Soon after Sun Life Financial’s Asia president, Kevin Strain, arrived in the region in 2012 he was on the acquisition trail. Five years later and he’s looking to reap a return on his investments.
The Toronto-based firm competed fiercely for a Malaysian insurer in 2012 against some of its biggest rivals including Britain’s Prudential, cross-town rival Manulife and Hong Kong-listed AIA.
It won, but it paid a steep price of US$596 million, or about 2.9 times book value.
“We pushed ourselves pretty hard on that acquisition, and it’s paid off. It’s way, way ahead of any business case we would have put forward,” said Strain during an interview with FinanceAsia in his Hong Kong office.
That was his largest deal in Asia to date, but more quickly followed. Last year alone Sun Life spent C$500 million on M&A by upping its stake in its Indian joint venture from 26% to 49% as well as buying the remaining shares it did not already own in its Vietnamese and Indonesian joint ventures.
In Hong Kong it purchased two pension businesses, one from FWD Life Insurance and the other from Schroder Investment Management.
Sun Life has not been alone in scaling up its presence across Asia. Some of the world’s largest insurance companies have been attracted to the high economic growth rates and relatively low penetration of insurance products across the region.
According to analysts at reinsurer Swiss Re, North American life insurance premiums grew at 3.8% in 2015 while emerging Asia stormed ahead at 15.6%. Swiss Re expects emerging Asia to maintain its double-digit growth rate into 2017.
Since the global financial crisis insurers have paid eye-popping book multiples even for small, start-up, businesses, particularly in South East Asia, as well as for tie-ups with banks to distribute their products via their branch networks, a process known as bancassurance in the industry.
To help justify acquisitions to their investors, insurance companies have been uniformly keen to point to ‘embedded value’ and ‘value of new business’ (VnB), measures that take into account all of those future premiums the insurer will collect.
The value of new business has grown four fold for Sun Life since 2012. Sun Life will update investors on strategy on March 9 where it will break out its Asian results in more detail.
However, some stock analysts are questioning when this mass acquisition spree is going to pay off and stop weighing on return on equity ratios. The answer is: in insurance these things take time and the road may be rocky.
The strain of paying for the new businesses in Asia as they develop has been weighing on Sun Life’s results. Expenses across Asia in 2016 climbed to C$873 million from C$673 million in 2015.
“We’ve invested close to C$1 billion and that takes a while to generate income. In the insurance business the first few years are generally flat to negative,” Strain said.
Ironically, the strain is hardest on those invested in the fastest growing countries. Sun Life Asia reported a core ROE of 7.5% as of the fourth quarter of 2016. That’s far short of Manulife, for which Asia accounted for over 35% of core earnings and generated an ROE of about 20% in 2015, predominantly in the more mature markets of North Asia, according to analysts.
Japanese insurers, who enjoy a very low cost of capital and relatively passive shareholders, have often been content to invest across South East Asia with the view they will not see their money back for decades. However North American and European insurers tend to be more disciplined and look to reap a dividend in around five to seven years.
“As these acquisitions pay off we will see ROE grow at a rate that is in line with the earnings growth. I’m quite bullish on ROE from a long-term perspective because I can see the VnB levels,” said Strain who is targeting a double-digit ROE in the next three to five years.
Regulation is one prominent threat to the smooth growth trajectory of insurance premiums in Asia for all insurers. In Hong Kong, which overtook the Philippines last year to become Sun Life’s largest market for life insurance sales, China is clamping down on its citizens buying insurance policies. To be sure, Sun Life’s percentage of sales to mainlanders in Hong Kong is much lower than some of its peers such as AIA, Prudential and Axa, but it is an attractive, fast-growing niche.
There is a also a new independent regulator in Hong Kong, the Independent Insurance Authority, which analysts expect to be more proactive than its predecessor.
So far though, the signs on the ground are that investors’ patience is starting to pay off. Earnings are up threefold since 2012 and insurance sales climbed 29% in 2016 year-on-year.
“Current growth rates could take the Asia division ROE to the 12%-14% objective within the next three to five years. Achieving that target would mean more value recognition for SLF Asia,” said Paul Holden, a stock analyst at CIBC, a Canadian bank.
Building a business
Just before Strain first arrived in Asia in 2012 there were rumours Sun Life would pull out of the region.
Then when Dean Connor was named CEO in late 2011 he named Asia one of his four pillars of growth in the company and set ambitious financial targets for the business.
“Dean making Asia a pillar put a spotlight on the region and focused the whole organisation on helping us grow,” said Strain.
Now Sun Life has over 13 million clients in Asia – more than double the 6 million it has in its home market of Canada. Connor targeted underlying earnings of C$250 million by 2015; Sun Life Asia squeaked over the line with C$252 million.
M&A has just been the most high-profile way that Sun Life has deployed about C$3.8 billion in equity across Asia.
Canada’s third-largest insurer by market capitalisation and assets has also been spending money on expanding its army of door-to-door salesman which has doubled since 2012 from 13,371 to 26,855 in 2016 (excluding India), on digital upgrades and on burnishing its brand.
In 2012, Sun Life had about 5,000 agents in the Philippines now it has about 9,300; Indonesia’s 5,000 agents have swelled to about 10,000; it had 1,200 salesmen in Hong Kong and now it has almost 2,000; Sun Life has gone from having zero agents on the ground to about 3,000.
“One of the things that was said to me by investment bankers and consultants was: “Why are you here Kevin? You were running one of the biggest businesses in Sun Life. Asia is so small and is Sun Life even committed to Asia?” No one says that now,” said Strain who was in charge of Sun Life’s Individual Insurance and Investments division in Canada from 2007 to 2012 before coming to Asia.
Sun Life Asia still has some way to go to hit some of Connor’s targets. Connor said in 2012 that he wanted to see Asia’s contribution to the group’s earnings to double from 10% to 20% in the coming years. It still hovers at around 10%.
Stock analysts expect Sun Life Asia to hit its earnings contribution target to the group partly via more acquisitions.
Sun Life and Malaysia’s sovereign wealth fund Khazanah Nasional were in talks to buy a majority stake in the insurance arm of Hong Leong Financial Group last year, however the parties failed to agree on valuation, according to a person familiar with the matter. Strain declined to comment.
When asked if there were more deals in the pipeline Strain said: “Our strong focus is first and foremost on organic growth and then using M&A to support growth in those seven markets.”
