Buying insurers shows China builders straining in debt load

[BEIJING] Chinese insurance companies have set new records with their appetite for real estate acquisitions. Now the tables are turning as developers prowl for insurers.

Country Garden Holdings Co and Future Land Development are among Chinese developers bidding for Dah Sing Financial Holdings Ltd's life insurance operations, people familiar with the matter said this month. Country Garden last year was a close runner-up in an auction for a life insurance unit under Ageas SA.

In the past year, Evergrande Real Estate Group Ltd and Dalian Wanda Group Co, the property-to-entertainment conglomerate owned by billionaire Wang Jianlin, have also invested in insurers.

While some developers say owning insurers will help them sell homes, their hunt for such deals also underscores a rising appetite for cash-yielding assets after soaring land costs helped drive indebtedness to a seven-year high by one measure. Insurers traded in China and Hong Kong generated average free cash flow of 25 billion yuan (S$5.2 billion) in the latest 12- month period, compared with negative cash flow for developers listed there, according to data compiled by Bloomberg.

"For property developers, the capability to finance has become one of the core abilities," Luo Yi, a Shenzhen-based analyst at Huatai Securities Co, said by phone. "The insurance industry has been booming with surging premiums, and controlling an insurance platform would enable developers to utilize funds more effectively."

China's government last year allowed insurers to invest up to 30 per cent of their assets in property, doubling a previous ceiling set in 2012. That gave property companies who buy insurers added scope to use such acquisitions as a vehicle for acquiring more real estate.

Insurers owned by developers would still be subject to industry rules mandating liquidity levels and payouts to policyholders.

The heated competition for land in first-tier cities, which has caused costs to surge, is forcing property companies to seek alternate sources of financing, developer CIFI Holdings Group Co's Chief Executive Officer Lin Feng said in an interview.

Companies need to secure stable external funding as the unpredictable timetable of local governments' land sales often require them to arrange financing that can reach 10 billion yuan at short notice - sometimes two weeks or less, according to Mr Lin.

Developers' cash flows are coming under pressure as rising leverage has overshadowed income from home sales. The combined net debt of 82 Chinese developers tracked by Bloomberg Intelligence rose to 5.1 times earnings last year, a seven-year high, from 4.7 times in 2014, even as a property-market recovery buoyed sales at many firms.

While cash levels rose for the group last year, they are climbing at a slower pace than land prices in some key cities.

Local bond issuance, where a flock of Chinese developers turned to in the last 18 months for funding, is showing signs of faltering. At least 42 Chinese companies postponed or scrapped note sales this month through April 15, according to data compiled by Bloomberg, including Dalian Wanda Commercial Properties, which on Friday canceled a 6 billion yuan bond offering.

Evergrande, the nation's third-largest developer by sales, in November diversified into insurance by acquiring a 50 per cent stake in Great Eastern Life Assurance Co's Chinese joint venture for 3.9 billion yuan.

Dalian Wanda in December became the largest shareholder of Chinese insurer AEON life Insurance Co with 11.6 per cent holding, a statement on the insurer's website showed.

Shenzhen-listed Oceanwide Holdings Co increased its stake in Minan Property & Casualty Insurance Co last year to 51 per cent, and is planning to establish a reinsurance firm, according to its annual report.

Standard & Poor's this month downgraded Evergrande's dollar-denominated bonds to CCC+ and kept its negative outlook, citing a deterioration in the company's finances. The ratings company also cited the developer's debt-funded expansion, along with higher land costs.

Research firm CreditSights last week said Evergrande may be "too big to fail" and a default could wreak havoc among banks. Evergrande representatives didn't return phone calls seeking comment.

Insurers, meanwhile, are benefiting from increasing demand from savers. The total assets of China's insurers jumped 22 per cent last year to 12.4 trillion yuan, the industry regulator said in January. Overall profit jumped 38 per cent, it estimated.

Chinese people have been flocking to Hong Kong to buy insurance policies, which typically come with better service than on the mainland and also are a way of moving money offshore. Purchases of insurance policies by mainland visitors in Hong Kong reached HK$21.1 billion (S$3.66 billion) last year through September, following a 64 per cent increase in 2014, according to the city's industry regulator.

Some initial offers valued Dah Sing Financial's Hong Kong insurance business at more than US$1 billion, according to the people familiar with the sale process. Dah Sing Financial, which controls one of the last independent Hong Kong banks, said in January it is exploring options for its life insurance operations and the rights to distribute the products through its bank branches.

The company is pushing to unlock the value of the business at a time when Hong Kong insurers are seeing big increases in product demand from mainland Chinese customers.

Country Garden, in a presentation last month, said its goal is to cross-sell insurance policies and wealth management products to its customer base of about 580,000 households. Investment advice and managing money for potential customers is one of the segments that the developer is seeking to expand in, according to the presentation.

"If a developer could team up with an insurance company generating strong cash flow, both its onshore and international business will benefit from the cooperation," Kenny Chan, executive director at Future Land, said in an interview from Hong Kong, declining to comment on Dah Sing or any specific acquisition targets. "They are cash cows," he said of insurers.

BLOOMBERG