As modern insurance service has been formally raised to national decision-making consideration and national strategy in the context of “new normal” macro-economy,the insurance funds, as a long-term kind,will increasingly take an active part in the capital market. In this view, the trend of Banner Acquisitions* by Insurance Funds will be a “normal” state rather than a short-lived phenomenon. The “Baoneng-Vanke Fight” coming around the end of 2015 has triggered extensive public comments on banner acquisitions on listed companies by insurance funds. The application of insurance funds had been controversial at one time when the investment channels for insurance funds were restricted. As the restrictive policies have been gradually lifted, their application again rises to a market hot spot attracting public attention, due to the recurrent share purchasing events. Nevertheless, as modern insurance service has been formally elevated to a national strategic level in the context of “new normal” macro-economy, the insurance funds, as a long-term kind, will increasingly take an active part in the capital market. In this view, the banner acquisitions by insurance funds will be a “normal” state rather than a short-lived phenomenon.
Normalization of banner acquisitions by insurance funds relies on the essential attributes of insurance companies
Insurance companies exhibit three major attributes: as an enterprise, they must make profits; as a financial entity, they must be able to circulate funds; as a social entity, they must undertake its due social responsibilities. As a financial entity,insurance companies, after accumulating certain amount of capital by charging the premium from policy holders, should have the funds utilized while keeping risks controllable. The funds may be used for real economic development by means of financing; or, it may be used for investment to gain benefits, preserve or increase values,to improve its compensation capability.
Opinions differ on the nature, or we may say the source, of the finance. But the most critical and most core nature of finance is that it should serve the real economy, and support the advancement of real economy,and in turn, realize its own development. “Finance will thrive if industries thrive,and finance will be kept stable if industries remain stable.” Therefore, finance is a core factor of the modern economy, and its source is to serve the real economy. The insurance industry is driven by two forces, namely making investments while charging premiums, which enables capital circulation. While in the capital market, fund-raising, directly realized by issuing shares, can serve the real economy, which also enables circulation of capital. The insurance company buys shares of a listed company with insurance funds, to connect the two channels of financing. The investment of insurance funds in the real economy not only backs the development of the real economy, but also facilitates its own advancement. It is an inevitable result as the insurance company is a financial entity, bearing financial attributes.
Normalization of banner acquisitions by insurance funds traces back to the large room for insurance industry development The density and depth of the insurance industry in China only reached USD235 and 3% by the end of 2015, lower than the world average level of USD662 and 6.2%. The total assets of insurance occupied 6% of the financial industry; in members of the Organization for Economic Cooperation and Development (OECD) countries, the share of national insurance and pension assets in total financial assets attained 20%; in developed countries, the insurance sector is one of the three pillars together with banking and securities, while insurance shows a slight edge. From this point of view, China’s insurance sector is at a lower level. But on the other hand, gaps allow for potential development, and backwardness will stimulate productivity. In addition, according to relevant statistics, a total of ten insurance companies performed banner acquisitions on 36 listed companies by the end of 2015, bringing the investment balance to RMB365 billion. It only contributed to 3.3% of the total of insurance funds application. The proportion is predicted to increase as the modern insurance service sector is projected to propel to the national decision.
In summary, insurance has become a stronger contributor to the economy, as the insurance awareness is enhanced among Chinese residents. The insurance sector is playing a greater role in the national economy and finance industry, and the total applicable insurance amount is also estimated to increase accordingly. Presently, the insurance funds used for banner acquisitions only comprise of a small part of the balance available, and the proportion is likely to rise through acquiring shares of a listed company, despite restrictions on the ratio of insurance funds in total stock investments. Furthermore, the overall risks posed by banner acquisitions by insurance funds are controllable at this time. As a consequence, proper banner acquisitions are conducive to industry expansion and improvement of the overall image and status, as along as each insurance company makes investment in a prudent manner and under rigorous supervision of regulators.
Normalization of banner acquisitions by insurance funds meets the demand on insurance funds allocation
The insurance funds should invest in the principle of security, profitability and mobility. The overall situation generally suffers from “asset shortage” upon themacro economy steps into the “new normal”. In the context of asset shortage,downward interest rates and profit reduction in fixed-income products, it becomes the primary goal for capital allocation to focus on quality underlying assets and acquire long-term stable returns. The listed companies have transparent operation and their shares are flexibly mobilized.
Meanwhile, the majority of quality industrial assets are assembled in listed companies, which are safer and more profitable. In view of the above aspects, it is quite beneficial to perform banner acquisitions on shares of listed companies. First, the insurance company can share the profit dividend gained from quality industrial capital, and obtain capital gains brought by rising stock prices due to industrial capital growth. Second, major fluctuations of solvency will be reduced, to relieve capital pressure; in doing so, the right to know and right of speech on the listed company whose shares are bought will be strengthened, to contribute to the strategic effects of acquiring enterprises and promoting their popularity. Third, such a move is also in line with the national strategy of advocating direct financing, supporting development of capital market, and decreasing macro-economy regulating leverage.
2015 has been a productive year for the insurance industry, in which returns on insurance capital application hit 7.56%, the highest since 2008 when the international financial crisis broke out. The significant improvement in the returns is largely attributed to the allocation of insurance capital in shares of listed companies. Twenty-one of the shares of the abovementioned 36 listed companies are blue chip companies. As to the hot issue of Foresea Life Insurance conducting banner acquisition on Vanke shares, we should not place too much doubt as long as the purchasing complies with relevant regulatory rules and the risks turn out to be controllable, according to the stress testing.Looking ahead, China’s modern insurance service sector will embrace greater improvement, and the total amount of available insurance capital will be significantly increased. Therefore, in light of security, profitability, mobility and the financial nature, a larger proportion of the balance of available insurance capital will be used to purchase shares of a listed company, to allocate quality underlying assets and support the development of the real economy. As a result, banner acquisitions by insurance funds will be a normal state against the“new normal” economy.