Asian insurance M&A gets pricey as region's promise beckons

Appeal of Asia's growing middle class and rising personal income pushed insurance takeovers in the region to a record $30.5 bn last year

A deal-making frenzy in Asia's insurance industry is turning up the heat on buyers to fork out huge sums or miss out on a prime chance to tap into the sector's fastest growing market, and few predict a slowdown despite the eye-popping prices.

The appeal of Asia's growing middle class and rising personal income pushed insurance takeovers in the region to a record $30.5 billion last year, according to S&P Capital IQ, a data compiler. At least $5 billion more are in the pipeline and that's good news for bankers, lawyers and shareholders such as Malaysia's AMMB Holdings Bhd , which is shedding its life insurance unit.

For buyers, soaring valuations and increased competition from foreign newcomers present a tough choice -- either pay through the nose for a scarce, fast-growing business or wait for prices to settle and potentially lose out to nimbler rivals.

There are signs that at least some potential buyers, like South Korea's Samsung Life Insurance Co, are getting spooked by higher deal valuations. Price to book value (P/B) ratios -- a key metric for valuing banks and insurers -- for Asian deals have risen on average by 13 percent between 2005 to 2012, while the same multiples across the world have shrunk.

"These deals have definitely gotten more expensive," said Manulife's Financial Corp Asia Chief Marketing Officer Philip Hampden-Smith, showing that even company executives are raising their eyebrows at how far some buyers are willing to go.

"You've got to have financial discipline -- a deal is only worth so much," he added.

Asian insurers trade at a median P/B ratio of 1.73, according to Thomson Reuters data, nearly double their peers in the United States and Europe. Some recent deals were struck at nearly twice the median P/B ratio of Asian companies.

Just 5.8 percent of Asia's population is insured, compared with 8.1 percent in the United States, and that is set to drive insurance premium sales in emerging Asia at nearly three times the growth in industrialised nations, Swiss Re says.

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Some companies, like ING Groep NV , have been forced to sell assets to pay back government bail-out money, while others like Aviva Plc are retreating from the region to focus on their home markets. Some are simply cashing out, riding the boom.

When India's Punjab National Bank launched its recently completed life insurance joint venture with MetLife Inc , more than 40 companies showed up to the auction.

The sale of ING's Asia insurance and asset management units last March attracted no less than 17 suitors.

That is an extraordinary number of bidders in a region where even just two or three buyers can create a competitive auction.

Also unusual is the terms being commanded by sellers in certain deals.

Malaysia's CIMB Group Holdings Bhd boldly demanded a 1.8 billion ringgit floor price from the final bidders for its insurance joint venture, two people familiar with the matter told Reuters.

Not bad for a simple, old industry that even some executives say is boring.

Canadian insurer Sun Life Financial Inc and Malaysian sovereign wealth fund Khazanah Nasional Bhd paid a P/B ratio of 3.2 for Aviva-CIMB insurance venture. That is 85 percent higher than the median P/B ratio for Asian insurers now, according to Thomson Reuters data.

CIMB did not offer an immediate comment.

Insurance executives will long remember the whopping 9.3 P/B that Japan's MS&AD Insurance Group Holdings Inc paid in 2011 for a 50 percent stake in Indonesian conglomerate PT Asuransi Jiwa Sinarmas' insurance unit.

PT Bank Negara Indonesia Persero Tbk PT (BNI) Chief Executive Gatot Mudiantoro Suwondo now expects similar multiples for the bank's planned sale of a stake in its life insurance unit.

"Valuations of recent deals are definitely more reliant on the future value the target companies can generate," said Peter Enns, Goldman Sachs & Co's head of Financial Institutions Group in Asia Pacific ex-Japan. "People view these businesses as very strategic (investments) that can deliver good future growth."

TIPPING POINT?

Enns warned that a major change in interest rates and a meaningful slowdown in regional GDP growth would impact how these businesses are valued and affect their prospects.

Some suitors are turning cautious. Samsung Life and Japan's Tokio Marine Holdings Inc <8799.T> are among the companies shying away from the BNI auction on fears of overpaying, people familiar with the matter said.

Khazanah recently dropped from the race to buy a minority stake in unlisted Thai Life Insurance Co, a person familiar with the matter said. The auction attracted KKR & Co LP among others.

Even so, plenty of potential buyers are still willing to stomach the high valuations.

Last year Prudential Plc's $590 million deal to buy Thai Thanachart Bank PLC's insurance unit translated into a P/B multiple of 5.8 for fiscal 2012, a person with direct knowledge of the matter told Reuters.

In part, higher valuations are supported by extended bank distribution deals. In 2010, Prudential struck a 12 year distribution deal with Singapore's United Overseas Bank Ltd , while it secured a 15-year deal with Thanachart. Sun Life and Khazanah signed a 20-year deal.

James Ankers, co-head of Financial Institutions in Asia at Rothschild, expects the active insurance M&A cycle to continue in markets such as Indonesia, even as it reaches a peak in Malaysia.

"But we expect high deal valuations for quality assets to remain," he added.