Anbang chairman’s close ties to China’s insurance regulator under strain amid setbacks on overseas deals

Anbang’s approach of investment financing first, insurance products second, is a reversal of the traditional way of doing the insurance business – and it has attracted scrutiny from the nation’s regulator

PUBLISHED : Friday, 10 June, 2016, 11:47am
UPDATED : Friday, 10 June, 2016, 10:23pm

With a powerful network of business friends and associates, Wu Xiaohui, chairman of China’s privately-owned Anbang Insurance Group, has the reputation of knowing everyone from the doorman to chairman at the China Insurance Regulatory Commission (CIRC), the industry’s top regulator supervising his business.

That type of access has opened many doors for Wu, whose company has grown from a little-known car insurer founded in east China’s Zhejiang province in 2004, into a conglomerate with assets worth more than 1 trillion yuan (HK$1.18 trillion), covering businesses including insurance, banking and property both inside and outside China.

But it looks like the smooth sailing that enabled Wu to raise money onshore while making outbound investments has hit choppy waters, with the CIRC beefing up risk control in the booming insurance sector, while the nation’s top leaders are becoming more selective in supporting overseas merger and acquisition attempts.

“The weather is changing. It seems the powerful support for Anbang which accompanied its rise is tapering off,” an insurance analyst with a state-owned investment bank in Shenzhen said, requesting anonymity.

Three months after it abruptly withdrew from a bidding war with Marriott International to acquire hotel chain Starwood for US$ 14 billion, Anbang was in the news again last week for having withdrawn an application to acquire US based annuities and life insurer Fidelity & Guaranty Life (FGL).

Although a source familiar with the transaction told the South China Morning Post that Anbang was preparing to refile its application, the timetable is unknown.

This type of setback is rare in Anbang’s relatively short history. According to Dealogic, Anbang has only withdrawn from two deals in the overseas M&A market during the period from 2012 to 2015.

It has completed 11 outbound acquisition deals since 2012, with aggregate deal value worth more than US$4.98 billion, including the eye-catching US$1.95 billion purchase of the historic Waldorf Astoria hotel in New York City in 2014.

Foreign media reported that the New York finance regulator had sought more detailed information about Anbang’s funding and shareholder structure before proceeding with the FGL deal. Analysts said it seemed the authority needed more proof from Anbang to show that sufficient financing would be secured from legitimate channels.

Some insurers are becoming more reliant on issuing so called universal life policies to raise funds, and invest the money to snap up riskier assets with higher returns
Dayton Wang, analyst, Guotai Junan International

Several days ahead of the news, Wu was quoted by Caixin, a mainland based financial magazine, as saying; “Anbang has assets that far exceed 1 trillion yuan, enough to carry out foreign investment.”

Wu made the statement after market rumours suggested that the termination of the company’s attempt to purchase Starwood was on orders from the CIRC because the regulator was concerned that the bid crossed a red line as Chinese insurers are capped at investing no more than 15 per cent of their assets outbound.

It is unknown how much leverage or bank loans Anbang was planning to use to fund the purchase of Starwood and FGL, but in its earlier M&A deals the company has been adept at using leverage, according to industry sources who requested anonymity.

“To put it simply, Anbang has been reversing the trajectory of development of insurers,” said the Shenzhen analyst. “For traditional insurers, fund management follows the issuance of insurance products. While for Anbang, it seems investment goes first, and insurance products were structured and issued based on the needs of investment financing.”

Anbang collects more than 40 per cent of its insurance premiums from the sale of so-called universal life policies, which are essentially high-yield wealth management products that combine certain life safety protection, and usually carry short-term payments including investment dividends.

Anbang’s premiums from universal insurance products grew 306 per cent in 2015 to 49 billion yuan, compared with industry-wide growth of 95 per cent, the Financial Times calculated based on regulatory data.

Such growth helped Anbang climb the ranks of premium Chinese life insurers from 40th in 2012 to fourth place last year. However, it also meant Anbang was under pressure to meet higher investment returns.

Dayton Wang, an analyst with Guotai Junan International in Hong Kong, said insurance companies would typically buy into low risk, low-return, but highly liquid financial assets because the priority was to preserve capital value and make payments to policy holders when unpredictable conditions happen.

“However, some insurers are becoming more reliant on issuing so called universal life policies to raise funds, and invest the money to snap up riskier assets with higher returns,” Wang said. “For universal life policies, it is particularly challenging to cover short-term payments if the money is invested into long-term projects,” he added.

Market leaders in the sales of these products include Anbang and Qianhai Foresea Life Insurance, a company under Baoneng Group, which is still wrestling with China’s property giant Vanke’s management for control of the developer.

Since March, the CIRC has been tightening its scrutiny of universal life insurance products, and ordered insurers to reduce the proportion of universal life policies in their sales. The regulator was also said to be planning to send inspectors to Anbang Insurance as part of its stepped up scrutiny of insurers’ investments in real estate and unlisted equities. Anbang officials declined to comment on the reports.

As Anbang embarked on its shopping spree over the last few years, the growth rate of its assets has exceeded the increase in revenue generated by the insurance business.

The 2015 annual report released by Anbang Life Insurance, a flagship subsidiary of Anbang Group, shows that the company’s insurance income and net profit rose 20.5 per cent and 46.94 per cent, respectively. Assets increased 6.7 times year on year to 921.6 billion yuan last year, mainly due to global investments and acquisitions.

Anbang has developed a reputation for its opaque structure. Chinese corporate registry filings show 39 mostly anonymous corporate shareholders, with multiple layers of holding companies registered all around China.

It also seems to have complicated connections with former top Chinese leaders. Anbang’s Wu is rumoured to be married to a granddaughter of former Chinese leader Deng Xiaoping. Zhu Yunlai, son of former Chinese premier Zhu Rongji and Chen Xiaolu, son of revolutionary Communist general Chen Yi, both once served as directors of Anbang Group, earlier Chinese corporate registry records show.