Inside China Vanke's power struggle: an unlisted insurer

HONG KONG (Reuters) - Unlisted Chinese insurance companies are using risky products to chase equity-like returns, stoking concerns of a systemic risk in the industry if stock markets fall.

An employee walks past a logo of Vanke at its headquarters in Shenzhen, south China's Guangdong province, November 2, 2015. REUTERS/Tyrone Siu/File Photo

Take, for example, Foresea Life, a little-known insurance unit of financial conglomerate Baoneng Group. Baoneng has built up a 25.4 percent stake in leading property developer China Vanke 2202.HK000002.SZ, fuelling speculation of a rare hostile takeover of a Chinese blue-chip.

About a quarter of Baoneng’s stake in Vanke is funded by Foresea Life, whose rapid emergence among China’s leading insurers highlights the risks unlisted insurers are taking to wrest market share from bigger, listed peers - through offering investors guaranteed-return, higher yielding products.

“These companies are offering high-return, short-dated policies to grab market share and increasingly channeling their funds into the stock market to guarantee those returns, which is concerning,” said Edmond Law, strategist at UOB Kay Hian in Hong Kong.

The battle for control at Vanke shows how even blue-chip companies are not immune from corporate raiders who use complex structures in their pursuit. Vanke has called for an investigation into how Baoneng has financed its stakebuilding.

Regulators have warned conglomerates against using their insurance arms like ATMS to fund investments.


Foresea Life held 36 percent of its total assets in equity investments last year, more than double the average for Chinese insurers and far higher than the 3 percent average among U.S. insurers, financial statements and industry data show. Its Vanke stake alone is about 11 percent of its total assets.

While globally, and even in China, insurance companies have cautiously increased the amount they invest in stocks and cut back on offering high-return products, Foresea Life and others have profited from offering big returns by selling investment-linked products via banks and scooping the premium income into high-risk equity investments in concentrated bets.

Betting aggressively, Foresea Life is able to deliver high returns for now - despite the risk of a regulatory crackdown. Besides Vanke, it has stakes ranging from 7 to 28 percent in eight other A-share listed companies, including Jonjee Tech 600872.SS, Shaoneng 000601.SZ and CSG Holdings 000012.SZ.

Such big bets nearly tripled its investment income to 11.28 billion yuan ($1.69 billion) last year, its financial statements show. Industry-wide, asset growth among China’s unlisted insurers was almost 60 percent last year compared to 14 percent among large listed insurance companies, according to JP Morgan.

“Some (insurance) companies are increasingly putting their money in high-risk equity investments, and the Chinese stock market remains very volatile. Impairment charges may rise quickly if stock prices fall,” said Sally Yim, senior vice president at Moody’s Investor Services.

Foresea Life did not respond to a request for comment.

Foresea Life’s assets almost trebled last year, catapulting it to 11th place in the industry, with total premium income of 77.9 billion yuan ($11.68 billion), up 124 percent.


Foresea Life’s meteoric rise has been fueled in part by selling high-risk, high-return “universal life” products - life insurance policies combining death benefits and an investment element. These accounted for 90 percent of its premium income.

The firm’s universal life products offered 4.5 to 8 percent returns last month, according to its website. Listed peers offer around 4 percent.

Given the high returns, universal life products - which are offered aggressively by unlisted rivals including Anbang Insurance Group and Sino Life - have become popular in China at a time when stock indices .CSI300.SSEC are underperforming and 10-year benchmark debt yields CN10YT=RR are near 2016 lows.

Most of these products are high cash-value products, says investment banking firm China International Capital Corp, meaning the breakeven period for policies is as little as a year, compared to 10 years for large listed insurers such as China Life 601628.SS and Ping An Insurance Co 601318.SS.

As a result, the policy surrender rate on some products in the second year tops 90 percent, raising the level of uncertainty on insurers’ cashflow and their adaptability in allocating investment portfolios. Foresea Life’s policy surrender value alone jumped almost seven times last year.

Regulators have tightened rules in recent months by reducing the total premiums the industry can invest in high-risk products and warning about investing the proceeds aggressively.

($1 = 6.6695 Chinese yuan renminbi)

Reporting by Saikat Chatterjee and Clare Jim, with additional reporting by Shu Zhang in Beijing and Sharon Shi in Hong Kong; Editing by Denny Thomas and Ian Geoghegan