Chinese insurers go on an overseas buying spree
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E-mail Shanghai Daily, December 1, 2014
In the past year, Chinese insurers have surprised the world with their cash splash on foreign real estate.
Last month, China's Sunshine Insurance Group paid about US$400 million for a trophy hotel in Sydney -- the 557-room Sheraton, located opposite picturesque Hyde Park.
A month earlier, Hilton Worldwide Holdings Inc said it agreed to sell the Waldorf Astoria Hotel in New York for US$1.95 billion to Anbang Insurance Group Co, though Hilton will retain management rights for another 100 years.
China Life Insurance Group in June acquired a 70 percent stake in an office building along London's Canary Wharf, paying US$1.35 billion. That followed China Ping An Insurance Co's nearly US$400 million acquisition of the landmark Lloyd's Building in London in July 2013.
The buying spree has coincided with the easing of China's foreign-exchange controls and administrative procedures, allowing Chinese companies across all industries to expand their global presence.
In the first three quarters of this year, Chinese enterprises have wrapped up a record 176 merger and acquisition transactions, a 31 percent increase from a year earlier, PricewaterhouseCoopers said in a report.
Global real estate consultant Knight Frank said last month that it expects the offshore expansion of Chinese financial institutions to continue unabated, as deregulation of the yuan creates huge investment opportunities overseas.
More channels
The China Insurance Regulatory Commission is encouraging the trend by opening more investment channels and by changing the rules on solvency to free up more capital.
After two years' testing and adjustment, the commission is set to implement the so-called "second-generation standards" for solvency. That will correlate capital requirements for insurance companies to risk, not size of their businesses.
The new system will assess a company's risks in insurance products, the market and credit, and vet intangible risks such as reputation.
It will require insurance companies to adjust their investment plans to their liabilities.
The new system is sometimes compared with the Solvency II regulations in Europe, but the Chinese version is expected to be milder so that insurance companies can weather the transition more smoothly.
Chen Wenhui, deputy head of the insurance regulator, said the new solvency regulations could free up 500 billion yuan (US$81.3 billion) from the capital reserves of life insurers and 50 billion yuan for non-life insurers. The effect will vary considerably among individual companies.
Since last year, the insurance regulator has been preparing for the transition by opening up investment channels for insurers, allowing those with sound solvency and sufficient asset management capabilities to seek higher returns.
The new investment regulations also will raise the proportion of unconventional investments, such as wealth management products and real estate, that are considered capital reserves.
In a blueprint Shanghai published last month on its plans to evolve into an international insurance center, authorities highlighted the prospect of using eased financial controls in the new Free Trade Zone to facilitate cross-border investment and fund-raising for insurance companies.
China's insurance regulator still limits the overseas investment of insurance companies to 15 percent of their total offshore assets. Even the larger insurance companies remain cautious about going overboard in foreign acquisitions.
There's speculation in the market that some Chinese insurers are losing bids for some offshore investment projects because they are offering lower prices to reflect risk concerns. Some have withdrawn from talks due to high property maintenance fees.
So far, actual investment offshore is less than 1 percent of permitted volume, leaving much potential unexploited.
Paul Traynor, head of insurance services at US-based investment bank BNY Mellon, said he expects overseas investment from Chinese insurance companies to top 8 percent of the industry's total assets by 2020 because the 15 largest domestic insurers still have that much capital and management capability in their arsenals.
If growth in offshore activity maintains its current pace, assets of the Chinese insurance industry could surpass 20 trillion yuan by the end of this decade, leaving 1.6 trillion yuan to be potentially invested overseas.
BNY Mellon now manages US$1.6 trillion in assets from global clients, of which US$115 billion comes from insurers. Although it has no assets of Chinese insurance companies currently under management, it has recently stepped up contacts with domestic players as the door for China's outbound investment opens wider.
Chinese insurers currently are focused on the real estate sector, Traynor said, but other investments, such as bonds, equities, hedge funds, and even farmland, will be added to their portfolio as they gain more expertise and confidence in offshore markets.
"When insurance companies seek overseas expansion, their major purpose is to diversify investment and to seek higher returns," Traynor said. "The need to match their investments with liabilities is met through domestic investment. The implementation of a second-generation solvency system means that insurance companies can improve their investment proficiency."
He said that the experience Chinese insurers have gained in dealing with the domestic stock market should greatly improve their prowess in investment overseas, but they need to understand that exchange and interest rate risks are the biggest challenges they face in cross-border expansion.
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