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Anbang Insurance Group is one of China’s largest and most aggressive financial institutions. It is known for its huge customer base, high leverage, and fast-paced deal making.
At least it was until the Friday before last.
That’s when Anbang was taken over by the Communist Chinese government. You can call that takeover, “a bailout with Chinese characteristics.”
Today, Anbang is a financially distressed ward of the Chinese state. In a classic too-big-to-fail moment, the Chinese Insurance Regulatory Commission, a government financial regulator, took control of Anbang, installed new management, and said they would manage Anbang for at least a year, “to protect the legitimate rights and interests of consumers and safeguard public interests,” according to the commission’s press release.
Anbang is not some medium-sized regional insurance company. It’s gigantic. Anbang has over $310 billion in assets, over 35 million customers, and has operations in Asia, Europe and North America.
China’s Anbang Insurance went on a global acquisition spree using policyholder funds. Among Anbang’s most high-profile acquisitions was New York City’s iconic Waldorf-Astoria Hotel, pictured here. Anbang paid almost $2 billion for the landmark property. After the takeover of Anbang, such assets are effectively owned by the Chinese government.
Anbang thrived by selling customers a kind of life insurance called “universal life,” which is more like a structured high-yield note than true insurance. Anbang sold these policies through a network of bank branches throughout China.
The sale proceeds were used to finance high-profile overseas acquisitions including the Starwood Hotels chain, and New York City’s historic Waldorf-Astoria Hotel on Park Avenue.
The problem with Anbang’s business model was that many of the universal life insurance policies had required payments in three-to-five years, while its investments were illiquid long-term investments. The only way Anbang could meet its obligations was with bank loans or sales of new policies in a kind of Ponzi scheme where new customers’ funds were used to pay off the old promises.
As Anbang’s business became more highly leveraged and its asset-liability maturity mismatch grew, policyholders became more nervous and started demanding their money back instead of extending the maturities on their policies. An insurance version of a run-on-the-bank was beginning. The Chinese authorities moved in to bailout the policyholders and prevent an out-of-control financial panic.
Anbang a good example of what might be called a “managed meltdown.”
You’ll be reading and hearing a lot more about the Anbang disaster in the weeks ahead. More importantly, investors need to take a step back from the headlines and consider the bigger picture of financial distress and the coming credit collapse in China more broadly.
Let’s consider how this will play out:
On the one hand, the Chinese financial sector (banks, insurance, asset management, shadow banking, etc.) is totally insolvent. Consumers’ savings have been used to finance ghost cities, white elephants, capital flight, Ponzi schemes, bribes and kickbacks.
There are some real assets to show (their trains are the best in the world) and some growth, but …read more
Source:: Daily Reckoning feed
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