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.

As a Chinese firm that came from nowhere and transformed into one of the nation's largest insurers, Anbang Insurance Group Co.'s tumble from grace was perhaps predictable. China Inc.'s history is littered with fallen businessmen, even ones that were politically well connected.

Caijing Magazine said late Tuesday that Anbang Chairman Wu Xiaohui was taken away by authorities on June 9, citing people it didn't identify. The news report was later deleted from Caijing's website and Anbang issued a statement saying Wu is unable to perform his duties for personal reasons.

It's a situation that would best be resolved quickly, but probably won't be.

A small provincial car insurance company just 12 years ago, Anbang was by last year selling premiums faster than state-owned China Life Insurance Co.

At a Premium
China Life sold 281 billion yuan ($41 billion) of insurance policies, including universal life products, in the first quarter. Anbang wasn't far behind, at 189 billion yuan
Source: Bloomberg Intelligence

The bulk of those policies were high-risk, short-term ones masquerading as life insurance products, and they were snapped up by retail investors. Similar to peers including Foresea Life Insurance Co., Anbang was promising returns of at least 6 percent, well above what could be had from government bonds or bank deposits, according to Bloomberg Intelligence analyst Steven Lam.

To meet those sort of yields, Anbang embarked on a global buying spree. Many of its purchases, however, were bricks-and-mortar assets such as hotels that can't be easily liquidated.

Gone Shopping
Anbang's overseas buying spree stretched into the billions of dollars last year
Source: Bloomberg

Wu, whose marriage to the granddaughter of Deng Xiaoping has helped him build contacts, has been almost as adept at forming relationships in the U.S. Anbang, and a company owned by the family of President Donald Trump's son-in-law Jared Kushner, in March ended talks to develop 666 5th Avenue, a Manhattan office tower. Investing in the loss-making property would have won Wu some kudos, both at home and abroad.

Notwithstanding failed tilts for Starwood Hotels & Resorts Worldwide LLC and Fidelity & Guaranty Life, the assets piled up. Since acquiring New York's Waldorf Astoria hotel in 2014 for $1.95 billion, Anbang has stretched its tentacles to cover insurers in South Korea and luxury properties across North America.

Unbridled Ambition
Anbang's forays have included a $15 billion bid, since terminated, for Starwood Hotels, and iconic buildings such as 717 Fifth Avenue in New York
Source: Bloomberg
Note: Anbang's bids for Starwood and Fidelity & Guaranty Life were terminated.

The people running those firms would be right to be concerned. Unlike Fosun International Ltd., whose chairman also disappeared for a while to assist authorities in an investigation, regaining the market's confidence won't be as straightforward.  Guo Guangchang continued participating in major decisions, and Fosun is now back in acquisition mode.

Crucially, Anbang relied in large part on funding that was ultimately people's nest eggs. Even many of its overseas purchases that were financed by bank loans used retail investors' savings as the underlying collateral. It's the type of behavior Beijing has been seeking to prevent.

Fosun also made leveraged bets, but sourced its cash from share sales, bonds, local private-equity firms and proceeds from offloading unprofitable assets.

Outside of messing with people's money, Anbang was aggressively acquiring shares. As Bloomberg View columnist Christopher Balding noted earlier this week, Anbang's domestic equity holdings were a staggering 203 billion yuan ($30 billion) at the end of last year, up from 27 billion yuan at the end of 2014.

Anbang's life insurance unit was banned in May from applying for new products for three months, after it got a rap over the knuckles for trying to pass off short-term policies as longer-term ones. It's hard to see how Anbang can keep paying out those promised returns without that income.

In China, social stability is key. Against that backdrop, Anbang faces an uphill battle, and not only to resolve this latest problem of Wu's disappearance.

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

(Updates to add reference to 666 5th Avenue in seventh paragraph.)

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