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China's Anbang faces IPO spotlight after quitting Starwood

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To understand how an obscure Chinese insurer has been able to fund a US$13.5 billion acquisition spree since 2014, look no further than one of its top-selling products, Anbang Longevity Sure Win No 1.

[BEIJING] To understand how an obscure Chinese insurer has been able to fund a US$13.5 billion acquisition spree since 2014, look no further than one of its top-selling products, Anbang Longevity Sure Win No 1.

Offering returns of more than triple the benchmark bank deposit rate, Anbang Insurance Group Co has used Sure Win No 1 and similar policies to woo Chinese mom-and-pop investors. Now, the closely held company is mulling a far tougher pitch: Tapping foreign investors with an initial public offering in Hong Kong.

"Anbang has grown very fast in recent years," said vice chairman Yao Dafeng, who confirmed this month in Beijing that the insurer is considering an IPO of its main life unit in the first ever interview by a senior executive with international media. "Now we want to get in line with international market rules and be transparent from corporate governance to operations. Then we can set our hands free and focus on growing the business again."

Any moves toward greater openness would be a big change for Anbang, which has sought to maintain a low profile despite attracting international notice in recent years with its purchase of New York's Waldorf Astoria hotel and a bidding war for Starwood Hotels & Resorts Worldwide Inc that it abandoned abruptly in March.

The shift also comes as Chinese regulators have stepped up industrywide scrutiny, especially of insurers reliant on sales of short-term policies to fund purchases of illiquid assets like real estate.

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An IPO, by providing Anbang with more equity capital to absorb potential losses, could ease any possible concerns about its balance sheet. It would also give Anbang more firepower to continue with acquisitions as it expands overseas.

One of the biggest mysteries about Anbang is who actually owns the company. The New York Times reported this month that Anbang is backed by companies controlled by people with ties to the insurer's chairman Wu Xiaohui.

Mr Yao dismissed those reports as "not factual," and derived from "stereotypes about China and Chinese companies," without providing details on ownership. Eileen Murphy, a spokeswoman for the New York Times, said the newspaper stands by the story and hasn't received any requests for a correction.

Anbang told the newspaper that it has multiple shareholders, including individuals and institutions, who have made all required disclosures under Chinese law.

In the decade following its 2004 founding, Anbang didn't attract much notice outside China. It started as a property- and casualty-insurer selling auto policies, before setting up the life unit in 2010.

Then, in 2014, Anbang emerged from obscurity by agreeing to pay US$1.95 billion for the iconic Waldorf Astoria hotel. A string of acquisitions from the Netherlands to South Korea followed as Anbang started assembling a global insurance empire. The spree culminated with this year's agreement to buy Strategic Hotels & Resorts Inc from Blackstone Group LP for about US$6.5 billion.

Fuelling Anbang's growth are policies that are popular with smaller insurers seeking to boost market share; yet they differ markedly from traditional products favored by large competitors like China Life Insurance Co. Anbang has been focusing on single-premium, high-yield products, many of which can be redeemed in two years at a profit.

Such policies helped drive gross sales at the life insurance unit up five-fold in the first seven months of this year to 252 billion yuan (S$51.6 billion), enabling it to overtake Ping An Insurance (Group) Co, according to data from regulators.

The practice of selling such products to gain scale is dubbed in China as "corner overtaking," a term borrowed from auto racing indicating that the strategy can be risky yet effective. The explosion in short-term policies has also caught regulators' attention. The China Insurance Regulatory Commission in March imposed caps on sales of products with less than five years' duration and warned that their rise has heightened liquidity risks and the possibility of an imbalance between the duration of assets and liabilities.

Anbang may have completed the "corner overtaking" phase of its growth and entered a "virtuous cycle", said Wang Guojun, an insurance professor with Beijing-based University of International Business and Economics.

The insurer's expanding premium income is fuelling an increasingly diversified global portfolio of assets, with returns high enough to keep policyholders attracted, he said.

Anbang Longevity Sure Win No 1 generated 47.6 billion yuan in sales to dominate premium income last year, according to the life insurance unit's 2015 annual report, while lack of comparable data makes it difficult to gauge if it has sustained that lead in 2016. Its 4.7 per cent expected yield was the second-highest among eight savings-type insurance products sold at a China Construction Bank Corp branch in downtown Beijing earlier this year, according to a sales brochure. A Funde Sino Life Insurance Co policy offering 5.6 per cent topped the list.

"It's proven both in international and Chinese markets that, from the perspective of sustainability and safety, life insurers need to focus on protection-type, long-term products," said Zhou Min, a Hong Kong-based analyst at Sanford C Bernstein.

"Maybe asset-liability duration mismatch isn't a particularly big issue for Anbang, but their investment risk can be a big concern," he added, citing the company's high exposure to volatile stock markets and cash holdings that normally don't provide high returns.

Mr Yao said Anbang's yields aren't the highest in the industry, and added that the company is seeking to expand in regular-premium, protection-type products. And while Sure Win No 1, which also provides accident coverage, offers buyers the option of cashing in after two years, most customers choose to hold the policy until its five-year maturity when the yield climbs to 5.8 per cent, according to the company.

"Our strategy is to always provide appropriate returns stably over the long term," Mr Yao said. "The majority of the clients will be pleased because they can rest assured" about getting the expected returns.

The share of Sure Win No 1 holders that terminate their policies after two years, known as the surrender ratio, is below the 60 per cent threshold that would trigger the mandatory ceiling under tightened rules this year, said the company, which didn't provide details. Regulators in March said annual sales of policies with maturities of less than five years can't surpass 200 per cent of capital or net assets.

Some of Anbang's investment-oriented products are subject to that regulatory ceiling, although they do have room for further growth amid an expanding capital base, the company said.

To ensure its investments match its policy liabilities, Anbang uses a model that's heavy on cash on the one hand and long-term assets like stocks on the other - what it calls the "dumbbell" approach, Mr Yao said. Unlike many other insurers, Anbang doesn't invest as much in bonds, he said, without elaborating on the specific numbers.

"We're good on the investment side, and that safeguards our liability side," he said, without directly commenting on whether Anbang faces a mismatch.

Anbang Life's investment returns averaged 7.2 per cent for the five years through 2014, ranking it the second-highest among Chinese life insurers, which had an average return of 4.95 per cent, according to the unit's bond prospectus last year.

While Anbang is seeking to demystify its business, questions still linger about its ownership structure. Anbang's ownership can be traced to 100 people including small-time merchants and villagers in China with ties to Chairman Wu and his wife, the granddaughter of China's late paramount leader, according to the New York Times report this month.

The air of mystery can have real consequences. Morgan Stanley, Hong Kong's No 1 IPO arranger in the past decade, decided to not pitch for a role in Anbang's upcoming offering, according to people with direct knowledge of the matter, Bloomberg News reported this month.

And Anbang in May withdrew an application to purchase US insurer Fidelity & Guaranty Life, amid reports that a New York regulator initially had reservations about Anbang's ownership structure and how it would fund reserves, people familiar with the application said at the time. The insurer has renewed discussions to seek approval for the US$1.6 billion deal, people familiar with the matter said last week.

Mr Yao acknowledged that the company's old approach is changing as the company evolves.

"We used to keep a relatively low profile," Mr Yao said. "Now it's different. It's no longer possible even if you still want to be like that."


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