China Dodges an AIG Moment With Anbang Seizure

(Bloomberg Gadfly) -- Beijing's interventions in the economy don't always merit applause, but the government's unprecedented seizure of Anbang Insurance Group Co. deserves a round.

Anbang was a toxic threat to China's financial system after a debt-fueled global acquisition spree -- including trophy assets such as New York's Waldorf Astoria hotel -- that was funded by the sale of high-yield insurance policies. Those risky products propelled the company from obscurity into the ranks of the country's biggest insurers in the space of a few years.

The government will take temporary control of Anbang for a year starting Friday and prosecute its founder Wu Xiaohui for "economic crimes," the China Insurance Regulatory Commission said in a statement. Wu, who was the company's chairman, was detained in June.

As I have written previously, the insurer was always going to crash and burn if left untouched. 

The heart of the Anbang dilemma is a duration mismatch. The company funded itself with the sale of short-term policies, some of which promised 8 percent returns in six months. The proceeds were often invested in long-term, hard-to-sell assets such as overseas real estate.

In its size and entanglement with China's financial system, Anbang is comparable to Lehman Brothers Holdings Inc. or American International Group Inc. in the U.S. before the global financial crisis. The company's total assets were equivalent to a staggering 3.4 percent of China's GDP, UBS Group AG analyst Jason Bedford estimated in a report in August.

By the end of last year's first quarter, Anbang was the country's second-largest insurer after state-owned China Life Insurance Co. Its voracious dealmaking included an aborted $15 billion bid for Starwood Hotels & Resorts Worldwide Inc. It  was also once in talks to invest in 666 Fifth Ave. in New York, the marquee holding of Kushner Cos., the family company of President Donald Trump's son-in-law Jared Kushner.

In May, though, an early sign of its downfall came when Anbang was restricted from selling the policies that had powered its growth. A month later, Wu, who was married to the granddaughter of former Chinese leader Deng Xiaoping, was detained.

By taking control of Anbang, authorities reinforce the message that President Xi Jinping is determined to tamp down financial risk. They also buy themselves time to scale down and recapitalize this bloated monster.

Strip away the uncontrolled trophy collecting and there appears to be a viable business underneath. Just 11 percent of the asset base of Anbang's core entities was invested in illiquid holdings such as the Waldorf Astoria, according to UBS's Bedford. 

Markets reacted calmly to the announcement, underpinning the sense that regulators have acted in time to head off potentially bigger problems down the road. The Shanghai Composite Index was marginally higher at the midday break on Friday; shares of China Minsheng Banking Corp., in which Anbang is the largest shareholder, rose in Hong Kong.

While debt-fueled conglomerates have been in Beijing's cross-hairs, don't expect the Anbang takeover to set a precedent. For one thing, HNA Group Co. and Dalian Wanda Group Co. have slimmed down considerably since the government began signaling its concerns. For another, neither is nearly as entwined in the financial system as Anbang, which has policies held by millions of small investors.

This won't be an AIG moment for China. Rather, it's more likely to mark the demise of a single businessman who overreached. When he was raking in billions of yuan in premiums by selling policies like Longevity Sure Win No.1, Wu probably never imagined that the longevity he most needed to ensure was his own. 

--With assistance from Andy Mukherjee and Shuli Ren.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.

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