Finance

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.

Is Beijing about to find out what it's like to be held hostage by a monster it helped create?

For the last several years, China has allowed smaller insurance companies to flourish in the interests of creating competition for industry heavyweights such as China Life Insurance Co. and Ping An Insurance Co. Authorities wanted to shake-up the population's save at all costs mentality and at the same time, encourage investment in areas other than the nation's oftentimes volatile stock market.

Sales of  universal life products -- short-term, high-yielding investments that include a small insurance component -- boomed, with newer market entrants like Anbang Insurance Group Co., Huaxia Life Insurance Co. and Foresea Life Insurance Co. the main issuers. To fulfill the heady returns promised, those firms embarked on highly leveraged acquisitions, from hotels in New York to insurance assets in South Korea and Belgium.

Promises Galore
China Life sold 281 billion yuan of insurance policies, including universal life products, in the first quarter. Anbang wasn't far behind, at 189 billion yuan
Source: Bloomberg Intelligence

Debt levels spiraled and before long, Beijing started to take steps to rectify the situation. In February, the China Insurance Regulatory Commission banned the chairman of Foresea Life from the industry for a decade, two months after it barred the company from selling all universal life products, indefinitely. It then prohibited Foresea Life from applying to sell new policies of any kind for three months.

Now, Foresea Life is warning of mass defaults and social unrest unless the nation's insurance regulator lifts that new-policy sale ban, according to a letter seen by the Financial Times. The unit of conglomerate Baoneng Group said it expects 60 billion yuan ($8.7 billion) in redemptions this year and might not be able to meet payouts unless it can sell fresh policies.

Foresea Life said in a statement on its website that cash flow is stable and business relations with customers are good. It also said its debt-coverage ratios are higher than what the regulator requires.

It's difficult to see how that's true. According to Bloomberg Intelligence analyst Steven Lam, Foresea Life's market share slid to 0.9 percent in the first quarter, based on premiums and investment funds received, from about 2.9 percent as of March 31, 2016.

And bondholders aren't buying it either:

No Guarantee
Sold at par to investors in September 2015, Foresea Life's 2025 notes have been in free fall since late last year
Source: Bloomberg

Whatever the case, Foresea Life's now-public complaint shines a spotlight on how China's tamping down on high-risk insurance products could hurt Beijing's much-prized focus on social stability above all else. If Anbang and Huaxia Life add their voices to the fray, Beijing may discover the real cost of its anti-leverage campaign.

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:
Katrina Nicholas at knicholas2@bloomberg.net