Reinsurance is a game of scale
The hotly-contested auction of pan-Asian reinsurer ACR Capital Holdings illustrated Chinese players’ rush to bulk up in their home market and beyond.
Singapore-headquartered ACR said on Wednesday that two Shenzhen government-owned entities, Shenzhen Qianhai Financial Holdings (QFH) and Shenzhen Investment Holdings (SIH), had won an auction for the firm.
In China, many banks are based in Beijing, insurers are headquartered in Shanghai and now the Chinese government wants to make Shenzhen the hub in China for reinsurance.
The chairman of QFH, Li Qiang, echoed the government's ambition when he said that he plans to “make Qianhai the national centre for reinsurance”.
With the sale to an arm of the Chinese government, ACR is now more likely to achieve the scale and retrocession contacts needed to absorb large losses in a region prone to natural catastrophes.
"Our partnership will take ACR’s penetration of the Chinese market to the next level,”said Peng Haibin the chairman of SIH which is the largest shareholder in Ping An Insurance and has a whopping $65 billion of assets. China is already ACR’s largest market.
What was surprising about the intensity of the auction is that ACR has had a mixed run since it was founded by entrepreneur John Tan with $620 million in 2006.
It was hit hard by the Thai floods in 2011, a year when about 60% of natural catastrophe losses globally were in Asia. There has also been a rise in protectionist measurers to promote local reinsurers in Indonesia, Vietnam and India across recent years.
Over the past decade ACR has built up a platform in terms of premiums of slightly less than $1 billion - but it needed more scale.
ACR and others have found reinsurance particularly challenging in Asia as people with the technical underwriting skills are in short supply and the necessary loss statistics are thin on the ground.
Asia suffered the largest proportion of economic loss from catastrophes in 2014 and 2015 at 47% and 41% respectively according to credit rating agency Fitch.
ACR’s private equity owners including Britain’s 3i and Morgan Stanley’s private equity arm have had little patience for big losses and riding the ups and downs of insurance cycles. For years now 3i for one has been keen to cash out, putting pressure on management to minimise risks and maximise profits.
Since the Thai floods ACR's management becamce much more risk averse and sought to maintain a capital buffer that could withstand the 1:1,000 chance of a catastrophe.
The retirement of Tan last year finally paved the way for the auction of the business when all shareholders were united on wanting out.
Bids came thick and fast from Chinese insurers including Foresea Life Insurance, China Taiping Insurance, Fosun’s Peak Reinsurance as well as Hong Kong's Mason Financial. There was also interest from Bermuda-based and European-headquartered reinsurers looking to bulk up in Asia.
Apart from sheer scale, Chinese insurers are also looking for currency diversification as the renminbi weakens.
In the end, QFH and SIH paid about 1.3 times book value. Global reinsurers trade around one times book.
Winner takes all
Chinese insurance companies are keen to hone their insurance skills in their domestic market due to changes in the country’s regulatory capital regime.
China’s new risk-based capital framework and the China Risk-Oriented Solvency System (C-ROSS) place greater emhasis on catastrophe–risk exposure in determining appropriate capital buffers.
The new regime is also likely to prompt greater placement of reinsurance within the local market rather than overseas due to more favourable capital charges imposed on reinsurance receivables from locally incorporated reinsurers – so for players such as QFH there is opportunity to grab market share from foreigners in China.
Bermuda-based reinsurance firm Validus recently set-up in China to try to mitigate the impact of the new rules, according to a person familiar with their plans.
ACR acquired a small Hong Kong-based insurance firm called Concord in 2014 to try to win a license in mainland China more easily. It does not have one yet.
Credit rating agency Fitch has said in a report that it expects competition in China to intensify after the creation of several local reinsurers this year and last. Also newly set-up insurers or smaller insurers with thin capitalisation will need to rely on reinsurance to mitigate their solvency strain due to ongoing new business growth.
The new players includes QFH which only won a license from the China’s insurance regulator CIRC in March. PICC is also setting up a new reinsurance firm, PICC Reinsurance.
ACR’s shareholders, 3i, Khazanah, Temasek and Marubeni Corp. and Morgan Stanley’s private equity arm, are all exiting.
Separately 3i said it had sold its 24% stake for about £182 million ($253 million), valuing the company at about $1 billion. 3i and Khazanah each invested $200 million in 2006.
Other investors at the time included Och Ziff, Morgan Stanley Private Equity Asia, Credit Suisse Private Equity Asia and the Luxembourg Sicav "Worldwide Sicav".
Marubeni bought a 22% stake in ACR in 2012 paying about 20 billion yen, after the Thai floods and the tsunami in Japan. Temasek acquired its stake from Och-Ziff.
Some of the buyers were concerned the deal would not win approval from regulators given QFH is a very new enity. However, people familiar with the matter say that regulators in Singapore and Malaysia have already given an unofficial nod to the deal, according to a source.