On the Insurance ‘Superhighway’

Fosun

Fosun, China’s largest privately owned conglomerate,became a truly global insurance group last year. It further increased itsshareholding in Portugal's leading insurer group Fidelidade to just under 90%and bought US insurer Meadowbrook Insurance Group (MIG) and Ironshore, theBermuda-based international specialty insurer to add to its existing Asianinsurance and reinsurance operations. 

The insurance operations join Fosun’s fast-growingrange of industrial, lifestyle and health businesses as Chairman Guo Guangchangpursues his aim of becoming the Chinese Warren Buffett and says the group isnow on the ‘superhighway’ of growth. Adrian Ladbury takes a closer look at thegroup’s insurance and wider strategy and growth in recent times.

 Fosun Group was originally founded as a marketresearch company by five graduates of Fudan University, China in 1992 and overthe last 34 years has transformed itself into the biggest privately heldconglomerate in China.

Guo Guanchang, group Chairman and lead shareholder,openly bases his strategy on that followed so successfully over the years bylegendary US investor Warren Buffett. Put very simply, Mr Buffett uses the‘float’ generated by insurance companies that does not need to be paid back topolicyholders immediately to invest in a wide range of other businesses innon-related sectors.

Those businesses obviously benefit from preferentialterms and conditions for their coverage from the group insurers because theyknow the risk profile of these companies better than any rival. At the sametime, the premiums generated feed the float in a virtuous circle. The groupalso has significant investment and asset management activities that alsobenefit both the industrial operations and the insurers. Lots of capital isneeded to make this system work as the insurers need to be diversified by lineand territory to avoid dangerous accumulation, hence the recent internationalexpansion. 

Apart from the fundamental business strategy, Mr Guoalso follows Mr Buffett’s example by writing a long and revealing letter toshareholders along with the group’s annual results. In his latest letterpublished last month as he revealed the group’s full year 2015 results heexplained the strategy as thus: "The Group has regarded insurance as a good meansto connect Fosun’s investment capability to high quality long-term capital. Onone hand, the insurance companies can improve their profits from underwritingby leveraging on the group’s extensive industrial operations experience andexpertise in insurance and finance, and on the other hand may also help thegroup to realise higher investment revenue through effective investmentpractices. As a result, insurance plus investment will be our core business inthe future,” he explained.

Just like Mr Buffett’s Berkshire Hathaway, Fosun isdoing rather well in this highly competitive global insurance market. Mr Guorevealed that, as at 31 December 2015, total insurance assets under itsmanagement reached RMB 180.6bn (us $27.9bn). This accounted for 44.6% of thegroup’s total assets and represented an increase from 32.9% at the end of 2014.Total investable assets reached RMB 160.4bn (us $24.8bn), an increase of 50.2%compared with 2014.

Profit attributable to the owners of the parentcompany from the insurance business rose by 88.4% year-on-year to RMB 2.10bn(us $320m) and accounted for 26.2% of the net profit of the group. The profitincreased at a compound average growth rate (CAGR) of 100.5% from 2013 to 2015,reported Mr Guo. 

So how exactly did Fosun build such a presence in theinsurance business?

 

First step with Yong’an

Xi’an-based Yong’an Insurance P&C was founded in2003 and was Fosun's first investment in the insurance market. The Group holdsa 19.93% equity interest in Yong’an, a national insurance company thatunderwrites all types of non-life insurance business and was ranked 11th in theP&C market in 2014.

The Chinese market is currently highly competitive andprofits are not easily found. Financial details are hard to come by forYong’an, but Mr Guo’s letter accompanying the group 2015 results states thatthe insurer has ‘taken the initiative’ and will be continuing to ‘adjust andtransform’ its business in 2016, indicating that it has experienced a tricky timeof late along with the wider Chinese market.

The group said that Yong’an has discontinued certain‘less efficient’ businesses and ‘constantly optimized’ its business portfolio.It has also increased per capita production capacity, reduced claims settlementcosts, enhanced innovative development and actively explored Internetapplications.

