What now for Anbang? Painful breakup, private investment likely

Following regulators’ takeover, private investors are likely to pick apart the chastened insurance firm.

Private investors are running their slide rules over Anbang Insurance Group in the hopes of picking up a bargain, but they should be aware some assets will be put on the block faster than others.

The China Insurance Regulatory Commission (CIRC) and other regulators, said on February 23 that they would formally take control of Anbang with immediate effect until February 22 next year. The insurance watchdog said authorities were holding the former Anbang chairman Wu Xiaohui and will prosecute him for economic crimes. 

CIRC indicated it would entertain offers for Anbang’s assets, which poses an interesting opportunity for private investors. Stock analysts are already talking about a string of sales.

“The regulators will introduce private capital to restructure Anbang, allowing it to remain a private company,” said Shujin Chen, an analyst at Huatai Financial, in a report. 

However, CIRC has already been in the driving seat for nearly a year, unofficially steering the company and quietly assessing its assets and liabilities. Companies that have made inquiries to Anbang staff about buying parts of the group have been told their hands are tied, according to one person involved in such processes.

CIRC’s very public takeover may have been prompted to reassure policy holders and avert a liquidity crunch. It could also have reassured itself that the insuance company was solvent and it would be able to avoid using public funds.

“There was no appetite for another GITIC,” said one financial institutions banker referring to the bankruptcy of Guangdong International Trust and Investment Corporation in 1998, China’s largest corporate failure at the time where liabilities far outstripped assets and the public purse was dented.

Bankers contacted by FinanceAsia suggested Anbang’s mainland Chinese assets might be sold first, to give regulators a quick win to show their public, followed by overseas companies which could take three to four years.

In China, Anbang is the biggest shareholder of Minsheng, holding 17.84% of the bank's shares (16.79% of its A shares and 1.05% of its H shares). Anbang is also the second-largest shareholder in China Merchants Bank with a 10.7% shareholding.

In November, China’s banking regulator asked Anbang to reduce its shareholdings in Minsheng and China Merchants Bank to below 5%.

Also in China it owns a 35% stake in Chengdu Rural Commercial Bank, according to S&P Capital IQ's data base. 

There is also Anbang itself.

Despite its reduced circumstances, Anbang has much to offer a new owner, most probably another Chinese insurance company. By 2017, Anbang had close to Rmb2 trillion ($316 billion) in assets, more than 10% of China's insurance sector assets.

“Anbang's life and health insurance licenses are still valuable assets in a highly regulated sector,” said Linda Sun-Mattison a stock analyst at AllianceBernstein.

The Chinese insurance sector as a whole is likely to be healthier and less risky for private investors now that Anbang’s more dubious business practices have been dramatically brought to a halt.

The fact the regulator has had to take possession of Anbang is embarrassing for the watchdog, in that it let the situation deteriorate to this point. Other government officials may well be asking: what took it so long?

After this eye-opener, CIRC is likely to plug the loopholes that allowed Anbang to take such risks.

Since 2014, CIRC relaxed rules on insurance asset allocation to boost returns for policyholders in its aging population. China’s new C-Ross capital regime, on the other hand, contained loopholes, which led to rising asset management risk. To name a couple of gaps: inadequate capital allowance for guarantee & options as well as loose rules on duration and currency mismatches.

“We expect more regulatory cleanups in coming months that could blacklist a few more cow-boyish insurers,” Sun-Mattison of AllianceBernstein added.

This should help lower competition, reduce pricing pressure and investment risks in the insurance sector, she said.

For foreign investors interested in Anbang’s mainland China assets, negotiating a deal may prove a time-consuming and obtuse process as the insurance sector remains highly regulated.

However, during US President Donald Trump’s visit to China in November, China's Vice Finance Minister Zhu Guangyao announced plans to remove caps on foreign ownership in Chinese financial institutions.

A foreign investor will be able to increase their equity holdings in life insurers to 51% three years after the rules take effect. The cap would be completely removed after five years. For commercial banks, the current foreign ownership caps -- for an individual foreign shareholder: 20%, all foreign shareholders: 25% -- will also be removed.

Still, it remains unclear when the rules will be formally introduced.

Overseas asset management firms might be very interested in Anbang’s wealth management product clients. However, Western insurance companies are likely to be more interested in building a clientele interested in protection products.

Anbang might well be worth the patience required to navigate the approvals process. History shows a former ward of the state can have a sound future in insurance.

CIRC became the biggest shareholder in New China Life in 2006, then sold it to state-owned Central Huijin Investment in 2009, after the then-chief executive, Guan Guoliang, was convicted of embezzlement.

New China Life went public in 2011 in Shanghai and Hong Kong and has gone through a successful turnaround under the current management. Its shares have risen since IPO in Hong Kong to HK$49.85 each from its listing price of HK$28.50.

OVERSEAS PRIZES

Anbang has a wide range of overseas financial service assets that will likely be up for grabs.

A few private equity funds, such as JC Flowers, specialise in financial services. But the more likely buyers are local insurance companies. 

In South Korea it owns Tongyang Life. In Europe it has equity in Belgian insurer Fidea, Delta Lloyd bank operations in Belgium and Dutch-based composite insurance group Vivat.

“As Vivat no longer has loan facilities with the parent company, it is relatively independent and can be sold to another company,” noted Marina Le Blanc, a credit analyst at ING.

The trouble is, a likely local buyer is not obvious. NN Group is still in the process of integrating its major takeover of Delta Lloyd and Aegon is struggling to recapitalise its Dutch unit. For a.s.r., its strict commitment to a 30% leverage ratio would make the financing of such a large scale acquisition challenging and expensive.

Yield on Vivat’s €650m 2024 bonds rose marginally to 2.217% from 2.174% on Friday.

This story has been updated to add extra material throughout 

To offer more insights on the insurance industry, FinanceAsia's sister title AsianInvestor is hosting its 5th Insurance Investment Forum in Hong Kong on March 1. Visit the website to register or find out more.  

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