Fosun aims to acquire run-off assets in Europe

Fosun Group, the $24.7 billion Chinese investment group based in Shanghai, is planning to buy 'run-off' insurance assets in Europe in the near future, as part of its plan to diversify the sources for insurance assets.

The purchases of run-offs, or outstanding insurance policy portfolios from an insurance company that are still paying out to existing policy holders but not accepting new ones, are expected help Fosun accrue $5 billion to $10 billion additional investable assets over the next 12 months, vice chairman and chief executive Liang Xinjun told AsianInvestor.

Fosun has been looking around the globe for the run-off opportunities for more than a year and has signed agreements with some insurers in Europe, pending regulatory approval, Liang said.

“Such opportunities are also seen in Asia, especially Japan, and US where we are also looking,” he said.

For Fosun, run-off assets are appealing because the cost of acquiring them is much lower than buying an insurance company wholesale. The former typically cost in the tens of millions of dollars, while latter can cost over $1 billion or €1 billion ($1.1 billion). Of course, purchasing run-off assets of an insurance company alone also means Fosun doesn't get a company's brand, intellectual property or employees. 

Liang argued that another advantage of run-off packages is that there are no new policies entering the run-off package, so Fosun can focus on improving the investment returns for the existing assets, improving efficiency.

Several insurance companies in Europe in particular have become sellers of run-off portfolios following the introduction of the Solvency II Directive for European insurers and reinsurers, which became fully applcable on January 1.

The rules take a severe attitude towards certain forms of investment, which has driven up the capital costs of many insurance companies. That has led to an increasing market for the disposal of legacy liabilities, especially for business lines that are no longer attractive to the company, Paul Corver, chairman of PwC's insurance & reinsurance legacy association, said in his firm's survey of discontinued insurance business in Europe in 2014.

“Solvency II has really focused attention on the most effective use of capital and is increasingly generating opportunities for acquirers of run-off," said Andrew Ward, director in PwC’s solutions for discontinued insurance business team. PwC estimated the overall size of the European non-life discontinued business market at about €250 billion, as of early September.

Diversified capital sources

Fosun began to grow its international insurance assets in 2014, when it bought Fosun Insurance Portugal, the then Caixa Seguros. It followed this in 2015 with the acquisition of US insurers Ironshore and Meadowbrook.

The purchases led the China insurer’s total investable insurance assets to grow sevenfold from Rmb13.4 billion in 2013 to Rmb106.8 billion ($17.2 billion) in 2014, and then a further 51% in 2015 to Rmb160.4 billion.

Liang noted that because Fosun has already acquired major insurance companies in major markets and currencies, it will use future acquisitions to reinforce its existing portfolio or in new insurance types or geographic areas that with huge growth potential. Run-off asset purchases are very much part of that strategy. 

Fosun’s newly-acquired insurers have in turn become purchasers of assets themselves. For example, on August 31 Fosun’s Hong Kong-based reinsurer Peak Reinsurance completed the purchase of a 50% equity interest in NAGICO, an insurance group in the Caribbean, to expand to central America business. NAGICO has investable assets of $142 million.

Insurance expansion

Fosun also plans to continue to expand into new insurance types, including health insurance.

In August, it gained approval from China Insurance Regulatory Commission to set up Fosun United Health Insurance Company.

Its interest is understandable. China’s health insurance market reached Rmb214 billion at end 2015, up 51.8% from a year earlier. And the market size grew 89% in the first half of this year, versus the same period of 2015.

The company also sees opportunities in other particular geographies. Liang said the company is bullish on the developments of south east Asia, Russia and Brazil, would like to invest in these markets so would correspondently acquire insurance companies there to obtain local currency capital.

It is also considering insurance acquisition opportunities in Japan, as Fosun currently lacks the currency of Japanese yen. Fosun currently has insurance policies issued in euro, renminbi and US dollars.

At the end of June Fosun had Rmb164.6 billion investable insurance assets. Of this amount, 74.1% were in fixed income, 10.7% in equities, 7.9% in property and 7.3% in cash.  

A full Q&A interview with Liang will be published in the December edition of AsianInvestor magazine.