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