Cross hairs are on insurers as China takes aim at raiders

CIRC urges companies to have profound rethinking of the problems created in the last year and take great caution to manage the insurance fund

PUBLISHED : Friday, 10 February, 2017, 10:39pm
UPDATED : Friday, 10 February, 2017, 11:27pm

China’s insurers are getting cross hairs on their backs, as financial regulators take aim at corporate raiders who use insurance premiums collected from policyholders to finance their takeovers and equity investments.

Insurers should “reflect on their faults,” manage their funds with greater care, said Chen Wenhui, vice chairman of the China Insurance Regulatory Commission (CIRC) in Beijing on Thursday, during an annual conference with insurance companies nationwide .

Some insurers have been “reckless” with their investments, by making highly leveraged hostile takeovers, or leading outsize acquisitions overseas far beyond their core business, Chen said.

Chen’s speech didn’t name any insurer, although the regulator’s actions have been louder than his words. At least four insurers had been investigated since December and subjected to reprimands that curtailed their ability to sell new products, as well as their ability to use the premiums of their policyholders to invest in equities.

The crackdown follows at least a year of headline-grabbing acquisitions, during which Chinese conglomerates used their insurance units as war chests to finance their shopping spree of assets at home and abroad.

Their coffers had been filled with last year’s 27.5 per cent surge in insurance premium income, reaching a record 3.1 trillion yuan (US$450 billion), according to CIRC data.

Anbang Insurance Group, China’s largest unlisted insurer, bought the Waldorf Astoria hotel in New York, and was engaged in a US$14 billion bidding war with Marriott International to buy control of Starwood Hotels & Resorts.

Baoneng Group, a little known insurer, came from nowhere to acquire the largest single stake last year in the country’s biggest property developer at that time, China Vanke Co.

“These emerging insurers had relied heavily on universal life products” for their capital source, using products “mainly issued through bancassurance aimed at retail policyholders,” said Dayton Wang, an analyst at Guotai Junan International. Chinese regulators have been compelled to act because “the use of the money is related to not just financial stability, but also social stability,” he said.

Many insurance policies in China are akin to wealth management products, where the insurers guarantee return rates that surpass bank deposits.

In order to earn enough returns to honour their guarantees, these insurers hand their capital to their parents, which then invest them in get-rich quick schemes, acquisitions and equity punts.

China’s securities regulator Liu Shiyu also added bite to Chen’s speech, inveighing against market manipulators and corporate raiders who used capital from insurance policyholders to fund their shopping, promising to bring them to justice.

Xiao Jianhua, the owner of Baotou Beida Tomorrow Resource Technology, also controls Huaxia Insurance. The closely held insurer, with 262.4 billion yuan in assets, was ordered by the regulator to suspend its online business, and barred from applying to issue new products for three months. Xiao was taken away by Chinese police before Lunar New Year to assist with investigations into alleged stocks manipulation.

After a year of frantic deal making and shopping, the capital adequacy and solvency ratios among some of the smaller insurers have fallen close to the regulator’s allowable minimum, raising concerns about the security of policyholders’ life savings.

In late January, the insurance regulator issued new rules requiring any equity stakes exceeding 5 per cent of a listed company’s total shareholdings to be reported to the regulator, in addition to stock exchange filings. Any outright takeover by an insurer requires the approval of the China Insurance Regulatory Commission.

Foresea Life, associated with Baoneng’s owner Yao Zhenhua, reported that its solvency ratio had fallen to 112.47 per cent in the fourth quarter, from 143.93 per cent, close to the minimum of 100 per cent.

Evergrande Life, which also funded its parent company China Evergrande Group’s ownership raid on Vanke, reported that its solvency ratio had plummeted to 109.68 per cent in the same period, from 179.73 per cent.

Both Foresea and Evergrande Life were investigated, reprimanded and ordered to halt their online businesses.

China’s regulators had been particularly forceful in compelling insurers to stop their reliance on aggressive short-term and high-yielding products, said Moody’s analyst Zhu Qian.

“Once their solvency ratio approaches the regulatory threshold, they will have to seek capital replenishment,” she said. “If they fail,they must rectify according to the regulatory requirements.”