Despite the need for ‘adjustment’ Yong’an recordedgross premium income of RMB 8.1bn, net profit of rmb 833.3m, investable assetsof RMB 10.9bn, net combined ratio of 98.0%, solvency adequacy ratio of 263.7%.The total investment return reached 10%. So the results show that Yong’an isnot doing bad at all.

 

Second step Pramerica

 

Fosun’s next big step into the insurance market camein September 2012 when it announced a joint venture with US financial servicesgiant Prudential Financial.

The company, named PramericaFosun Life InsuranceCompany Limited (PFI), is a 50/50 joint venture that started with registeredcapital of rmb 500m.

The company was China’s first life insurer jointlyfunded by a Chinese private investor and a foreign investor. Mr Guo said at thetime: "The life insurance industry in China is experiencing rapid growth,driven by an increasing focus on protecting the livelihoods of families aroundthe country. We look forward to benefitting from PFI’s deep actuarialexperience, asset management expertise and 137-year history of success in thelife insurance industry, as we move forward together to develop products thataddress the life insurance needs of this market.”

 

In the latest financial report for 2015 Fosun saidthat in recent years the premium received by PFI has grown rapidly on the backof several innovative projects. He said that the company continuously promotesproduct innovation and is also exploring a new sales model of "Insurance +Health Manager + Retirement Community + Overseas Asset Allocation,” andcrowd-funding insurance.

The group now offers a comprehensive set of productlines that span from life, accident, critical illness to universal life andhealth insurance.

In 2015 the new annualised premium income and thetotal premium of PFI reached rmb 125.3m and rmb 978.1m respectively (bothincluding universal life insurance policyholders’ deposits). The company alsorecorded gross premium income of rmb 57.2m, net loss of rmb 113m, investable assetsof rmb 1.9bn, a solvency adequacy ratio of 985.5% and the total investmentreturn reached 6.9%.

 

Climbing to the peak

 

Then in January of 2013 Fosun created Peak ReinsuranceCompany Limited (Peak Re), a Hong Kong based reinsurer designed to capture thegrowing demand for modern reinsurance solutions in the Asia Pacific region. Thecompany started with an initial capital of US $550m. 

 

Peak Re is actually held jointly with theInternational Finance Corporation (IFC), a member of the World Bank Group focusedon private sector development. It invested US $82m (14.9%) in the company. Atthe time of launch Mr Guo said: "Together with Fosun’s other insuranceprojects, we believe our investment in Peak Re will create an anchor revenuestream from the insurance business to support our investment activities andsteadily making inroads to establish Fosun as ‘a premium investment group.’”

 

The group pointed out that Asia Pacific has beenunderinsured in general for too long. It pointed out that, in the aftermath ofa series of natural catastrophes in Asia Pacific in 2011, including the Thaifloods, Tohoku earthquake and tsunami in Japan, New Zealand earthquake andAustralian floods, less than 22% of the total economic loss registered wasinsured. This was significantly below the ratio of insured loss to economicloss seen in the US and Europe at that time, which stood at approximately 63%and 50% respectively.

 

Moreover, in 2010 China suffered its most devastatingfloods in a decade that caused around us $50bn economic loss, of which only Us$1bn was covered by insurance. Peak Re therefore planned to invest‘significantly’ in the research and development of risk management solutionsfor households and business in the region. It said that, in cooperation withIFC and Fosun, Peak Re planned to enter emerging Asian markets including China,India and Indonesia in its first five years.

 

The new reinsurer also said that it planned to growboth organically and strategically via the acquisition of portfolios ofprofitable underwriting business. Last year the reinsurer took some big stepsto diversify itself by territory and product line. It announced its plan toacquire a 50% stake in Caribbean insurance group NAGICO Holdings Limited inJuly 2015, currently pending for regulatory approvals. Peak Re also set up aZurich branch in September 2015 to get closer to its clients in Europe andfurther diversify the book of business.

