© EPA

A day after raising its offer for Starwood Hotels & Resorts, Anbang Insurance Group moved to reassure investors that it can afford the $14bn price tag — even as analysts warned that its reliance on high-cost borrowing carries plenty of risks.

On Tuesday, Anbang chairman Wu Xiaohui was quoted by Caixin, a respected non-state controlled Chinese financial magazine, as saying: “Anbang has assets that far exceed 1 trillion yuan, enough to carry out foreign investment.”

However, costly borrowing has played a significant role in its global shopping spree — including its $2bn purchase of the Waldorf Astoria — and seen it evolve from an obscure Chinese car insurer into a $290bn global conglomerate with investment strategies more akin to the world of private equity.

Mystery and speculation surrounds the identity of investors who boosted Anbang’s registered capital fivefold in an eight-month period in 2014. But Mr Wu’s ability to draw on political connections to raise equity is only one part of the story.

Anbang collects 44 per cent of its insurance premiums from the sale of so-called universal life policies, high-yielding wealth management products that combine a death benefit with an investment component that guarantees a payout during the policyholder’s lifetime. For many of these, the savings or “cash value” component dwarfs the protection element.

Anbang’s premiums from universal insurance products grew 306 per cent in 2015 to Rmb49bn ($7.5bn), compared with industry-wide growth of 95 per cent, according to regulatory data. Such growth helped Anbang climb the Chinese premium ranks among life insurers from 40th in 2012 to fourth place last year.

Sam Radwan, partner at Enhance, a consultancy that advises several midsized Chinese insurers, says his clients fear the entry of Anbang to markets where they are active.

“They basically told me, ‘once Anbang comes to town, we know we’re not going to be able to compete.’ They tend to offer higher returns.”

Yet this strategy carries risks, analysts say. Higher yields enable Anbang to grab market share but also force the group to chase higher returns — and take on greater risk — to meet promises to investors.

Traditional insurers invest mainly in conservative assets such as government bonds and try to earn profits by using actuarial skill to minimise payouts. Anbang more closely resembles a private equity fund, where capital is expensive and investment returns drive profits.

Wu Xiaohui, Anbang chairman
Wu Xiaohui, Anbang chairman © FT

There are also worries about liquidity risk. Many WMPs carry short maturities, while assets such as luxury hotels cannot be quickly sold. Universal insurance policies from Anbang and other insurers carry a headline maturity of five or 10 years but carry an option to cash out after one or two, sometimes with no penalty.

“There is an issue with selling long policies for the short term. But you have to invest in long-term assets like equity or infrastructure debt if you want to generate the high returns,” said Zhang Fenghua, insurance analyst at China Chengxin Credit Ratings. “This can lead to liquidity mismatch.”

WMPs have surged in recent years as Chinese savers looked for alternatives to low-yielding bank deposits. Commercial banks are the biggest sellers but regulations limit the assets that lenders can buy. Insurers such as Anbang have benefited from deregulation allowing them greater freedom to invest in equity and real estate.

Bank WMPs with guaranteed payouts currently offer yields of about 3-4 per cent, while those from insurers reach 5-6 per cent. Yet the true cost of WMP funding to insurers is even higher than the product yield. When sales commissions to banks or online platforms such as Alibaba’s Taobao are included, the cost to the insurer may reach 7-8 per cent.

To be sure, Anbang’s solvency ratio is among the highest in the industry, and analysts do not expect near-term problems. But Mr Radwan says the experience of Japan and Taiwan shows that aggressive selling can sow the seeds of future disaster if falling interest rates depress asset returns for insurers committed to paying high yields.

“(Mr Wu) is building an atomic bomb. It may work out fine, or it may explode in a big way,” said Mr Radwan.

Regulators are aware of the risks. Last week Caixin reported that Chinese regulators may block the Strategic and Starwood deals because they would put Anbang on the wrong side of a regulation limiting foreign investments by Chinese insurers to no more than 15 per cent of total assets.

“If there is any risk that the takeover activities will slow, it would likely be due to tighter regulations of bidders’ financial leverage,” Vincent Chan, head of China research at Credit Suisse, wrote in a recent report.

“China’s insurance regulatory agency has already stated concerns about the usage of funds raised from insurance products to support these bids.”

Anbang could not be reached for comment. 

Additional reporting by Ma Nan

Twitter: @gabewildau

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