By Fan Yu
China Anbang Insurance Group's sudden withdraw of its $14 billion bid for Starwood Hotels (HOT) raises questions about Anbang's source of financing, business model, and standing with the Chinese Communist Party regulators.
Anbang's all-cash offer should be more attractive to shareholders on paper, but a person with knowledge of the deal told the Financial Times last week that Anbang had failed to demonstrate it had the necessary financing to back up the all-cash bid.
Starwood indicated that it was comfortable Anbang had the financing in place for its latest offer. But with Marriott (NYSE:MAR) likely preparing a sweetened bid should Anbang's latest offer have stood, it was unclear if Anbang's consortium - which also includes private equity firms J.C. Flowers and Primavera Capital - would have been able to arrange enough financing to increase the bidding.
Information from China paints a different, and more convoluted, picture.
The China Insurance Regulatory Commission (CIRC) was considering blocking Anbang's acquisition of Starwood, due to Chinese regulations barring domestic insurance firms from owning more than 15 percent of its assets in foreign investments.
Anbang already has a roster of foreign assets. It owns overseas insurance companies such as Iowa-based life insurer Fidelity & Guaranty Life (NYSE:FGL), Belgian property-casualty insurer Fidea, and South Korea's Tongyang Life Insurance. Last year, it paid $2 billion for the Waldorf Astoria Hotel in New York.
CIRC calculates foreign holding limit by using insurance assets only, and Anbang's insurance assets are comparatively small. Out of its $293 billion (1.9 trillion yuan) of assets as of 2014, only $50.8 billion relate to life, property, and casualty insurance, capping its foreign holding at around $7.7 billion.
But something doesn't add up. Regulatory difficulties seem like an excuse - they have never been a problem for Anbang's Chairman Wu Xiaohui. He is the grandson-in-law of the former Chinese Communist Party leader Deng Xiaoping, and Anbang recruits among former senior party officials.
A Chinese investment bank said Anbang intentionally reshuffled shareholder registrations over the years in order to skirt CIRC rules on insurance company ownership, according to Caixin, a Chinese financial magazine. CIRC rules state that a single investor could not hold more than 20 percent of any insurance company.
Caixin's research also found that some of Anbang's 39 investors are obscure outfits such as auto dealerships, real estate firms, and mine operators that sometimes use shared mailing addresses, many of whom are connected to Chairman Wu. Most of the investors bought their stakes in 2014 and together injected 50 billion yuan into the company. There's also a trend of major state-level investors scaling back their ownership, with SAIC Motor Corp. and Sinopec decreasing their ownership levels from 20 percent each to 1.2 percent and 0.5 percent, respectively.
A Chinese investment bank said Anbang intentionally reshuffled shareholder registrations.
When Anbang raised its offer to Starwood to $82.75 per share, Wu was telling Chinese media that the insurance company had around 1 trillion yuan to deploy, signaling Anbang's global ambitions were hardly sated.
With the company seemingly treating regulators as a nuisance to be brushed aside, why would a foreign investment limit from the CIRC suddenly stop Anbang in its tracks?
Uncertain Business Model?
Anbang has snapped up market share from rivals by offering the highest returns for its policyholders.
The biggest portion of Anbang's premium revenues comes from sales of so-called universal insurance policies, a combination of death benefit payout and an annuity with guaranteed payments during a policyholder's life. Another driver of the company's recent success is Anbang's decision to capitalize on the popularity of wealth management products that offer high yields while maintaining short maturities.
None of this is out of the ordinary, as many Chinese insurance companies offer similar products, though few can match the returns promised by Anbang. What's strange is Anbang's investment model, which deviates from most insurers.
Insurance companies typically buy into low-risk, highly-liquid financial securities such as government bonds and investment-grade corporate debt. The reason for this is twofold - insurance companies' No. 1 mandate above all else is to preserve their capital (which is the definition of "to insure"), and since payouts caused by deaths and natural disasters are unpredictable, fixed-income instruments such as bonds offer a stable and secure cash flow over time to cover such liabilities. In effect, a big challenge for any insurer is cash-flow matching, which is having the liquidity profile to cover payouts (cash outflows) with cash inflows generated from investments.
But Anbang completely upends this model. Its assets are real-banks, hotels, and companies - and long-term investments. While they generate far higher returns than bonds, they are illiquid and unstable.
Of course, Anbang may have little choice but to swing for the fences. Its policyholders have to get paid, as wealth management products average 7 percent yields, and it must pay its brokers. Its tangled web of owners registered across China also demand returns on equity.
Anbang's Starwood exit could be a matter of industry regulators putting the brakes on Anbang's policyholder-financed spending spree. Or it could be Chinese Communist Party politics, as some of its executives were former party officials. Given the meteoric rise, it's clear Anbang enjoyed past support from Beijing at each step of the way.
But such support could prove fleeting, depending on which side of the Xi Jinping fence Anbang's executives reside. More clarity will come soon enough, when we find out how quickly and effectively Anbang is able to deploy its "1 trillion yuan" of capital going forward.