 

Fosun revealed that the reinsurer’s business in AsiaPacific expanded ‘steadily’ and added that it has also made ‘solid’ progress inEurope and North America. In 2015, the gross premium written from Europe andNorth America accounted for 41.5% of the total premium income, showing anincrease of 24.4% from 17.1% in 2014.

By the end of last year Peak Re had served over 285customers in 47 markets around the world, compared to 175 customers by the endof 2014.

The company wrote gross premiums of US $582.7m in 2015compared to us $288.1m for the same period in 2014. Net profit was us $59.2m,up by US $17.6m on 2014. The net combined ratio was 96.8%, solvency adequacyratio was 754%, investable assets were US $913m and total return on investmentwas 6.4%.

 

 

Fosun arrives in Europe… Via Portugal

 

The biggest step forward in Fosun’s insurance growthstory came in May 2014 when Chinese President Xi Jinping and PortuguesePresident Anibal Cavaco Silva witnessed the signing of documents to secureFosun’s completion of its €1.038bn acquisition of 80% of the share capital andvoting rights of each of Fidelidade, Multicare and Cares, collectively nowknown as the Portuguese Insurance Group.

 

The three companies were wholly-owned subsidiaries ofCaixa Seguros e Saude (CSS), the insurance arm of Portugal’s state-owned bankCGD.

Fosun said that, following the successful completionof the acquisition, it had made a ‘major stride’ towards becoming a world-classinvestment group underpinned by the twin drivers of ‘insurance-orientedcomprehensive financial capability’ and ‘profound industrial foothold basedinvestment capability.’ This, said the group, moved it closer towardsimplementing the ‘Warren Buffett model of development’. 

 

The Portuguese Insurance Group’s unaudited totalassets reached €12.8bn by end-2013. On a pro forma basis after consolidatingthe Portuguese Insurance Group, the proportion of Fosun’s insurance assets tothe Group’s total assets increased significantly from 3% to 39%. "Asinsurance is the core business for Fosun’s development, the cooperation betweenFosun and the Portuguese Insurance Group will undoubtedly be a long-term andstable one. Meanwhile, Fosun is fully confident about the existing managementteam and has committed to maintaining the stability of the ongoing businessstrategy.

 

Through efforts of both parties and synergies derivedfrom shared resources in various aspects, Fosun hopes to develop higher qualityproducts and services as part of its efforts in achieving sustainable returnsto our shareholders, employees and customers,” stated Fosun. The Chinese groupsaid that it would also facilitate  collaboration and synergy with otherinsurance companies that it had invested in, again following the Buffett model.

 

"For instance, we will facilitate collaborationwith Peak Reinsurance to lower the reinsurance costs and to cooperate withYong’an P&C Insurance in technologies, products and sales channels toachieve rapid business development. On the other hand, Fosun will make use ofits core investment capability to optimize the investment portfolio to improvethe investment returns for the Portuguese Insurance Group, especially combiningwith Fosun’s global investment strategies. Fosun will also review in at fulllengths the investment opportunities across Europe and OECD markets whilebroadening its business scope, with a view to minimizing systemic risks ofgeographical concentration through diversification,” explained Fosun.

 

The Chinese group added that it had been activelyidentifying different types of ‘value investing opportunities’ around the worldand decided that, despite Portugal’s recent economic problems, it believed thatthat country remains a highly attractive key market and matches well withFosun’s global expansion strategy. "Fosun stays vigilant and is attentiveto other investment opportunities in other sectors of the Portuguese market, inparticular the sectors of property, tourism and brand products,” added Fosun.

 

Fosun’s representative office was set up in Lisbonfrom where it would be able to provide better support to the Portuguese InsuranceGroup and explore investments in other sectors in Portugal and further promote‘Sino-Portugal’ economic exchange and cooperation, said the group. "Thismove will also allow Fosun to contribute its effort, albeit minute, to recoveryof the economy in Portugal. Fosun aspires to play the role as a bridge thatfacilitates business developments in China by companies originated in Portugal,and developments in Portugal by companies originated in China,” added thegroup.

