ING Agrees to Sell Malaysia Unit to AIA GroupBy Cathy Chan and Maud van Gaal - Oct 11, 2012

AIA Group Ltd. (1299), the third-largest Asia-based insurer, agreed to buy ING Groep NV (INGA)’s

insurance business in Malaysia for about 1.3 billion euros ($1.7 billion) in its largest acquisition as a

listed company.

The purchase will boost the percentage of profit AIA gets from Malaysia to 13 percent from 8 percent,

it said in a statement. Separately, AIA said its value of new business rose 22 percent in the third

quarter to a record $300 million.

“The deal may add around 5 percent to AIA’s earnings per share and shift its business to a higher-

growth region,” Arjan van Veen, a Hong Kong-based analyst at Credit Suisse Group AG, said in an e-

mail response to Bloomberg. AIA’s value of new business growth in the third quarter well exceeded

the consensus analyst estimate of 12 percent, according to van Veen.

AIA Chief Executive Officer Mark Tucker has sought to revive new business growth after the Hong

Kong-based insurer was hurt during the financial crisis because of woes at its bailed- out former

parent American International Group Inc. (AIG) Tucker today said the strength of AIA’s balance

sheet means it can grow its existing business as well as buy new assets.

“This is a rare opportunity to acquire a high-quality company,” Tucker said in a conference call with

wire services reporters today. “It’s an excellent strategic fit for AIA.”

The acquisition will combine ING’s operations, the third- largest in Malaysia, and AIA’s existing

business, the fourth biggest, to create the No. 1 life insurer in the country, according to the statement.

Still Looking

AIA has the capability of paying for the acquisition with any combination of internal cash and debt

with the specific mix to be decided closer to the completion date, Tucker said. AIA, which has no debt

before the acquisition, will remain financially strong afterwards, he added.

The Malaysian acquisition was both rare in size and quality, Tucker said, adding AIA will continue to

look at acquisitions that are both strategically and financially compelling.

The purchase includes ING’s life-insurance and employee- benefits businesses in Malaysia, as well as

its 60 percent stake in ING Public Takaful Ehsan Berhad. The deal values the operations at 16.9 times

2011 earnings and 2.2 times book value in the first half of 2012, ING said.

The deal values the Malaysian business at 1.8 times of its 2011 embedded value, Tucker said, declining

to give forward- looking data because of Hong Kong stock exchange restrictions. Embedded value is

an actuarial estimate of the economic value of life insurance business.

ING Gain

AIA, which went public two years ago in Hong Kong’s biggest initial public offering, ended the day

unchanged at HK$29.60 in Hong Kong trading today, keeping this year’s gains at 22 percent. ING lost

0.2 percent to 6.38 euros in Amsterdam yesterday.

The transaction, which may be completed in the first quarter, is expected to lead to a gain of about

780 million euros, Amsterdam-based ING said.

AIA is in talks with the Malaysian regulator, Tucker said on the call in answer to a question regarding

whether the deal would meet obstacles in a country which restricts 100 percent foreign ownership of

life insurance companies.

There are no current regulatory hurdles preventing the acquisition, Ng Keng Hooi, AIA regional CEO

in charge of Taiwan, Malaysia, Singapore, China and Brunei, said during a press conference in Kuala

Lumpur today.

Last month, AIA agreed to pay $109 million to buy 92 percent of Aviva NDB Insurance Plc (CTCE),

Sri Lanka’s second-largest life insurer, from London-based Aviva Plc (AV/) and National

Development Bank.

AIA’s existing Malaysian operations accounted for about 6 percent of new business value in the six

months to May 31, according to a statement on July 27. That will rise to 10 percent if the takeover

succeeds, it said today.

Sale Requirement

AIA’s market share will double to 25 percent in the country, which the insurer described as one of

Southeast Asia’s most attractive and fast growing life assurance markets.

Credit Suisse analysts raised AIA’s 12-month price target to HK$33 from HK$32 and kept the

outperform rating for the stock, citing the acquisition and third-quarter new business trends.

Deutsche Bank AG, Morgan Stanley, Evercore Partners Inc. and CIMB Group Holdings Bhd. advised

AIA on the transaction. Debevoise & Plimpton LLP is the legal adviser to the firm, AIA said in a stock

exchange statement today.

AIA received a $1.73 billion 12-month bridge loan from eight banks to help fund the purchase,

according to a person familiar with the matter. The banks, which will fund the facility in equal

amounts, are Australia & New Zealand Banking Group Ltd., BNP Paribas SA, DBS Group Holdings

Ltd., Deutsche Bank, HSBC Holdings Plc, JPMorgan Chase & Co., Morgan Stanley and Standard

Chartered Plc, the person said, asking not to be identified because the details are private.

‘Major Step’

ING is required to sell its insurance and investment- management businesses before the end of 2013

after getting 10 billion euros of state aid during the financial crisis. While executing the imposed

divestment program, it’s also selling banking assets to help speed up repayment of a remaining 3

billion euros with premiums.

“Today’s announcement is the first major step in the divestment of our Asian insurance and

investment management businesses and shows that ING continues to make steady progress in the

restructuring of our company,” Chief Executive Officer Jan Hommen said in a statement.

In the last six weeks, ING announced an agreement to sell its Canadian online bank for $3.16 billion,

its U.K. Internet business and a 33 percent stake in China Merchants Fund, an investment

management joint venture. The firm also raised about $3 billion last month by selling 54 million

shares of McLean, Virginia-based Capital One Financial Corp. (COF)

Earnings Boost

ING’s Asian insurance and asset-management business had a combined book value of 6.6 billion

euros, the bank said on Sept. 27. The company’s operations in the region include emerging markets

such as Malaysia, where rising incomes are fueling demand, and Japan, which is grappling with

deflation and an aging population.

AIA’s gauge of projected future profitability of new policies increased to $300 million from $245

million a year earlier, overcoming depreciating Asian currencies, the insurer which sells policies in

local currencies yet reports earnings in dollars said in a separate statement to Hong Kong’s stock

exchange today.

Underlying annualized new premium, the sum of first-year premiums and 10 percent of single

premiums, grew 17 percent to $696 million, from $594 million a year ago.

New business margin, measured by value of new business as a percentage of annualized new

premium, widened by 11 percentage points to 42.6 percent, the fourth straight quarter above 40

percent.

“Given the significant improvement in overall margin over the last 12 months, there’s a concern that

margins could be peaking for AIA,” Morgan Stanley analysts led by Ben Lin wrote in an Oct. 4 note.

“In our recent meetings with investors, some raised the view that they would like to see the growth

composition shift more toward volume growth and less on margin expansion.”

To contact the reporters on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net; Maud

van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net;

Frank Connelly at fconnelly@bloomberg.net

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