Across The Border
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Chinese firms remain keen to invest in insurance targets

Moody’s report says outbound M&A deals by Chinese companies were worth US$6.6 billion in 2015, and have reached US$10.2 billion in 2016 so far

PUBLISHED : Wednesday, 23 November, 2016, 6:01pm
UPDATED : Wednesday, 23 November, 2016, 10:36pm

The acquisitive appetite of China’s companies by overseas insurance companies will remain strong, despite rising uncertainty and volatile market conditions, according to analysts.

But the risks of taking on the business might be high, given both insurance sector players and non-insurers are likely to join the bidders, analysts say.

Sally Yim, a senior analyst with rating agency Moody’s, said outbound insurance M&A deals by Chinese companies were worth US$6.6 billion in 2015, and have reached US$10.2 billion in 2016 so far, indicating support is stronger from non-insurance acquirers than sector players.

“Insurance is quite a specialised and long-term business with extensive capital requirements. Some non-insurance corporates may not fully understand these concepts,” said Yim.

“This may lead to conflict between management teams down the line, in terms of return levels and the need for capital injection to support the soundness and growth of the insurance operations,” she said.

The latest major insurance sector deal led by a Chinese company was announced in late October, when Genworth Financial Inc, a dominant carrier in US long-term-care insurance sector, agreed to sell to China Oceanwide Holdings Group Co, for US$2.7 billion.

Many like insurance sector targets, because they act like cashboxes, and can absorb foreign currency denominated premiums, which can be used as a long-term cash pool that supports the investment
Li Daokui, a professor of economics at Tsinghua Universit

“I find nowadays, Chinese companies are keen to go abroad to the US, and Europe, and are mainly after two things – properties and insurance companies.

“Many people say they like insurance sector targets, because they act like cashboxes, and can absorb foreign currency denominated premiums, which can be used as a long-term cash pool that supports the investment – a business model used by Warren Buffett,” Li Daokui, a professor of economics at Tsinghua University and a former central bank adviser, told a forum held in Beijing last week.

“However, after talks with entrepreneurs and Wall Street bankers, I have found Chinese companies are loss-making as they are paying too much for targets… the risks are great,” he added.

Using insurance assets to fund investments is a model often associated with Warren Buffett’s Berkshire Hathaway Inc, which has bought many of its long-standing successful investments using insurance policy reserves.

Compared with Japanese insurers, who are also active on the global M&A market, they tend to target companies with strong and often-niche positions in their respective markets, and have credit profiles in the A1-A2 financial strength rating category, a research report issued by Moody’s last week showed.

“Chinese firms often acquire mid-tier players with credit profiles in the lower A3-Baa financial strength spectrum.

“This is also reflected in deal size, which ranges from US$4-8 billion per acquisition by Japanese insurers, and US$1-3 billion for Chinese insurers,” the report said.

Genworth Financial was downgraded to Ba2 in terms of financial strength by Moody’s.

Dai Ke, principal at Roland Berger, said the risk of taking over mid-tier or below-level insurers remained the main target, and a management challenge.

Deal size ranges from US$4-8 billion per acquisition by Japanese insurers, and US$1-3 billion for Chinese insurers
Moody’s research report

“Some target companies may need fresh capital injection or new financing.

“Some may already have gone through several rounds of restructuring before going on sale, which requires strong management to really turn around performance,” he said.

The Moody’s report said, for Chinese insurers, the direct impact of acquisitions on their business profiles was likely be less pronounced, due to the smaller size of the transactions being made and the still robust and dynamic growth in the home market.

The resultant burden on the acquirers’ operations, however, and its credit profile can be “disproportionately large for those Chinese insurers, given the brief and rapid pace at which they have pursued overseas acquisitions, and their relative lack of experience operating as a multinational entity”, the report said.

Two examples of such risk are the inherent volatility associated with the type of specialty reinsurance facing the China Minsheng Investment Corp, after taking over Sirius International Insurance Corporation, and the negative spread issue observed in some life markets in Europe facing Anbang Life Insurance Co Ltd after it snapped up VIVAT, the report said.

“In addition, if the acquirer chooses to significantly re-risk the investment portfolio of the target, this could increase volatility and risk its overall profile,” said Yim.

On the other hand, some Chinese insurance groups, such as Anbang Group and Fosun International, have also actively acquired non-insurance assets to diversify outside of the global insurance market.

High-profile cases also include Fosun’s acquisition of Club Med, Anbang’s purchase of the Waldorf Astoria and the attempted bid for Starwood Hotels & Resorts Worldwide.

Analysts with Moody’s said the moves reflected these groups’ desire to generate long-term investment returns from value investments across a broad spread of asset classes.

Although the acquisition of such non-insurance assets can provide a good long-term hedge against insurance liabilities – for example, property investments can provide a stable return to match long duration of life insurance liabilities – they can also raise policyholder credit risk.

For example, major property deals can imply meaningful asset concentration, are usually very illiquid and may turn out to provide only modest returns.

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