JD Capital’s purchase of a Hong Kong life insurance business from Belgian insurer Ageas for $1.4 billion is the latest in a surge of deals by Chinese financial institutions looking to diversify overseas.
Established in 2007, JD Capital is similar to other privately owned Chinese peers such as Fosun and Anbang which have struck high-profile deals lately as they look to rapidly build an international financial services platform using the steady cash flow from insurance premiums.
The value of Chinese insurance acquisitions abroad has already hit an annual high so far this year at $5.77 billion, up from $2.23 billion in all of 2014, according to data provider Dealogic.
More broadly Chinese financial institutions have racked up a shopping bill overseas of $13.13 billion so far this year, nearly double last year’s total of $7.22 billion.
M&A bankers have long waited for China's enormous state-owned banks and insurers to transform their overseas' ambitions into deals, especially when their valuations were high. However, relative to their size deals have been puny.
The challenge has instead been taken up by younger, more ambitious companies. "The surge started with Fosun and is spreading to a longer list of non-traditional Chinese players," said one veteran investment banker in Hong Kong.
Many of these young businesses, such as Fosun and JD Capital, are looking to transform capital made from early private equity deals into a more permanent financial services business. JD Capital has been hiring insurance experts such as Fang Lin from CPIC and using its publicly listed vehicle, including the original private equity business, to buy assets such as Ageas' Hong Kong unit.
Most of the targets have been in mature markets such as Hong Kong. China Minsheng Investment in July bought and casualty reinsurer Stockholm-headquartered Sirius International Insurance for about $2.24 billion in cash and Fosun bought Australia's Ironshore for $1.84 billion earlier this year.
This push by China’s financial institutions is unlikely to abate due to the turmoil in the country’s stock markets according to M&A experts as most of the country’s banks and insurers have ample financial resources. To be sure Chinese securities brokers, the most impacted among financial institutions by the gyrations of the nation’s stock markets, have put their international expansion plans on the back burner.
Chinese buyers have had to pay top dollar for their acquisitions as financial assets only rarely hit the market in Asia, especially deals offering control. Ageas owned 100% of the Hong Kong business.
The price tag on JD Capital's acquisition equates to a valuation of just under 1.3 times end-2014 embedded value with an implied trailing new business multiple of 15 times. The purchase price is also far higher than the $896 million Ageas paid for it from Hong Kong entrepreneur Richard Li's Pacific Century Insurance and the Belgian company manage to reap ample dividends from the business.
This also equates to over 20 times Goldman Sachs’s estimate of its 2015 HK Life reported IFRS earnings (to be sure these earnings have been depressed by the amortisation of the value-of-business-acquired (VOBA) of its 2007 acquisition of the business). In 2007, Ageas acquired Pacific Century Insurance and rebranded the company to Ageas.
JD Capital paid 1.27 times the book value of the Hong Kong operations of €967 million as per the end of June 2015. In comparison, ING sold its Hong Kong life operations (which are 1.3 times the size of Ageas’s operations) to Richard Li’s FWD for €1.6 billion or 1.9 times book value or 25 times P/E in 2012.
Both buyers paid a premium for being relatively unknown outside their home markets. JD Capital was not among the initial parties approached by Ageas when it formally launched an auction.
The sellers demanded a higher price tag and reassurance that the finance was in place, especially given the financial turmoil in China.
JD Capital’s purchase is the largest cross-border insurance deal by value since CP Group bought a 15.7% stake in Ping An Insurance for $9.39 billion in 2012.
Morgan Stanley acted as exclusive financial advisor to Ageas on the transaction. Citigroup advised JD Capital.
China angle
Most of the Chinese buyers are willing to pay up for deals because they believe they can make the purchases grow, usually by helping the acquired company scale up by capturing more business related to still fast-growing mainland China.
Beijing-based JD Capital hopes to use its business connections onshore to help the Hong Kong unit capture more business from mainland Chinese who buy insurance during visits to the Territory, a fast-growing segment of the industry. So far Ageas didn't capture this opportunity as well as the rest of the market.
About 30% of the industry's new business in Hong Kong came from mainland Chinese visitors, one market expert estimated. It is unclear how China's market turmoil has impacted this opportunity.
JD Capital is an asset management company listed on the Chinese National Equities Exchange and Quotations. It operates in a variety of financial services including private equity as well as mutual fund management, securities brokerage, P2P lending and payment processing.
Ageas pivots to SE Asia
For many western insurance companies new rules called Solvency II have meant they need to be more stringent with their allocation of capital and made it more attractive to focus on bancassurance businesses than directly manage a large salesforce of agents.
For Ageas, Hong Kong was also an oddity in its Asian distribution platform as it was the only wholly-owned unit and otherwise comprised bancassurance agreements. Ageas in Hong Kong has the fifth largest agency force in the Territory with more than 2,500 professional financial advisors.
The deal was triggered by unsolicited expressions of interest. JD Capital entered the fray about two months ago.
"The decision to sell our business in Hong Kong follows a strategic review of our Asian activities in which we concluded that it is in the group's best interest to realign our strategy towards the fast growing emerging markets of Asia,” said Bart De Smet, CEO of Ageas in a press release.
