, they want to smooth over the barriers between – and redefine the roles of – the banking sector and insurance.
The business of insurance is becoming more complex,” says Mary Trussell, an insurance advisory services partner at KPMG in Hong Kong. “This is partly due to product innovation, but also the result of insurance groups entering other areas of financial services, entering new markets and seeking new partnerships and alliances to distribute their products.”
Regulators are increasingly focusing on their risk management – “as a way to capture opportunity, as well as to guard against difficulties and losses” and the direction of progress is becoming quite clear: it is following the example of the banking sector in the years after the introduction of Basle II. “Those who start their enterprise risk management journey early will not only show a more favourable image of their company to the regulators, rating agencies and investors but may also have the opportunity to influence the shape of regulation in this area,” recommends Trussell.
That is why the AIA sale was expected to have important ramifications for the Chinese insurance sector: “It could provide the Chinese insurers with an opportunity to expand into the rest of the region, and tell us something about how major international insurance companies see opportunities in China,” predicted one financial services consultant before the listing.
That was the hope – that it could prise open the stasis that solidified the sector since the financial tsunami. But it hasn’t; or rather it has highlighted the caution that Asia’s financial heavyweights have exercised when buying up another country’s assets.
“AIA is now potentially that rare thing – a genuine multinational financial services player rooted in the fast-growing East that doesn’t have to worry about being held back in the West,” says an investment banker in Hong Kong. “That is something that might make the established players over here think about, when defining themselves as Asian or global or whatever, and assume they speak for the region or sector while reporting to their shareholders and head office back home.”
AIA has the past to match its vision: it is after all the only foreign insurer with a wholly-owned licence to operate in China. Shanghai is where the original company actually began in 1919 and was soon occupying an office on the Bund next to HSBC, Chartered Bank, the Japanese and Russian finance houses and the rest. It is still there and may compete with the descendants of the first two names for the privilege of listing on the Shanghai Stock Exchange.
Apart from being the only international life insurance company operating (and the market leader among them) without the restrictions a joint venture involves, it is also a substantial shareholder in PICC, which it helped in its transformation from being the state warehouse of China’s insurance agreements in 1949 into what is now China’s largest non-life insurer. PICC’s own IPO will bring it all back home, and could be said to wrap up Beijing’s first (and probably final) stage of the liberalization of its insurance sector.
And now China is ready to join the party on the investment side: “Having been slow off the mark shortly after the financial crisis, Chinese financial institutions are ready to buy the assets on offer,” says one investment banker in Hong Kong. The financial tsunami caught everybody unawares by its speed and thoroughness, but nothing shows better how unprepared Chinese companies were for grasping the mantle of international market leadership. How could China Life and Ping An, or the largest banks in the world sit on the sidelines when a British company was handed AIA, largely thanks to its ‘presence’ across the region, an accident of its imperial history?
The answer is that Ping An lost its appetite for foreign ventures, having had its fingers burnt buying into Fortis just before the financial crisis unravelled. Back when Prudential stepped in earlier in the year, China Life was in discussions to buy AIA as strategic investors but was too slow to act. A few months on, down the road, they seemed to be ready for the challenge of buying a rare Asian ‘string of pearls’ insurance operation.
Different Chinese groups, the largest financial institutions backed by state funds and private equity-fronted private shareholdings, including Hong Kong companies, were looking at AIA again since Prudential dropped out: China Life, with an amalgam of business partners, including its own asset management arm and the Foshan group, the country’s largest private equity firm included, baulked at the asking price. They are believed to have now turned their sights on Prudential’s Asian assets instead. To add to the irony, AIA’s new boss, Mark Tucker, has made little secret of his desire to gobble up some of them too, now the IPO has furnished the new Asian company with a fat war-chest to drive ownership back to the West and become the undisputed heavyweight insurance champion of Asia.
At a time when the axis of financial power is shifting from the developed and deteriorating world towards emerging Asia – but before the battle formations and allegiances, as well as the parameters and features of the new financial landscape have been fully formed, that puts it at the top table of financial players in Asia. And its listing might have prised open the stasis that has seemingly gripped the potentially immense inward and outward investment flow of insurance and banking capital market and merger and acquisition (M&A) activity in the wider China story.
With the distinctions blurring between insurance companies and other parts of the financial services industry, the future path is very much open to all-comers – both Chinese insurers seeking to expand out of the Middle Kingdom as well as foreign firms trying to make some money out of all their efforts in the country where, nearly 10 years after WTO accession, they are left with a less than 5% market share in most products – and that is dwindling!
Well it's a long story that will unfold over 2011. Great to see someone write about things and try to guess what is going on.
ReplyDeleteMark R