From prey to predator, Philamlife strikes deal with Ayala

By Lala Rimando, abs-cbnNEWS.com/Newsbreak

Posted at Aug 26 2009 09:59 PM | Updated as of Aug 30 2009 02:52 AM

MANILA - The new deal between 2 of the country’s biggest players in the financial services industry made another history in local business.

In a joint statement on Wednesday, the country’s largest life insurer Philippine American Life and General Insurance Company (Philamlife) and one of the country’s universal banks, the Bank of the Philippine Islands, announced their “strategic bancassurance joint venture.”

The transaction involves Philamlife acquiring 51% stake in BPI’s life insurance subsidiary, Ayala Life Assurance Inc.

The deal is significant not only because the country’s largest financial players are involved, but also because it signifies a major turnaround in the fate of Philamlife.

Not so long ago, Philamlife was a prey. This time it is calling the shots.

Philamlife for sale

Philamlife was put on the auction bloc in October 2008 after its parent American International Group (AIG) became the world’s most legendary mess. AIG’s downfall triggered the global financial crisis that brought the richest economies to their knees.

AIG was selling assets like Philamlife in the Philippines to settle US-bankrolled lifeline loans that saved AIG from collapsing. The planned sale of Philamlife, the biggest and the most profitable insurance company in the country, became the Philippines' first direct experience of the impact of the financial shakeup in the US.

Philamlife attracted buyers from the Philippines and elsewhere. Joining the bid for Philamlife are Manila-based conglomerates, especially those with a banking arm.

BPI, the banking subsidiary of Ayala Corp, was one of them.

The Ayala family, one of Manila's elite, controls Ayala Corp, the Philippines' oldest commercial house for almost 160 years. They have built a reputation of strength and stability in real estate, banking and finance, telecommunications and utilities businesses.

The Ayalas have been in the insurance industry since 1933, when earlier generations established the predecessor of Ayala Life Assurance, Incorporated.

Most of the Ayala group's insurance companies are housed under BPI, which bought in 2000 various small life, non-life and re-insurance firms, in turn, selling these new products through its branch banking network.

The life insurance operations under Ayala Life is the 7th largest in the country with over 129,000 premiums in place. According to the joint statement on Wednesday, it had over P1.8 billion of gross premiums in 2008.

According to records from the Insurance Commission, Ayala Life had P11.5 billion assets as of December 2008. 

Philamlife, on the other hand, is the largest insurer in the country and the undisputed market leader in the life insurance sector with consolidated assets of up to P111 billion as of December 2008.

A merger of the Ayala group's insurance and Philamlife's businesses could have catapulted the Ayala family to the top of the heap.

In March 2009, however, the sale of Philamlife was called off. AIG decided to change its strategy and instead folded Philamlife into AIG’s Asian unit, AIA Group.

The AIA Group has over US$60 billion in assets and a base of over 20 million customers. Philamlife said in the Wednesday statement that its inclusion into AIA is “in the process” and is “subject to regulatory approvals.”

Bancassurance

Despite the aborted sale, Philamlife has apparently remained in the merger and acquisition arena. This time, it stayed on the other side of the fence.

Except for its acquisition of the 51% stake in Ayala Life, Philamlife did not include additional information on the financial terms of the new deal with BPI.

Both stressed, however, that the bancassurance arrangement was key in the deal.

A bancassurance arrangement is mutually beneficial to the new partners. To Philamlife. it means being able to piggyback on an existing distribution channel—BPI’s network of over 800 branches and 1,500 Automated Teller Machines nationwide—thus sparing it from spending for the same infrastructure.

For BPI, it means additional financial products it could add to its current menu. An extensive product portfolio means more ways to profit from its over 3 million customers.

Philamlife's new president and chief executive Trevor Bull described the partnership as “an exciting and positive development that will significantly increase our distribution footprint and offer a substantially wider selection of quality life insurance products to BPI's customers, which are keys to success under the growing popularity of bancassurance in the region."

For his part, BPI president and chief executive officer Aurelio Montinola III said, “We believe that there are significant cross selling opportunities on both sides. We feel that in the same way that Philamlife will have access to our customer base for life insurance products, BPI will have reciprocal access to Philamlife's customers for banking products. "

BPI Capital and ING acted as financial advisors to BPI while Deutsche Bank acted as sole financial advisor to Philamlife and AIA for this transaction.

Bancassurance has become an important profit contributor to financial industry players. BPI said that in the first 7 months of 2009, Ayala Life’s gross premiums increased by 140% to P2.6 billion “as a result of strong bancassurance sales.”

For Philamlife, its existing bancassurance unit Philam Equitable Life Assurance Company (PELAC) has been a significant contributor of premium income.

Last year, PELAC contributed premium income of P2.1 billion to Philamlife’s total gross premiums of P13.6 billion. PELAC’s 2008 premium income was 70.6% higher than the previous year.

What about BDO?

The new bancassurance-related deal between Philamlife and BPI raises a question on the existing relationship between Philamlife and another bank, Banco de Oro (BDO).

PELAC is 95% owned by Philamlife and 5% by BDO. PELAC was actually established in 2003 to focus on the sale of Philamlife’s life insurance products to the customer base of Equitable PCI Bank, which BDO acquired in 2006.

The merger of BDO and Equitable Bank edged out BPI as the country's second largest lender. BDO has assets of P677 billion and a nationwide network of 657 branches.

The Sys have been aggressive in scaling up their banking assets to complement their cash rich retail business. The Sys control the SM chain of malls, which has been strategically positioned to take advantage of a consumption-led economy based on over $16 million remittances sent home by about 8 million Filipinos overseas.

Aside from PELAC, BDO also has an exclusive bancassurance deal with Generali Pilipinas, a minority insurance player that the Sy family also has a stake in.

When Philamlife was still for sale, the Sys joined the bid in partnership with Generali.

Before the Philamlife-BPI deal, Philamlife was negotiating the extension of its bancassurance deal with BDO since it is set to expire in 2010.