Impending Bidding War For ING's Asian Life Insurance Arm

Mar.27.12 | About: ING Groep (ING)

Some of the world's largest insurance companies are getting ready to bid for ING Group's (NYSE:ING) Asian life insurance arm, potentially creating a bidding war that could reach $6 billion for what is considered a good franchise in the world's fastest-growing insurance market.

MetLife (NYSE:MET) and Prudential Financial (NYSE:PRU), the two biggest U.S. life insurers have hired Credit Suisse (NYSE:CS) and Bank of America Merrill Lynch (NYSE:BAC) respectively to advise them on possible bids. Manulife Financial (NYSE:MFC) has hired Citigroup (NYSE:C). Sun Life Financial (NYSE:SLF), Canada's third-largest life insurer is also considering a bid.

Asian demand for insurance products is expected to grow rapidly as an expanding middle class buys life, health and savings products. Penetration of insurance products in many Asian countries is just a fraction of where it is in Western countries. The combination of ING's good franchise and desire by Western insurers to expand in Asia is pushing up the value of the deal to $6 billion, and perhaps even beyond. bankers say. Asia remains hugely important to the future of globally competing insurers.

ING has put the Asian business on the block to comply with the European Commission's order that it sell its global insurance arm in return for the state aid received during the financial crisis. In Asia, valuation multiples on deals done in the last year have been pretty high. Another positive is that the insurers on the block in Asia are significantly smaller. Thailand's Thanachart Bank is auctioning its life-insurance business in a deal for around US$500 million and a private-equity fund is selling it controlling stake in South Korea's Tong Yang Life Insurance.

It is rare that a pan-Asian platform comes up for sale, which is also stimulating competition. With headquarters in Hong Kong, ING's insurance operations consist of eight wholly owned or joint-venture businesses doing business in China, Hong Kong, India, Japan, Malaysia, South Korea and Thailand. The joint ventures are expected to be sold separately over time.

Not all the competitors want ING's entire Asian platform. Its two biggest operations in the region by sales are in the mature economies of South Korea and Japan. Japan is particularly seen as unattractive due to its variable-annuity business, which contains guaranteed returns to investors, the people said. But the sizable businesses in Malaysia is seen as very attractive.

Hong Kong-listed AIA Group (OTC:AAIGY), the Asian life insurer partly owned by American International Group (NYSE:AIG) , has hired Deutsche Bank (NYSE:DB) and Morgan Stanley (NYSE:MS), respectively, for advice, people said earlier. ING is likely to send detailed information to interested parties in the coming weeks.

For Prudential, where international operations represent about half the company's annual earnings, its executives said recently that the company has excess capital it can use to expand abroad. Its international operations are centered in Japan, where it spent $4.8 billion last year to acquire two life insurers from AIG. Beyond Japan, Prudential has smaller operations in Korea, Taiwan and elsewhere.

For MetLife, timing could be trickier than for Prudential. It is continuing the integration of its $16 billion purchase in 2010 of an AIG life-insurance business with properties around the globe. That purchase overnight transformed MetLife from a mostly U.S. player into an international one. MetLife has a large Japanese operation now, as well as significant ones in Mexico, Korea, Poland and Chile, among other places.

Earlier this month, the Federal Reserve rejected MetLife's plans to sharply boost its dividend and begin repurchasing shares, saying it had failed its "stress tests" for major financial institutions to see how they would fare if another deep economic slump or financial crisis were to strike. MetLife disputed the results, saying the bank-focused test didn't accurately reflect its strengths.

Time will tell if it's actually MetLife, Prudential, or AIA Group that prevails in bidding for this rare gem, as Japanese and Australian insurers are also likely to express interest. Samsung Life Insurance said it would be interested in ING Asia's insurance business, although it isn't entirely clear whether that is just the Korean operations.

One sure winner will be ING Group, as the anticipated $6 billion is 20% above previous forecasts. ING's Asian-Pacific insurance business, including its asset-management unit, was originally valued at €5 billion, based on a P/E of 13-15 times 2011 earnings.

ING Group received €10 billion in total in aid during the 2008 financial crisis, and it still owes the Dutch state the last portion of €3 billion, plus a €1.5 billion repayment premium. The firm is aiming to return the money by the end of 2013.

ING investors have been told that the company will resume paying dividends once it has fully repaid the Dutch government and its capital buffer is big enough. Although ING isn't formally prevented from paying dividends, the bailout terms discourage it from doing so. ING would have to pay an extra fee to the Dutch government in that case.

The sale process of Dutch mortgage bank Westland-Utrecht is still being hindered by stricter banking regulations under Basel III, with banks reluctant to make acquisitions in a time when they are expected to bolster their capital buffers. ING's CEO Hommen recently said that ING is developing creative ideas and that these would be discussed with the European Commission and the Dutch state.

ING Group is also stepping up efforts to cut costs, and recently announced it will scrap 2,000 jobs at its retail bank, which is expected to result in EUR300 million in annual savings by 2014. This was done in spite of a sharp rise in quarterly net profit of €1.7 billion from €239 million a year earlier. This number was also boosted by capital gains from a number of other divestments.

An improved performance at ING's insurance business partly offset weaker results from its banking arm, and the group's capital position improved further, lifting the core Tier 1 ratio of its bank to 9.6%. ING's funding position remains strong.

With a current P/E of 5.0, and a P/B and P/S of 0.5, ING Group is arguably one of the best buys around. Not only in terms of operating performance and valuation, also because of strong interest in its divestments and the impending return of a sizable dividend.

2012 EPS is expected to be around $1.95 US (= €1.47), giving you a Forward P/E of 4.5 at current price. Let's assume a reinstated dividend will be around $0.50 annually, $0.125 quarterly. That's a 5.7% dividend at a pay-out ratio of 25%. It will only be a matter of time and patience before ING's market cap again starts to reflect the Group's true underlying value.

Disclosure: I am long ING, MET, PRU.