Government takes over Anbang Insurance

On the 23^rd of February, the Beijing-based Anbang Insurance Group was seized by the China Insurance Regulatory Commission. Chairman Wu Xiaohui was dismissed for fraud. Anbang was known for its aggressive international acquisitions and use of leverage.

In recent months, China has expressed its commitment to reduce debt, which stands at almost 250% of its GDP.

Background

The People’s Republic of China is the second largest economy in the world. The trillion dollar economy averaged a growth rate of 10% through the first decade of this century, and has been slated to overtake America’s GDP in another 10 years. However, in recent years, growth has slowed to approximately 6.8% (as of 2017).

One of the key problems the Chinese economy faces today is debt, which is almost 250% of its GDP. Corporate debt makes up the bulk of this, at 165% of the GDP. China’s debt is higher than the United Sates, however it remains lower than Japan, which is the world’s most indebted leading economy. Experts have said that if China’s trajectory continues, then it will be looking at an economic slump sooner than later. Due to China’s increasing build-up of credit, more than one rating agency has downgraded China’s long term credit rating.

Since 2017, Beijing has indicated its intention to begin deleveraging processes, an action encouraged by the IMF.

The China Insurance Regulatory Commission (CIRC) was established on November 18^th, 1998. Its purpose is to “conduct administration, supervision and regulation of the Chinese insurance market, and to ensure that the insurance industry operates stably in compliance with law”. The CIRC has previously intervened in small investment companies facing problems due to corruption or loss.

The Anbang Insurance Group was established in 2004 as an automobile and property insurance agency. In 2010, the company, located in Beijing, ventured into life insurance as well. It is ranked 139 on the Global Fortune 500 list, and holds over $310 billion in assets. Anbang is not publicly traded, and is known for its aggressive procurement of international assets.

In 2015, the company acquired the Waldorf-Astoria hotel in New York, the Dutch insurance agency Vivat, and a 57% stake in South Korean Tongyang Life Insurance. The following year, the corporation invested billions of dollars in properties across North America. Last year, it was reported that Anbang Insurance was in talks for a real estate deal with US President Donald Trump’s son-in-law, Jared Kushner. According to CNN, the agency has spent over $20 billion on deals since 2014.

Analysis

Anbang’s spree of extravagant acquisitions has come to an end. In a move that has been called “unprecedented” yet unsurprising, Chinese regulators have temporarily seized Anbang Insurance Group Co. This is the largest takeover by the CIRC yet.

The CIRC has claimed that this takeover was conducted to protect consumer interests. Anbang had been engaging in “illegal management and operation activities” that could “seriously endanger the solvency of the company”, the regulatory agency stated. For at least one year, the corporation will be controlled by government agencies including the CIRC, the central bank, and other regulators.

In June 2017, it was reported that the founder of Anbang, Wu Xiaohui, had been detained as part of an investigation into his activities. On Friday, he was officially prosecuted for fraud and misappropriation of funds, and was removed from his position. Wu is known to be connected to the political elite of the nation; he is married to the granddaughter of former leader Deng Xiaoping.

On Monday, the company expressed its acquiescence to CIRC’s decision. “We will continue to be committed to our overseas subsidiaries’ business and investment, and will provide necessary support to their healthy development,” said the company spokesperson.

This move doubles as a crackdown against corruption, and corporate leverage. Analysts have stated that Anbang’s acquisition is meant to send a strong signal to companies engaging in financially risky ventures and overseas investment. “[Anbang] expanded quickly by seizing opportunities during the liberalisation of China’s financial sector… But it also failed to adapt just as quickly to the new macro policy environment which stresses deleveraging and regulatory tightening,” Sun Wujun, professor at Nanjin University told South China Morning Post.

Tom Rafferty, from the Economist Intelligence Unit, told the BBC, "Clearly it is designed to be a warning shot to firms engaged in particular types of financial engineering and leveraged acquisitions… The government has made clear reducing financial risk is one of its main policy priorities."

Assessment

Our assessment is that the Anbang takeover is part of China’s continued efforts to manage its debt. President Xi Jinping has stated that long term fiscal stability is a major goal. We believe that the seizure is not necessarily indicative of a trend towards nationalization. However it does represent a shift in policy in Beijing.  We have previously recommended that the Chinese Government improve financial supervision in order to manage debt.

Other organizations that may come under scrutiny include the HNA Group, a $53 billion conglomerate also known for its large-scale acquisitions and use of credit.