Anbang’s fall raises tough questions for copycat insurers

Anbang’s explosive rise and equally spectacular collapse has left many questions hanging over China’s insurance industry. One of them is how much its failure has wrecked the business plans of its many copycats.

The privately held insurer had a simple strategy: offer high-yielding investments packaged as insurance products to raise funds and use them to make acquisitions. It was highly successful; from its founding in 2004 the conglomerate amassed assets worth Rmb2.5 trillion ($396 billion), the equivalent of 3.4% of China’s GDP, by August 2017, according to UBS's estimate.

That caught the attention of other insurance firms, which tried to clone its success. UBS first dubbed Anbang and its copycats “platform insurers” in a report last year.

Of the 20 biggest domestic insurance groups in China in 2016, key platform insurers included Anbang Life, Foresea Life, Huaxia Life, Tian An Life and Guo Hua Life. Also falling into this category, according to the UBS report, was Hexie Health (a subsidiary of Anbang), Sino Life and Evergrande Life. 

Anbang’s implosion, and its subsequent takeover by the China Insurance Regulatory Commission (CIRC) for a year, has left the futures of all these operators in question.

“We believe the asset-driven model adopted by platform insurers has come to an end, as signaled by the takeover case [of Anbang by the CIRC]. These insurers are likely to experience a painful transformation of their business model,” Credit Suisse said in a report on February 26.

“The company [using Anbang’s model] treats the insurance business as a cheap funding platform…Its practice does not match the philosophy of a life insurer,” the Hong Kong-based investment head of a foreign insurer, told AsianInvestor on condition of anonymity.

Other such insurers will have to stop pursuing this business model after Anbang's fall. That means they will likely have to lower their guarantee levels for the products they offer, the investment head said.

DURATION MISMATCH

For years platform insurers primarily grew their asset bases by offering short-term and high-cash-value life products, among which are universal policies, which contain investment components rather than life protection. These policies tended to offer very appealing yields, typically around 50 to 80 basis points higher than their traditional peers.

Platform insurers in China contributed 58% of life sector asset growth over 2014 to 2016, with their market share doubling from 16% to 32%, largely due to aggressive product pricing and effective bancassurance distribution. All told, they had assets of about Rmb3.75 trillion, with Anbang accounting for nearly two-thirds of them.

The investment strategy used to invest these sums raised credit and duration mismatch risk, Moody’s said in a report in March 2017. 

Many of these insurance firms have adopted a so-called ‘barbell’ asset allocation, maintaining large cash holdings to meet potential high surrender rates on the one hand, while investing long-term non-cash holdings in high-risk assets to achieve the target returns on the other. 

After presiding over the rise of this unstable funding strategy for many years, the CIRC began clamping down on it in late 2016, when the regulator ruled that Foresea Life had violated regulations and provided false information on its capital increase, and suspended it from selling universal life products. And in early 2017 Foresea’s chairman was forced to step down after a failed attempt to conduct a hostile takeover of property developer China Vanke.

SOLVENCY PERPLEXITY

The regulator’s harder approach has culminated in its move on Anbang. Its censure and hostile takeover of Anbang on February 23 was final confirmation that the company had flown too far and too high. 

The draconian regulatory reaction might come as surprising given Anbang Life’s latest available solvency ratio showed it was above the CIRC’s stipulated requirements. The company said its core solvency ratio was 101.25% as of the first quarter of 2017, before its chairman Wu Xiaohui was detained in June.

The solvency ratio of an insurance company measures its capacity to meet its contractual commitments, in broad terms its total net assets divided by the total potential payouts it has underwritten. In China, the CIRC requires insurers to maintain solvency ratios of over 100% and encourages ratios of over 150%.

In contrast, Foresea Life’s core solvency ratio was reported to be 73% as of end 2017.

Contrary to market perceptions, only about 11% of the asset base of Anbang’s core entities are invested in illiquid assets, such as the Waldorf Astoria hotel in New York. Most of its underlying assets are publicly traded securities, UBS said last year.

While many have criticised such platform insurers for deviating from an insurer's fundamental job of giving protection to policyholders, some observers believed that Anbang’s business practice was not illegal.

“It was just doing what it was allowed to do under a regulatory framework. It was just maximising its return,” Iris Pang, Greater China economist at ING Wholesale Banking, told AsianInvestor.

“Wu is not wrong in his overseas investments. He’s wrong in siding with the wrong camp,” added Pang at ING.

Wu was detained in June 2017, just two months after former CIRC chairman Xiang Junbo was taken down. This offers a lot of room for speculation as to the reasons for his arrest, said the unnamed investment head at the international insurer.

But others are more sceptical about Anbang's stated solvency ratio. They note that the insurer holds stakes in many companies through complicated structures, and these companies in turn hold equity stakes in Anbang. And the examination of these capital injections was conducted by a bank that is owned by Anbang as well, raising questions about the validity of the reported levels, according to an insurance analyst who declined to be named, and a report by Caixin in May last year.

CONCENTRATION RISK

While the CIRC wades into the weaknesses of Anbang’s financial structure, eyes will now turn to the potential fallout for the platform insurers that copied its model. A large part of this is likely to focus on the health of these companies.

Some consolidation between these smaller players is possible, but it's unlikely any of the insurers will collapse, said the insurance executive. He noted that the CIRC and other regulators do not want to deal with the chaos that would ensue following a failure, particularly that of policy holders losing their money.    

But platform insurers will still face problems. For a start, CIRC's clampdown on investments last year means they cannot offer as high-yielding products, which means they will attract less clients. 

In addition, Chinese insurance capital regulations have tightened up, most particularly through the adoption of the China Risk-Oriented Solvency System (C-Ross) framework, which CIRC introduced in 2016. While none of these platform insurers have been as aggressive as Anbang in their investments, the new regulatory standard has created potential risks for them.

Under C-Ross, bond investments do not suffer from any sort of solvency ratio discount, making them an appealing investment for traditional insurers. But platform insurers have tended to invest more of their product liabilites into large cap stocks, which do receive a solvency discount (which reduces the overall solvency ratio of the insurer) but tend to offer dividends higher than bond returns.

That has made them a better investment for the insurers’ high-yielding short-term policies, as blue chip shares aren’t discounted as heavily as other types of listed stocks. But it has also led many platform insurers to be left with concentration risk in their investment portfolios, the Hong Kong-based insurance analyst told AsianInvestor.

As China’s insurance industry absorbs the impact of Anbang’s calamitous fall, the country’s platform insurers will feel the pressure to ensure their own investment and solvency models don’t suffer from similar weaknesses.

The CIRC has shown it’s prepared to take extreme actions with one of the nation’s biggest insurers. Imagine what it would be prepared to do with some of the industry’s smaller actors.