Chinese insurers under pressure to rein in overseas deals
Regulators and concerns over leverage put squeeze on appetite for foreign assets
In mid-December, Chinese conglomerate Fosun International announced the sale of its casualty insurance unit Ironshore to Liberty Mutualfor nearly $3bn. That same week, a team of Anbang Insurancestaffers flew to Seoul from the group’s Fifth Avenue building in New York, in connection with its planned purchase of two insurance companies in South Korea.
These two insurers spent much of last year scouring the world for potential targets and were among the most aggressive purchasers. They provided rescue capital to troubled financial firms in Europe and scooped up real estate and other investments in the US and Asia. They were among the contributors to the $225bn in Chinese offshore acquisitions announced last year, according to data from Dealogic.
But a combination of strictures from mainland regulators and internal pressures from within for many firms, including Anbang and Fosun, may mean that China’s voracious appetite for overseas assets is about to be curbed.
Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.
The shift away from acquisitions is likely to be particularly pronounced among Chinese insurers, and that will have an impact beyond China. Not only have the country’s insurers been among the highest (or only) bidders for some global assets, they are also an important source of funds for major pools of money outside China.
In the past, for example, mainland insurance companies have written big cheques to private equity firms like Blackstone. They were attracted by promises of double digit returns because it is just as hard for insurers in China as elsewhere to earn the big returns their clients want.
Until recently, many analysts expected Chinese insurers to increase their offshore activity.
“More assets are expected to flow overseas as Chinese insurers see a growing need for better returns outside their domestic market,” Boston-based consultancy Cerulli Associatesnoted in a report just weeks ago.
“A fall in interest rates will inevitably have an impact on their investment income and will push insurers to deploy assets more efficiently by diversifying their sources of returns, including overseas. Investments in the ‘others’ category — which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate — rose from 23.7 per cent in 2014 to 34.2 per cent in June 2016.”
Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that “the insurers have shifted to investing in riskier assets to sustain investment yields. This makes their credit profiles more vulnerable to unfavourable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown”.
Fosun, which is listed in Hong Kong, is starting to respond to investor concerns that it has too much leverage. Moody’s analysts see the sale of Ironshore, which the company bought in 2015, as one clear example.
“Fosun slowed its pace of overseas expansion in 2016 and management has indicated its commitment to improve the company’s financial profile and focus on integrating previously acquired businesses,” the analysts noted. “The cash proceeds . . . will help improve its weak liquidity profile.”
Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US rating agencies suggested that it was likely to receive a non-investment grade rating.
Without easy access to offshore funds, and facing tighter rules at home, Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed. That in turn would crimp its ability to buy more.
In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued, and the US focused inward, it is not clear who will take their place.