Regulatory tightening may slow Anbang’s deal-making

Tighter controls on capital outflows and scrutiny from other Chinese regulators mean tighter constraints on overseas expansion, experts tell S&P Global Market Intelligence.

Regulatory tightening may slow Anbang’s deal-making
Anbang made headlines when it bought the Waldorf Astoria

After splashing out billions of dollars on overseas buys in less than two years, Anbang Insurance Group Co. Ltd. may find itself pushed off the acquisition trail as Chinese authorities clamp down on both capital outflows and insurers' riskier products.

The insurance company initially gained global attention with its US$1.95 billion purchase of the Waldorf Astoria New York hotel in October 2014, and later became the first Chinese entity to strike a deal for a U.S. insurer with its pending US$1.58 billion acquisition of Fidelity & Guaranty Life.

However, Anbang's sudden withdrawal from a US$14 billion bidding battle for Starwood Hotels & Resorts Worldwide LLC due to what it called "various market considerations" triggered speculation that the deal would have been blocked by the Chinese insurance regulator. The deal, had it gone through, could have pushed Anbang's overseas holdings above 15% of its total assets, the limit imposed by the industry watchdog.

Tightened controls on Chinese capital outflows have also been imposed since late 2016, following a fall in China's foreign exchange reserves to just over US$3 trillion, the lowest level since February 2011.

"Under the current conditions of tightened forex regulations, if a company continues aggressive overseas expansion, it will certainty fall under regulatory scrutiny," Zhou Min, a Hong Kong-based senior research associate at Sanford C. Bernstein, told S&P Global Market Intelligence. "Anbang's investment approach was even more aggressive than most Chinese mutual funds."

The country's State Administration of Foreign Exchange has begun vetting outbound capital transfers over US$5 million, according to Reuters, citing sources. Previously, only deals above US$50 million were subject to scrutiny.

Aside from forex controls, other regulatory bodies including the China Insurance Regulatory Commission, the National Development and Reform Commission and the Ministry of Commerce have tightened rules on outbound investments, said Zhan Hao, a lawyer at Beijing-based AnJie Law Firm who works with Chinese insurers on overseas investments.

Another constraint on overseas expansions such as Anbang's, especially in the second half of the year, may come from caution ahead of the 19th National Congress of the Communist Party of China, according to a PricewaterhouseCoopers presentation in January. The meeting, which takes place every five years, is expected to usher in personnel changes among the highest ranks of the country's political leaders.

Anbang unit Anbang Life Insurance Co. Ltd., which began operations in 2010, grew rapidly to become the third-largest life insurance company in China by November 2016, largely on the back of sales of products with wealth management features. The sales of these products have helped fill Anbang's war chest for overseas investments, with such short-term, high-yield universal life insurance contracts accounting for 66.7% of Anbang's total premium income as of the first 11 months of 2016.

"Anbang is more like an investment company, not a life insurer focusing on traditional protection-type policies," said Dominic Chan, head of Asia-Pacific insurance research at BNP Paribas in Hong Kong.

Since the beginning of 2017, however, the Chinese insurance regulator CIRC has clamped down on the sales of short-term investment-type products, arguing that these may create asset-liability mismatches. In one move, the regulator stopped approving new branches for companies that sell more of such products than traditional protection-type policies. Meanwhile, Industrial & Commercial Bank of China Ltd.China Construction Bank Corp.Industrial Bank Co. Ltd. and China Merchants Bank Co. Ltd. have also all stopped selling Anbang's investment-type policies at their branches following warnings from the CIRC, Caixin reported Jan. 12.

"The tightening [on investment-type policies] will have some impact on Anbang's cash inflow and would be a shock to its business model," Zhou said.

Anbang could move toward selling more protection-type policies, but such a pivot could take two to five years as it builds up its own sales force along the lines of more traditional insurers, he said.

Anbang declined to comment, with a Hong Kong-based spokeswoman saying the company prefers to maintain a low profile.

The article is authored by Xuan Lei of S&P Global Market Intelligence

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