 

In early 2015, Fosun further increased its equityinterest in Fidelidade to 84.986%. Fosun Insurance Portugal is now asignificant global operator in the Portuguese insurance market. Fosun explainedin its latest set of annual results that it sells its products in all key linesof business and benefits from the largest and most diversified insurance salesnetwork in Portugal.

This includes exclusive and multi-brand agents,brokers, own branches, Internet and telephone channels. It also has strongdistribution partnerships with the post office and Caixa Geral de Depósitos, aleading Portuguese bank. Fosun Insurance Portugal is also active in sevencountries on three continents (Europe, Asia and Africa).

During the Reporting Period, Fosun Insurance Portugalreported gross premium income of €3.9bn, a non-life business net combined ratioof 98.4%, a solvency adequacy ratio of 215.7% and net profit of €301.1m."International business of Fosun Insurance Portugal continued to reveal astrong commercial performance, reaching overall €202.1m in direct insurancepremiums, an increase of 13.7% compared to 2014,” reported Fosun at the end ofMarch this year.


Next stop United States!

Despite the scale of the Portuguese acquisitionChina’s Warren Buffett was not ready to stop there and the next target was inthe huge US insurance market. In July of last year Fosun announced thecompletion of its acquisition of 100% of Meadowbrook Insurance Group (MIG) forus $439m. "Meadowbrook will further strengthen Fosun’s capability toaccess long-term high-quality capital and enhance the Group’s insurancebusiness capabilities on both the liability end and investment end. We arecommitted to leveraging Fosun’s global resources to support long-term andstable development of Meadowbrook,” said Mr Guo. 

Meadowbrook is a property & casualty insurer andinsurance administration services company focused on specialty niche markets.It markets and underwrites specialty property and casualty insurance programsand products on both an admitted and non-admitted basis through a diversenetwork of independent retail agents, wholesalers, program administrators andgeneral agencies. Critically, Meadowbrook possesses a full range of non-lifeinsurance licenses in 50 states nationwide, which cover admitted andnon-admitted product lines. 

The completion of the Meadowbrook acquisition gaveFosun a strategic insurance platform in the US, enabling the Group to establisha significant presence in the world’s biggest property and casualty market.Last year MIG recorded gross premium income of US $726.5m and net profit of US$34.3m on the back of a net combined ratio of 100.3% and solvency adequacyratio of 200.3%. MIG has investable assets of us $1,570.6m.

  

And now international specialty market

In February of last year, as Fosun was preparing itsacquisition of MIG, it completed the acquisition of approximately 20% of thetotal outstanding ordinary shares of Ironshore, the Bermuda-based internationalspecialty insurance group. The purchase price was approximately US $466.6m.

True to form, in November of last year, the Chinesegroup completed the acquisition of the remaining interests in Ironshore for us$2bn in cash.

Ironshore is a big step forward for Fosun into thehighly valuable and currently popular large corporate and commercial insurancemarket. Apart from Bermuda, Ironshore has operations in the US, Lloyd’s andIreland.

In 2015 Ironshore’s gross premium income reached US$2.16bn and it delivered a net profit of us $57.8m on the back of a netcombined ratio of 96.7%. The solvency adequacy ratio was approximately 166% andtotal investable assets were us $5.1bn.

Given the group’s existing presence in the potentiallymassive Chinese primary life and non-life markets, the Asian and internationalreinsurance market, mainland European life and non-life market and the UScommercial specialty markets, the addition of Ironshore gave Fosun arguably thefinal piece in its jigsaw, for now at least.

