Chinese cash chases global firms

Low funding costs and depressed insurance asset prices push companies to M&A spree

Overseas insurers are increasingly popping up on the shopping lists of acquisition-minded Chinese companies, whose recent buying sprees globally have driven the country's outbound mergers and acquisitions to a record high.

Since last year, Chinese companies have announced at least nine M&A deals for overseas insurers. The total deal value (both pending and completed) exceeds $8.4 billion. That's up 280 percent from China's total outbound insurance M&A value in 2014, according to financial data provider Dealogic.

That indicates the global insurance sector could be the next target of Chinese capital. China is already the world's leader in technology M&As, analysts say.

"What we are seeing now is just the beginning, and such a trend will continue in the future," says Wang Guojun, a professor at the University of International Business and Economics in Beijing.

The trend highlights the ambition of cash-rich Chinese conglomerates such as Anbang Insurance Group and Fosun International Group to build an insurance-driven investment empire, inspired by the principles of US billionaire investor Warren Buffett.

The focus on insurance also reflects the shift in China's overseas M&A activity from energy and resource industries to service and consumer-centric sectors.

The most recent deal is Anbang's purchase of Allianz Life Insurance Korea and Allianz Global Investors Korea, the South Korean operations of German insurer Allianz SE.

It is the second time Anbang has acquired a South Korean insurer, following its purchase of a controlling stake in Tongyang Life Insurance Co for $1 billion last year.

Beyond Asia, Anbang has also expanded its presence in the US and European markets in a slew of high-profile deals, including its agreement to buy US insurer Fidelity & Guaranty Life for about $1.6 billion, as well as its purchase of Dutch insurer Vivat last year and Belgian insurer Fidea in 2014.

Another large and active Chinese acquirer is Fosun, which has spent more than $5.7 billion buying insurance assets over the past two years.

Prominent deals included Fosun's $1.84 billion purchase of an 80 percent stake in US insurer Ironshore Inc in 2015 and its $1.5 billion acquisition of Portugal's largest insurer, Fidelidade, in 2014.

Simon Harris, managing director for global insurance and managed investments at global ratings agency Moody's Investors Service, says M&As are attractive because of a combination of economics and favorable asset prices.

He cited low funding costs and depressed insurance asset prices in some markets as reasons for the latest wave of Chinese M&As in insurance.

The moves by Chinese companies come at a time when overseas insurers, in particular those in Europe, are struggling with stricter regulatory requirements as well as a low interest rate environment, which has adversely affected their investment returns. They often invest heavily in fixed-income assets.

German insurer Allianz decided to spin off its South Korean business and sell it to Anbang after the insurer suffered a $277 million loss on the South Korean life and health insurance unit last year.

Analysts say the M&As could also be fueled by the desire of Chinese companies to diversify their investment into global markets, hedging against a weaker renminbi and with the intention to gain more low-cost capital through expansion of the insurance business.

"In the case of Fosun, insurance can offer a long-term and low-cost way to gain capital so that it can reinvest the premiums to feed its other businesses, which could yield higher returns," says Zhao Shasha, an insurance analyst at Huarong Securities Co.

Meanwhile, other Chinese investors have joined the acquisition spree to take advantage of China's growing demand for overseas insurance products.

JD Capital, a Beijing-based private equity firm, has offered to buy the life insurance operations of Hong Kong-based financial group Dah Sing Financial Holdings Ltd, Bloomberg reported, citing sources familiar with the matter.

The report says the deal reflected JD Capital's plan to unlock the value of the business at a time when Hong Kong insurers are seeing big increases in product demand from the Chinese mainland.

But analysts warn the latest insurance M&A deals could bring new challenges, such as low interest rate exposure, volatile business conditions and growth pain.

"The targets are in large markets but these targets sometimes exhibit modest market positions," says Harris at Moody's Investors Service.

He notes that M&A activities will continue but likely at a slower pace in the coming years.

Just how prudent and cautious Chinese companies have become is illustrated by Fosun's termination of its $462 million purchase of Israeli insurer Phoenix Holdings Ltd in February. Fosun attributed the move to global market turmoil.

Some analysts speculate the cancellation may indicate the intention of Fosun to reduce its leverage and improve its investment rating after the rapid growth of its investments in international markets.

lixiang@chinadaily.com.cn

( China Daily Africa Weekly 04/29/2016 page30)