Why Anbang’s fall should comfort investors into China
Back in November 2016, Chinese insurance maestro Wu Xiaohui, chairman of insurance upstart Anbang, had dinner 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 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.
The purchase capped a meteoric rise for Wu and Anbang, founded in just 2004. Their fall was to be even swifter.
On Friday (February 23), 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.
Even more unusually, the China Insurance Regulatory Commission (CIRC) announced it would lead a working group to seize control of Anbang for the next 12 months. 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, said 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 of its rules of both universal life products and how insurers can invest their assets in early 2017, 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.
The regulator intervention underscores one big lesson for investors into China: Beijing remains reluctant to let big business failures endanger the financial security of the man in the street—in this case policyholders, though stock investors have also benefitted.
That has implications for how much risk some Chinese investments truly offer investors.
RISK-FREE INVESTING?
The CIRC's primary goal for the state takeover was stability. It didn't want an Anbang collapse to hurt the mom and pop buyers who fuelled the insurer's rise by buying up products they didn't realise were too good to be true.
But by doing so Beijing has prevented one of the country's largest insurers and its creditors from suffering from the consequences of its actions.
The panel of regulators that is taking over—which includes 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 that 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”.
It's not the first time Beijing has stepped in when financial problems arise. 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.
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, before selling the shares to state-owned Central Huijin Investment in 2009. Two years later, the insurer executed a dual Shanghai and Hong Kong listing.
It's not yet clear what will happen in the case of Anbang, including whether the government will honour all of the company's outstanding debt. But the insurer began cashing out of its investments quietly last year, which some analysts view was likely to boost its solvency margin and ease debt repayment pressure.
This appears to be good news for investors into Chinese assets, at least at the smaller level. With actions, if not words, Beijing has revealed it will support companies that it deems too big—or at least too influential—to fail, even if they are in private hands.
For those concerned about so-called "moral hazard", this is anathema. But it certainly makes buying some Chinese assets much more appealing.
Additional reportng by Alison Tudor-Ackroyd
This piece first appeared in AsianInvestor's sister title, FinanceAsia
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