As the Ironshore deal was revealed, Mr Guo stressedthe Buffett style synergies that the companies will enjoy within the Fosunfamily. He said: "Now and in the coming year, Fosun will strengthen itsintegration and collaboration efforts, seeking to establish a cross-region andcross-industry global insurance and financial group. We encourage our investedcompanies to collaborate wherever applicable, seeking to connect them toFosun’s resources with our global insurance and finance platforms to enhancetheir competitiveness in their respective industries.”

And Ironshore did not hang around long to take advantageof its new group potential for in January it announced that its Lloyd’ssubsidiary, Pembroke Managing Agency, would set up an office in Shanghai tojoin the Lloyd’s China platform. The Shanghai Pembroke Managing Agency willunderwrite specialty lines of business, initially focused on the agriculture,marine and healthcare sectors. Tracy Ma was appointed underwriting manager ofthe entity and reports to Hui Yun Boo, managing director of Ironshore’s AsiaPacific region.

"Ironshore’s parent Fosun, headquartered inShanghai, positions us with clear distinction in the local market, allowing usto offer onshore specialist products to meet growing demand within this vibrantcity,” said Mark Wheeler, chief executive officer of Ironshore International.Ms Boo said the new Shanghai office complements Ironshore’s existing regionalpresence in Asia Pacific growth hubs, such as Singapore, Hong Kong, Tokyo,Sydney and Auckland.

Interestingly only two months later on March 22, theboard of directors of Fosun announced that the Company is considering pursuingan initial public offering of the ordinary shares of Ironshore.

"As at the date of this announcement, no finaldecision has been made by the respective board of directors of the Company andIronshore on whether, when, or where to proceed with the Possible IPO,” statedthe group. 

Whatever Fosun decides to do with Ironshore it isclear that the Chinese group will continue to build its business in theinternational insurance space. As Ms Lan Kang states in the following Q&AFosun will remain focused on this market and use its Portuguese andinternational bases to seek further growth opportunities. Watch this space! 

Guo Guangchang meets role model at us-china CEOroundtable

Last September Chinese President Xi Jinping attendedthe US-China CEO Roundtable in Seattle hosted by the Paulson Institute and theChina Center for the Promotion of International Trade. This was the highlightof the second day of President Xi’s visit to the United States. Xi Jinpingstressed at the roundtable that, due to differences in stages of development,the Chinese and U.S. economies are highly complementary. He said that there isgreater room and opportunity for bilateral economic and trade cooperation. TheChinese President added that China supports large US companies that establishregional headquarters and research centres in China and encouraged more smalland medium US enterprises to expand their business in China. 

Meanwhile, Chinese investments in the United Stateswill also continue to grow, he said. There were 15 CEOs from China’s biggestcompanies including Guo Guangchang of Fosun who took part in the discussionalong with 15 CEOs of the biggest corporations in the US including WarrenBuffett of Berkshire Hathaway. Jokingly, Guo Guangchang called himself astudent of Mr Buffet at the roundtable as he introduced Fosun’s US investmentprojects, including the recently acquired Meadowbrook Insurance Group (MIG) andIronshore, and its participation in Sino-US cultural and artistic cooperationand exchange programs.

At the roundtable, Guo Guangchang said that the UnitedStates has the world’s largest concentration of superior resources, and givenFosun’s focus on the four major fields of insurance, private banking, healthand happy & lifestyle, the Group actively explores superior projects forcooperation.

At that point, Fosun’s scale of investments in theUnited States had already surpassed US $5bn, creating a total of 4,895 jobopportunities, Mr Guo said.

Apart from Ironshore and MIG, these investmentsinclude: the establishment of three pharmaceutical laboratories in SiliconValley for seamless 24/7 global research and development as well as over 10investment cooperation projects, such as the New York landmark 28 Liberty,renowned US womenswear brand, St. John, innovative Hollywood film company,Studio 8, and a number of other venture capital projects.

During the roundtable, Mr Buffett and the ‘ChineseBuffett’ had the chance to meet face to face and reached a consensus: Continueto be optimistic for the Chinese economy and continue to adhere to valueinvesting discipline.

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