China Life unveils approved M&A look; tackles new risks

Belt & Road is the new M&A catch phrase as insurers seek to appease regulators. But new traps await the unwary even in “approved” countries.

State-controlled China Life Insurance is looking to expand in Southeast Asia and its plans appear studiously designed to avoid the political missteps that have tripped up peers such as Anbang Insurance

The country’s biggest life insurer is seeking the halo effect of aligning its overseas strategy with President Xi Jinping’s plan to expand trade, dubbed the Belt and Road Initiative.

Hung Wong, general manager of strategic planning at China Life Insurance Overseas said his company was actively looking to grow, particularly in Malaysia, Indonesia and Thailand.

“In terms of our expansion strategy, we are taking a very measured pace, we not going to be aggressive, we’re not going to be in a rush and we are in it for the long term, just like the Belt and Road Initiative,” Wong said.

Hitting the brakes
After the explosive growth of outbound Chinese M&A in 2015 and 2016, with outward direct investment overtaking inbound flows for the first time, China stuck a pin in the ballooning volumes of deals.

Since late last year, Beijing has clamped down on M&A it considers “irrational” or “fake” and restricted deals in some sectors such as real estate.

Chinese insurance company Anbang fell foul of regulators after a debt-fuelled overseas expansion drive between 2014 and 2016, during which it spent over $30 billion on assets such as the Waldorf Astoria hotel in New York. Beijing ordered banks to scrutinise lending to Anbang and suspended it from selling universal life insurance products. Anbang’s chairman Wu Xiaohui was detained in June.

So far this year there has been only $681.9 million worth of overseas acquisitions by Chinese insurance companies, versus $11.36 billion last year, according to data provider Dealogic.

To be sure, China Life also appears to have been impacted by the clampdown on M&A. This year it has inked three deals versus eight in 2016.

Its deals last year might not have been passed muster under the new guidelines, such as its participation in the purchase of the largest office building transaction in the US during the 2016, the $1.65 billion purchase of a building on 1285 Avenue of the Americas.

China has instead carefully stipulated what kind of assets its companies should be buying and it has clearly given the green light to deals in countries along the Belt and Road.

To encourage such spending, in July 2015 the China Insurance Regulatory Commission (CIRC) relaxed rules and expanded the scope of projects for insurers to invest in. Insurers no longer need regulatory approval to invest in infrastructure.

Political and financial industry sources have told FinanceAsia that Beijing is particularly keen for Chinese instiutions to focus on Southeast Asia among the 65 countries along the Belt and Road.

“Our sweet spot is very much in this region, in Southeast Asia,” said Wong at the FT Asia Insurance Summit 2017 in Hong Kong.

The Beijing-headquartered life insurer currently has operations overseas in Hong Kong, Macau and Singapore. It also has representative offices in New York and London.

“We’re coming into a new phase in terms of outbound Chinese investments, and China Life is certainly one of the companies that is going to be part of that phase,” said Edwin Northover, a partner at law firm Debevoise & Plimpton.

This wave of investment has the potential to change the insurnace landscape in the region. China’s insurance sector has the capacity to invest more than an estimated Rmb24 trillion ($3.7 trillion) in infrastructure and real estate over the next 20 years, according to reinsurer Swiss Re.

“A slower, more measured pace looking to the long term and potentially leveraging off the Belt and Road initiative, I think is where we will see the direction of Chinese insurance investment over the coming years,” said Northover.

De-risking M&A
Apart from trying to stem money flowing out of the country, Beijing has another agenda. 

“Part of the government’s strategy is to make sure that the quality of investments is good, and to make sure there is no embarrassment for China as a result of deals not happening,” said Northover.

That is a tall order along the Belt and Road as many of the designated countries have unstable regimes, growing religious terrorism, as well as institutions riddled with corruption.

Militants in Pakistan said in June that they had killed two Chinese nathionals they believed were missionaries posing as language teachers.

“There is lots of risk,” said John Spence, regional head of M&A and strategy at Trieste-headquartered insurer Generali Asia.

Still, eyes on the prize.

Generali is already working with its joint venture partner China National Petrolum
Corporation
(CNPC) in places like Bangladesh and Pakistan selling products to the people working on projects such as the medical insurance and insuring the physical assets.

CNPC has either invested or is constructing the projects they are working together on, he said.  

Reinsurer Swiss Re estimated that the Belt and Road plan would boost commercial insurance premiums by $23 billion since the policy’s official launch in and 2013 in a report.

Products could include engineering and liability insurance cover for the construction phase of projects. Marine, transport, export credit and product liability are the key lines of business for international trade activities.

Swiss Re advised that within the limits of local regulations, China’s insurers should consider partnership with a local entity.

Impact of Belt & Road on China Commercial Insurance from already planned projects
Source: Swiss Re

One way in which China Life is looking to reduce the geopolitical risk and improve the sustainability of its purchases is by carefully selecting markets with a strong affinity with China, be it culturally or socially.

“We are very keen to expand in countries where there is a significant Chinese population to benefit from the Chinese diaspora,” said Wong. “If you look at Southeast Asia there are countries where people share a much stronger affinity with Chinese people and the Chinese state.”

This will also makes sense in terms of sales of insurance products as customers will tend towards the familiar.

“Insurance is a long-term promise for the future,” said Wong, “so the brand and the image and what the company stands for will be top of mind for a lot of our customers.”

China Life thinks its country’s phenomenal development of its infrastructure over the past 30 years will be of use in Southeast Asia.
  
“It has been an experience that we believe will be worthwhile for us to share with our brethren along the Belt and Road countries.

The infrastructure gap in Belt and Road countries could top $20 trillion between 2015 and 2030, said Swiss Re.

“Making investments along the Belt and Road means that as an insurer we would be very keen to look at opportunities in the infrastructure,” said Wong.

However he noted that Chinese companies need to mitigate the risk of moving into new markets and that could come via joint ventures.

“We [Chinese insurers] need international legal expertise and underwriting expertise in the GI [general insurance] space and all those things that currently sit with multinational companies.,” said Wong.  “We only use so much silk,” said Wong. 

Trump factor
Seeking out friendly jurisdictions is increasingly important in these times of rising protectionism to avoid political embarrassment for China.

Roadblocks abound overseas, not least in the US where China Oceanwide has had to withdraw its application to watchdog Cfius to buy control of US insurer Genworth. It will refile with additional mitigation proposals.

Fosun has had to delay the sale of Ironshore and sell a line of business when Cfius raised concerns over its sale of insurance products to government employees.

“As a Chinese investor you need to be well versed in the regulatory regime and the political landscape into which you are investing. A few people have been caught out in that,” said Edwin Northover, partner, Debevoise & Plimpton.

For information about our forthcoming supplement “Belt and Road - Driving Asia’s growth”, please contact Keith Frith on [email protected] or (T) +852 2122 5266.

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