Four Things to Know About the Fund Bailing Out Anbang Insurance
The Waldorf Astoria Hotel in New York and the Four Seasons Hotel in Wyoming are just two of the trophy assets of fallen financial star Anbang Insurance Group Co. Ltd. that are now in the hands of a little-known state-run bailout company, China Insurance Security Fund Co. Ltd. (CISFC).
The agency, whose functions include rescuing or liquidating insurance companies and operating the insurance industry’s bailout fund, has played a key role in defusing the risks built up by Anbang, which was put under government control in February 2018.
Since becoming Anbang’s biggest shareholder in April 2018, CISFC has been the vehicle for regulators to restructure the troubled insurer and sell off its assets. A new company, Dajia Insurance Group, was set up in June with registered capital of 20.4 billion yuan ($3 billion) to deal with the assets and operations of Anbang. CISFC holds 98.2% of the shares of Dajia.
So far, the company has disposed of or is in the process of disposing of more than 1 trillion yuan of assets, Liang Tao, a vice chairman of the China Banking and Insurance Regulatory Commission (CBIRC), said last Thursday at a press briefing.
Here are four more things you need to know about CISFC:
What does CISFC do?
China set up a system to deal with risks in the insurance industry back in the 1990s including a risk bailout fund. Until 2008 this was managed by a department at the China Insurance Regulatory Commission (CIRC), which was merged into the CBIRC in 2018.
CISFC was created in 2008 and took over the management of the insurance security fund to run it in a market-oriented, professional manner. The company also monitors risks in the insurance industry and advises the CBIRC. It provides funds to bail out policyholders, individuals and institutions, and gets involved in the liquidation of an insurance company when it is dissolved or declared bankrupt. It also takes over and disposes of assets to be liquidated.
Yu Hua, a veteran of the CIRC, became CISFC’s chairwoman in August 2018 after Ren Jianguo stepped down in the wake of the Anbang takeover. The company is regarded by regulators as an integral part of China’s financial security network and is complemented by similar funds in the banking, securities and trust industries.
How big is the fund?
The bailout fund run by CISFC raises money through mandatory contributions from insurance companies based on their premium income. The fund reported 126.7 billion yuan in its coffers at the end of 2018. Of that total, 63.5%, or 80.4 billion yuan, was in the property insurance security fund and 46.3 billion yuan in the life insurance security fund.
Contributions vary depending on the type of insurance and range from 0.05% to 0.8% of premium income, according to the CISFC website. Insurance companies currently all pay the same rates, but this may change, with fees adjusted to reflect the level of risk in each company.
Ren, the former CISFC chairman, said in 2016 that linking insurance companies’ risks to fee rates would encourage them to curb risks and the impulse to expand blindly, preventing poor investment choices and moral hazard, or taking on excess risk because someone else will bear the consequences. At a forum in July 2017, Chen Wenhui, a CIRC vice chairman, said the current fixed-rate fee model will change into a differential-rate model as part of proposed reforms to the fund.
Where does CISFC’s fund park its cash?
In 2011, the fund picked seven asset management companies set up by insurance companies as entrusted investors to manage the money. The fund puts together an annual and quarterly investment plan with the aim of ensuring the money is invested safely and in liquid assets. Under current rules, 80% is deposited in banks and 20% can be invested only in fixed-income products such as government bonds, central bank bills, and bonds issued by state-owned enterprises under the control of the central government, Ren said in a July 2018 article in China Finance.
In recent years, the fund had made an average annual return of more than 5%, higher than the average return of fixed-income products in the market, Ren said.
How many insurers has the fund bailed out?
The bailout fund has been used to inject money into three insurance companies – Anbang, China United Property Insurance Co. Ltd., and New China Life Insurance Co. Ltd.
In April 2018, the fund injected 60.8 billion yuan into Anbang to ensure the company had an “adequate” ability to repay its debts, stabilize its operations and protect the interests of policyholders, the CBIRC said in a statement at the time. The money was also used to maintain the value of Anbang’s registered capital at 61.9 billion yuan after the stake of the company’s controlling shareholder, Wu Xiaohui, was declared unlawful. Wu was sentenced to 18 years in prison in May 2018 for fundraising fraud and embezzlement.
The fund’s first intervention came in 2007 when it injected 2.9 billion yuan into New China Life Insurance after its then-chairman was found to have embezzled funds from the company. The second bailout came in 2012, when 6 billion yuan was poured into China United Property Insurance after the company suffered massive losses as a result of poor management. The fund’s shares in the two insurance companies were subsequently sold to other investors at a profit.
Contact reporter Guo Yingzhe (firstname.lastname@example.org)
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