Lu Zhiqiang is following a well-trodden path as his company China Oceanwide bids $2.7 billion for US mortgage insurer Genworth Financial.
Other billionaire-led Chinese firms, Guo Guangchang’s Fosun and Wu Xiaohui’s Anbang Insurance, have pending acquisitions awaiting approval by US regulators. At the same time Japanese insurers are scouring the US for growing companies as the demographic profile of policyholders at home ages rapidly.
The Japanese have a super-low cost of capital and a long track record of managing companies in the US, so can handily compete with the Chinese, relative newcomers on the international M&A stage.
US targets offer both Chinese and Japanese insurers a way of quickly bulking up – so the race for scale is on.
Earlier this month Sompo bid $6.3 billion for US insurer Endurance Specialty Holdings.
“Large acquisitions in North America can have a more immediate effect on your business mix than Asian deals, which have more growth potential in the long term, but are not immediately transformational for your portfolio,” said Ian Brimecome, a senior managing executive officer at Japan’s Tokio Marine Holdings at the FT Asia Insurance Summit on Friday.
Tokio Marine, Japan's largest P&C insurer owns Philadelphia Insurance Companies, Delphi Financial and HCC Insurance in the US.
As this wave of buyers grows, industry experts warn there may be some high-profile regulatory snafus, with buyers from some countries favoured over others. Overseas acquirers may also be underestimating how closely regulators around the world monitor insurers’ cash to protect the interests of policyholders.
Motives
Like Lu's holding company China Oceanwide, some serial acquirers of insurance companies around the world, including Fosun and JD Capital, started as Chinese property empires and are searching for new revenue streams and looking to park money in offshore vehicles they can use as investment platforms.
“For the Chinese players there is much more of a financial driving force; there is still a need for diversification but in many cases it is not quite so strategic,” said Tokio Marine's Brimecome.
Founded in 1985, China Oceanwide became a shareholder in China Minsheng Banking in 1996 and has also invested in an insurance broker and a property-to-casualty reinsurer.
However the local Chinese insurance market is incredibly competitive, with many large state-controlled insurers selling wealth management products at razor-thin margins.
Other domestic property companies are also snapping up insurance companies after the Chinese insurance regulator CIRC loosened insurers’ ability to invest in alternative products, including real estate. In one example, Evergrande bought a 50% stake in Great Eastern Life Assurance China for $617 million last year, according to data provider Dealogic.
Add into the mix China’s economic slowdown and the renminbi’s depreciation and it's not hard to see why Chinese buyers increasingly look overseas for assets.
Beijing-headquartered China Oceanwide has already invested in the US market including property developments in New York City, San Francisco, Hawaii and Los Angeles.
The Chinese group saw the mortgage insurer as an attractive proposition, given that its assets had recovered sufficiently from the US property meltdown while its value remained depressed. Lu also felt that the institutional knowledge at the firm could prove useful for its property-related businesses back home, according to people with knowledge of his thinking.
"Genworth is an established leader in both mortgage insurance and long term care insurance, which are markets that present significant long-term growth opportunities," said Lu on Sunday in a statement announcing the acquisition.
Some Chinese conglomerates such as Fosun have said they model themselves on Warren Buffett’s Berkshire Hathaway, which uses premiums from insurance companies as a cheap source of capital.
However industry experts whisper that some Chinese buyers, Fosun excluded, may be underestimating how closely regulators monitor insurers’ cash in the interest of policyholders.
Regulatory woes
US regulators are occassionally holding up Chinese bids, which has in some cases made sellers worried that deals may not complete and demand, ehm, some form of insurance.
US foreign investment watchdog CFIUS (the Committee on Foreign Investment in the United States) is reviewing Fosun International’s bid for US-based insurer Ironshore. Financial sources point to Ironshore’s control of Wright USA, which supplies liability insurance for CIA agents, as a potential source of conern.
Already Anbang’s failure to secure Starwood Hotels is jacking up the hurdles for Chinese buyers. The Chinese insurer walked away from the negotiating table in March after making a $14 billion bid.
“After Starwood we may see bigger reverse break fees being forced on Chinese companies for buying assets abroad than we do for other countries,” said Edwin Northover, international counsel at Debevoise & Plimpton, who specialises in insurance deals.
For China Oceanwide, which has been negotiating with Genworth for a long time and had easily the best financial offer on the table after the US firm had been through the go-shop process, a break-up fee was not particularly relevant, one person familiar with the matter said.
Chinese bidders have also been asked for evidence of money onshore in the US, US-licensed operations, escrow facilities, non-refundable deposits, according to one M&A banker who frequently works on Chinese deals. The banker bemoaned the extra back-end work involved in putting regulators' minds at rest and pushing Chinese deals over the finishing line.
"The hard bit used to be getting a client to the point of signing the deal, then you'd relax. The rest would be relatively formulaic," he said. "Not any more."
Industry service providers are closely watching the progress of Anbang’s $1.58 billion bid for Fidelity & Guaranty Life. New York regulators have already asked for more information about Anbang.
“What happens with Anbang, on the regulatory side will have a significant impact one way or the other,” said Thomas Leonardi, a senior advisor at Evercore Partner. “If for some reason it doesn’t get approval, whether it will create problems for other Chinese buyers down the road is an excellent point,” he told the audience at the insurance summit.
Another investment professional countered that regulators will always judge deals on a case-by-case basis and each prospective suitor has to pass a fit-and-proper test.
Lu's status as a Communist Party secretary and membership of the nation's key political advisory body may raise the eyebrows of some regulators, however one person familiar with the deal said a preliminary assessment from law firm Sullivan & Cromwell showed there were no government contracts that might cause alarm.
Many US States would not approve deals where government-controlled entities would own more than 10% of a US company. This can be tricky to ascertain in China, where the government permeates much of society, but is less of a problem for Japanese buyers who are more often privately owned and well known to US regulators.
“There is a lot of comfort with Japanese buyers” because of their long track record of buying US companies said Leonardi.
In some cases Chinese buyers have assagued regulators concerns by helping US insurers recover from a rough patch. Fosun managed to complete its acquisition of Meadowbrook which was recovering from significant adverse loss reserve development in 2012 and 2013.
Lu, a member of the standing committee of the 12th Chinese People’s Political Consultative Conference, is looking to show the acquisition is positive for Genworth, its policyholders and the wider industry.
As part of the deal, China Oceanwide is contributing $600 million to address Genworth’s debt maturing in 2018 as well as $525 million of cash to the US life insurance businesses.
“We have structured the transaction with the intention of increasing the likelihood of obtaining regulatory approval," said Lu.
