What a difference 18 months make.
In November 2016, Chinese insurance maestro Wu Xiaohui was sharing a meal with Jared Kushner, son-in-law of US president-to-be Donald Trump.
The two would've had plenty to talk about. Wu's Anbang had made a massive splash in the New York real estate world, where Kushner was also a big player, with the $1.95 billion purchase of the plush Waldorf Astoria Hotel.
It capped a meteoric rise for Wu and Anbang, founded in just 2004. The fall was to be even more swift and dramatic.
On Friday, the Shanghai Prosecution Service formally announced it would prosecute Wu for "fraudulent fundraising activities" and "misuse of his position" – a rare case in which a company head is charged over the business's wrongdoing by authorities. Anbang faced an even more unusual fate. The China Insurance Regulatory Commission (CIRC) announced it would lead a working group to seize control of Anbang for the next year. It said “there are illegal operations at Anbang, which may seriously endanger its solvency capability ... prompting the government takeover to effectively protect consumer rights.”
Anbang's rampant overseas acquisitions of long-term and often illiquid assets were funded by the sales of short-term, high-yield quasi wealth management products. This activity carried massive duration and currency mismatch risks, noted insurance analysts.
CIRC's take-over could have been prompted by a threat to liquidity at Anbang.
"Anbang's quasi-WMP products sold since 2015 are coming to maturity now. But the music has stopped for Anbang," said Linda Sun-Mattison, a stock analyst at Bernstein.
Thanks to CIRC tightening, Anbang's premium inflow has evaporated since the second-quarter of last year. With much of its investment locked up, it will find it hard to meet the redemption payments. Rising yields on bank WMP products pose further outflow pressure.
Solvency capital could have been another trigger. Solvency margins at Anbang's life and health insurance fell sharply by the first quarter of last year.
"Regulators' clampdown on irregular solvency accounting would have also contributed to the collapse of its solvency positions," said Sun-Mattison.
But what lessons can investors take from the affair? Should investors be spooked? Initial market reaction suggests not – the Bloomberg Asia-Pacific Insurance Index was up 2.43% on Friday to 208.7 points as the temporary takeover removes any possibility of a messy bankruptcy and systematic contagion.
CONSUMERS WIN; BUT DO INVESTORS?
What's clear is that the regulator's interest is in what's best for the consumers – the mom and pop buyers who fuelled Anbang's rise by buying up products they didn't realise were too good to be true.
The panel of regulators that is taking over – which also included the central bank and watchdogs for banking, securities and foreign exchange – have pledged to introduce “high-quality” private capital to restructure Anbang Insurance and keep it private. They added the takeover “won’t affect Anbang’s external liabilities” and now the company’s operation was “stable”.
Another statement, released simultaneously by the CIRC, said “all the money transactions, asset purchases or sales, and information disclosures, must go through the panel’s approval first”.
There is a precedent for a government takeover of an insurance company in China. In 2006, CIRC said its investigations suggested New China Life Insurance's ex-chairman Guan Guoliang had embezzled and misappropriated money. The regulator used an industry protection reserve to become the biggest shareholder of New China Life (also known as Xinhua Life Insurance) by buying a 38.815% stake in the insurer. Then in 2009, the shares were sold to state-owned Central Huijin Investment. Two years later, the insurer executed a dual Shanghai and Hong Kong listing.
In the case of Anbang, it is not yet clear what will happen next. Nor is it clear whether the government will repay Anbang’s debt. But the insurer has been cashing out of its investments quietly last year, which some analysts view was likely to boost its solvency margin and ease debt repayment pressure.
What has been underscored though for investors is the reluctance of the Beijing government to allow big business failures to endanger the financial security of the man in the street – in this case policyholders, though stock investors have also benefitted.
And in 2015, the so-called "national team" plunged billions of dollars to prop up a creaking stock market. Earlier, it took the bad loans off the books of China's key banks ahead of listings in the mid-2000s.
For investors, at least at the smaller level, this is all good news. After all, who can resist a risk-free investment? For those concerned about so-called "moral hazard", of course, this is anathema.
With this in mind, it's worth a look back at how Anbang got here.
Anbang started out in 2004, and like many of China's fast-growing private sector, it was bolstered by powerful political connections – Wu is married to Zhuo Ran, granddaughter of Deng Xiaoping, the paramount leader who opened China up to the world. His other connections include Chen Xiaolu, the youngest son of Chen Yi, one of the founders of the nation with Mao Zedong. According to Chinese newspaper Southern Weekly’s, the younger Chen might even be Anbang’s invisible owner. The group is controlled by a group of entities owned by about 100 people with ties to Wu, according to a New York Times report in 2016.
Its rapid growth was fuelled by the sale of high-yield – and high-risk – insurance policies. For example, life insurance subsidiary Hexie Health had annual premiums worth around $14.5 million in 2013, according to CLSA. By June 2016, the company’s premiums had grown to $9.79 billion.
With so much money flowing in, Anbang set about putting it to work.
Over past three years, a global spending spree saw it snap up real estate and financial services assets including a $1.5 billion deal for Vivat, $1.1 billion for Rabobank’s mortgage business in the Netherlands, $1 billion for the Westin St. Francis hotel in San Francisco, $1 billion for Tongyang Life in South Korea, and $406 million for InterContinental Miami in Florida, among others.
To be sure, Anbang has not had it all its own way. When pressed by US regulators to disclose more details on an almost $14 billion bid for Starwood Hotels & Resorts assets last year, Anbang just walked away. Another deal to buy Fidelity & Guaranty Life, collapsed in April after Anbang failed to satisfy financial queries from US regulators.
But its problems became clearer early last year, as China's regulators took aim at so-called "universal life insurance" – a euphemism for a type of short-term wealth management product. At about the same time, regulators took a stand against "irrational" outbound M&A – with real estate and hotels specifically called out for criticism.
That didn't stop Anbang ... at least immediately.
In June last year, the company was at it again, purchasing a central Amsterdam hotel for almost $400 million. That was about as good as it got.
By the time the Amsterdam deal was announced, Wu's whereabouts were already the subject of speculation. He had not appeared in public since March's Boao Forum – although local newspaper Beijing News published an interview with Wu in April – and later in June the company admitted Wu was unable to fulfil his duties as chairman, citing unspecified "personal reasons".
That same month, the insurance watchdog sent in an inspection team after finding violations of rules on short-term insurance policies among its annuity products. These activities, CIRC said at the time, were "wreaking havoc" on market order.
Anbang has since been in sale mode. Its flagship Anbang Insurance Life unit raised at least Rmb6.6 billion by selling shares it held in the big-four state commercial banks in the second quarter last year, for example. More recently, it has reportedly been selling $9.5 billion worth of real estate and shares it bought from alternative investment giant Blackstone Group.
Additional reportng by Alison Tudor-Ackroyd
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.