The Bank of China Tower, left, Citibank Tower, second left, and Cheung Kong Center, right, stand in the Central district of Hong Kong, China.Brent Lewin/Bloomberg
Canada's largest life insurers have amassed enough excess capital to make some acquisitions, but the price has to be just right.
That's a factor at play now as European insurance giant AXA SA reportedly looks to part ways with its Hong Kong pension business, and two Canadian insurers have been named among possible bidders for the asset.
Paris-based AXA has been backing out of less profitable markets and business lines since the financial crisis, including selling U.S. life insurance assets for $1.1 billion (U.S.) in 2013 and its Canadian business arm to property and casualty insurer Intact Financial Corp. for $2.6-billion (Canadian) in 2011.
Insurers Manulife Financial Corp. and Sun Life Financial Inc. were both identified by Bloomberg sources as interested in the Hong Kong asset, which could fetch $400-million (U.S.) at auction. U.S. investment manager Principal Financial Group Inc. may also be circling.
The deal would give a buyer more exposure to Hong Kong's retirement market through AXA's Mandatory Provident Fund (MPF) business. These are privately managed savings plans where most employees and employers are required to contribute at least five per cent of the employee's income into an investment plan. The MPF scheme was put in place in 2000 as part of the government's efforts to provide for future retirees.
The acquisition could be a fit for either Sun Life or Manulife, both of which already offer MPFs in the region. Hong Kong's demographics are shifting rapidly, with the portion of the population 65 years old and older expected to double to 30 per cent by 2041.
But other foreign players should be presumed to be bidding, and the asset is unlikely to come cheap. "This will come down to price," said Peter Routledge, analyst with National Bank Financial. "Generally the Asian assets have gone for very heady premiums, and it isn't the most sensible bidder that always wins."
Companies headquartered in Asia have regularly been bidding on regional assets in recent years. Hong Kong's AIA Group Ltd. bought ING Groep NV's Malaysian life business for about $1.7-billion in 2012, for example.
Manulife's chief executive Donald Guloien said on an analyst call following the company's recent $4-billion acquisition of Standard Life's Canadian business that the company has looked at lots of transactions in Asia, but that a good deal had been difficult to find.
"We discovered Asia 125 years ago. Some people discovered it more recently. And they get all excited about it and are trying to enter and driving up the prices. You know, some of the deals are simply uneconomic," said Mr. Guloien on the call.
Tom MacKinnon, an analyst with BMO Nesbitt Burns, wrote in a recent note that Sun Life has had a quiet decade when it comes to acquisitions. He noted that Sun Life's chief executive Dean Connor recently said the insurer would "continue to look at acquisition opportunities – not of the transformational kind, but more of the bolt-on kind."
Sun Life did its last deal in Hong Kong in 2005 when it bought the Commonwealth Bank of Australia's insurance and pension operations in the region for $560-million. Its MPF business is smaller than Manulife's, so any deal would have a larger impact, marginally expanding the company's footprint in the city, Mr. Routledge said.