Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's serial overseas acquirers tend to follow a familiar trajectory -- a spurt of purchases that eventually tapers off as Beijing reins in their ambitions. With the insurance regulator probing Anbang Insurance's funding and investments, one of this year's most prominent buyers looks to have reached the waning phase sooner than most.

Signs that Anbang's honeymoon spree was approaching its end came in April when the insurer walked away from a $14 billion deal for Starwood Hotels, what would have been China's biggest U.S. acquisition. Starwood was the apogee of a two-year shopping binge that raised questions over Anbang's sources of finance, given that it started life little more than a decade ago as a provincial car insurer. Sure enough, Caixin reported in early May that the China Insurance Regulatory Commission was sending a team to investigate funding liabilities at Anbang.

The company began ramping up acquisitions in late 2014 when it bought the famed Waldorf Astoria hotel in New York for $1.95 billion, a price some analysts called steep. So far, Anbang has announced more than $14.5 billion of overseas purchases, including $1.57 billion for U.S. life insurance provider Fidelity & Guarantee Life in November and $6.5 billion for Strategic Hotels & Resorts in April. Both those deals have yet to close.

Overseas Rush
Anbang Insurance's overseas acquisition spree only began in 2014
Source: Bloomberg

There's no doubt that Chinese insurers need income-generating assets. All are grappling with falling returns and rising liabilities. Yields on 10-year bonds in China have fallen to about 2.9 percent from 4.7 percent at the start of 2014, after six cuts to benchmark interest rates. A stock-market selloff has compounded the hit to earnings, with industry giants such as China Life and Ping An posting declines in first-quarter investment income of more than 25 percent.

Anbang's dilemma, like many small Chinese insurers, is even worse, because a large bulk of its income comes from so-called universal life policies that are essentially wealth management products. These promise high returns in a short time period, in contrast to the longer-term, protection-focused policies that dominate sales at its larger state-owned peers. 

Weighty Commitment
Promised returns to policyholders at China's non-state-owned insurers are high
Sources: Company websites, Bernstein analysis
Footnote: Promised returns = crediting rates. Only a small portion of policies sold at insurers such as China Life and Ping An are wealth-management-type universal life products.

To meet those liabilities, Anbang needs to buy overseas assets that promise higher returns than those available in China, whether that's through real estate and hotels, or insurance assets in markets such as South Korea.

The focus on universal life products has super-charged the company's growth and given it a war chest to fund acquisitions. Anbang rose to be China's ninth-largest insurer by premiums last year, from 40th in 2013, according to Bloomberg Intelligence analyst Steven Lam.

Rising Rank
Anbang last year was China's ninth-largest insurer by premiums
Sources: Bloomberg Intelligence, China Insurance Regulatory Commission

Given the pressure to pay returns, Anbang needs to keep finding good-quality, revenue-generating assets. Whatever the concerns over its finances, calling a halt to the insurer's international expansion may lead to an even uglier result. That's something for Beijing's regulators to consider. Expect those overseas purchases to carry on, though at a less ambitious pace.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net