Chinese insurance firms continue overseas acquisitions

Chinese insurance firms are increasingly participating in overseas acquisitions at a time when the global insurance market is experiencing consolidation, says James Peagam, global head of insurance advisory at JP Morgan Asset Management.

This action allows Chinese insurers to expand their business overseas and diversify their portfolios, at the same time gaining access to expertise and good returns, Peagam says.

Some notable acquisitions in recent times include Anbang Insurance's 2014 acquisition of the Belgian insurance company Fidea, and its acquisition of the Dutch insurance company Vivat earlier this year.

Fosun, a Chinese conglomerate, is also diversifying its businesses, expanding into the global insurance market through its acquisition of the Portuguese insurer Fidelidade in 2014.

"We've seen a lot of acquisitions not just by Chinese firms but everybody. It is a review of what is capital efficient, as some companies may not have enough capital to survive on their own, so they join with other companies in the process," Peagam says.

Peagam was speaking at an insurance investment event hosted by JP Morgan Asset Management in London on Tuesday.

The event explored the trend of insurers considering investing into alternative asset classes as declining bond yields globally has meant that investing in fixed income assets is increasingly hard for insurers to pay claims or meet policyholder guarantees.

This trend is caused by a global reduction of bond yields, which has meant that fixed income assets are generating too little return, and insurance firms are venturing into equity and alternative asset classes for higher returns.

"Every insurance company is talking about this, some are already doing it and others are seeing it as a new stage of development," Peagam says.

Against these changes in the global insurance environment, Chinese firms are increasingly seeking expansion overseas, and Peagam says there are three key reasons for this trend.

The first is the falling interest rate in China, which makes other markets more attractive compared to the domestic market. The second is the low insurance penetration in China compared to other markets, prompting Chinese insurers to look for returns elsewhere, and thirdly, overseas investment provides diversification, good returns and access to expertise. In addition, because the Chinese government has set a limit for overseas assets that Chinese insurers can hold, many Chinese insurers prefer to acquire overseas insurance companies, which do not count as overseas assets, but instead help to enlarge their overall balance sheets.

"So you can't invest more than a certain percentage of your balance sheet outside China. But if you buy an insurance company outside China, you suddenly have a new balance sheet outside of China which you can look at investments," he says.

In an effort to diversify investments and seek returns, many Chinese insurance firms have invested into the overseas real estate sector.

In 2014, China Life bought 70 percent of an office building along London's Canary Wharf in a $1.35 billion deal, and in 2013 Ping An Insurance Group bought the Lloyd's of London building for 260 million pounds ($388m).

Peagam says that buying a singular asset is very different from and much simpler compared to buying an insurance company, which is far more complicated because it requires a great deal of effort to keep the target firm profitable.

When acquiring an insurance company, Chinese firms can diversify the type of insurance business they do. If they do one type of insurance business in China, and they want to access another type of insurance business, it may be easier to just go overseas and buy, he says.

"As a company expands into different markets and takes on different types of risks, it will experience less volatility and more stable returns," he says.