Chinese insurer emulates ‘Buffett model’ with Waldorf purchase

The previously obscure Chinese insurance company whose global shopping spree has raised eyebrows in the investment world is pursuing a Warren Buffett-like strategy in which investment returns drive growth and insurance plays only a minor role.

This month alone, Beijing-based Anbang Insurance Group announced the purchase of Manhattan’s Waldorf Astoria hotel for $1.95bn and Belgian insurer Fidea for an undisclosed price. South Korean media have also reported that Anbang is considering acquiring a controlling stake in state-run Woori Bank.

Such ambitious investment may seem strange for a company that ranks eighth among Chinese life assurers with only a 3.6 per cent market share, far below leaders China Life and Ping An, which control 25 and 14 per cent, respectively. 

Yet a look at Anbang’s business model suggests the company is more like a private equity fund with a side business in insurance. Rather than profiting from the excess of premiums over claims, analysts say Anbang aims to generate earnings through investment returns.

Chinese entrepreneurs have expressed admiration for the “Warren Buffett model” in which insurance premiums provide cheap funding for far-flung equity investments.

Fosun founder Guo Guangchang has frequently cited the example of Mr Buffett in outlining intentions to transform his industrial conglomerate into a strategic investment group.

In China, however, the strategy of using insurance as a platform for unrelated investments is riskier, since the core insurance business is less profitable than in the west.

Roughly 70 per cent of “life assurance” products in China are more akin to certificates of deposit. The customer pays a premium only once, and the insurer guarantees the return of principal plus interest after five to 15 years.

Insurers earn razor-thin margins on such products, which are sold mainly through banks and must compete for funds with lenders’ own high-yielding wealth management products.

Protection-type products, which only pay out in the event of an accident, illness or untimely death, deliver higher margins because the insurer doesn’t pay out on every policy, but still comprise only a small fraction of China’s overall insurance market.

Privately held Anbang collected Rmb33bn ($5.4bn) in life assurance premiums in the first eight months of 2014 versus only Rmb3.4bn in property and casualty fees, government data show.
Its profitability has been further compromised by its rapid growth strategy. Premiums have grown from Rmb1bn in 2005, the year after Anbang’s founding, to Rmb36bn so far this year. That has required big spending on hiring sales agents and paying commissions to banks that champion their policies.

“I can’t see how they’re making a profit, with all the reserves they have to put away and all the acquisition costs. I would be stunned,” says Sam Radwan, co-founder of Enhance, a management consultancy that advises China’s insurance industry.

Premiums at Anbang’s life assurance unit amounted to only 8 per cent of assets by end the of 2013, compared to 16 per cent at China Life. That suggests Anbang is using equity capital, rather than premiums, to finance its purchases.

China Life and Ping An have both ventured into foreign real estate over the past year, following regulations enacted in 2012 permitting such investments by insurers. But their core businesses are more diverse and profitable than Anbang, meaning investment returns are icing on the insurance cake.

Still, in other respects Anbang seems well-suited to the Buffett model given the proven ability of founder and chairman Wu Xiaohui, son-in-law of late paramount leader Deng Xiaoping, to raise funds from China’s elite state-owned companies. 

Anbang raised its registered capital to Rmb30bn in April this year, up from Rmb12bn in 2011 and more than the Rmb28bn in registered capital at rival China Life.

A complete shareholder list is not publicly available, but the company has wooed investors including state-owned oil refiner Sinopec and SAIC Motor, China’s largest carmaker, according to state media. Anbang could not be reached for comment.

If it succeeds in efforts to emulate Mr Buffett, the danger is that Anbang ends up resigning itself to unprofitability in its core business and basing its strategy solely on high-risk investments.

“If you’re playing the asset game and pushing your yield, you can get yourself into a lot of trouble,” says Mr Radwan.

Source: http://www.ft.com/intl/cms/s/0/9b6f1036-5424-11e4-80db-00144feab7de.html

Ecommerce model proves difficult to drive

“Well, in those days, one had to telephone a room inside a building and hope that, at the very same moment, the person with whom one wished to converse might be found therein.”

As British comedian Eddie Izzard once observed — if not in those exact words — the concept of landline telephony must sound ridiculous to the youth of today.

But, as many households will have discovered over the holiday season, the 21st century concept of ecommerce is barely any more intelligent. While it may be increasingly app driven on mobile devices, it still involves goods being driven in delivery vans — in the vague hope that, in an unknowable number of days, they will arrive at a building at the very moment when one may be found therein.

Even some of the solutions to these challenges appear daft. Earlier this year, Volvo, the carmaker, announced an initiative to avoid the “first-time delivery failures” that cost companies “an estimated €1bn”: it will arrange for an operative to drive to where one’s Volvo is parked and place purchased goods therein. Anywhere. Even a shopping centre car park.

However, with a global value of €172bn — according to the dubiously named Transport Intelligence — ecommerce delivery is not a business that investors can ignore.

It offers revenue growth: analysts at Transport Intelligence forecast a rate of 9.8 per cent a year until 2017. It offers cash flows: Ofcom estimates that Britons pump £1,968 per person through ecommerce channels every year, followed by US consumers who spend £1,171 each. It offers more predictability: research group ComScore says online sales growth on Cyber Monday, after Thanksgiving, has slowed because consumers now spread out their purchases.

Delivery companies, though, seem stuck at the wrong end of the value chain. In the UK, private equity-owned delivery business City Link went into administration on Christmas Eve, claiming it was unable to handle any more parcels because of the “continued substantial losses it would incur”. Earlier this year, the privatised Royal Mail reported a 21 per cent drop in first-half operating profits, from £353m to £279m, in the face of greater competition. In the same period, UK Mail’s margins were such that it made just £4.9m of pre-tax profit on revenues of £241.4m. 

In the US, FedEx and UPS have at times found the ecommerce model more costly than lucrative. UPS warned on profit in early 2014 after a failure to deliver thousands of parcels cut quarterly earnings by 14 per cent.

Far from proving the telecoms-like income plays that their activities suggest, all these companies’ shares look low yield and expensive. FedEx offers a dividend yield of 0.5 per cent, and trades on 19.7 2015 earnings — well ahead of the S&P 500. UPS shares yield 2.39 per cent but trade on 19.9 times forward earnings. Not exactly a utility.

Royal Mail currently yields more than 4 per cent but also trades on an earnings multiple closer to higher margin FTSE 100 companies.

Where, then, is the value? Ironically, some of the most attractive yields in ecommerce now come from bricks and mortar. According to IPD, the European warehouses from whence all those vans set off yielded 8 per cent in the 12 months to end September. As one fund manager told the Financial Times last week: “It’s a very defensive asset class to invest in.” He believes ecommerce property is not just for Christmas — rather like those missing parcels you might receive in coming days.

Source: http://www.ft.com/intl/cms/s/0/9718e448-8b7a-11e4-be89-00144feabdc0.html