China conglomerate plans to launch Asia-Pacific Reinsurance Ltd.

by Artemis on August 13, 2015

Further underscoring the interest in the reinsurance business from conglomerate and investment organisations in China, Oceanwide Holdings Co., Ltd., a Chinese company, is planning to launch Asia-Pacific Reinsurance Ltd. with 2 billion yuan invested in the start-up reinsurer.

Recently reports have suggested that upwards of 40 major Chinese conglomerates, industrial groups and investment organisations are all actively looking at the insurance and reinsurance business as a source of diversification and return.

These diversified Chinese business groups see Warren Buffett’s Berkshire Hathaway type strategy as something to aspire to, bringing reinsurance into their conglomerate as a way to both source more permanent capital that can be used elsewhere in their businesses, as well as source returns that are less correlated with their other business ventures.

Oceanwide Holdings also sees the need for more risk capital to service the growing Chinese economy and an opportunity to establish a reinsurance company in order to compete with the large global players that are trying to gain footholds in the China and Asia-Pacific region.

The capital from these players should not be underestimated, as it comes from diversified business groups which can wield a reduced cost-of-capital if they choose. Also the links these groups have in industry and business in China, as well as to the government and State Council, could make the next breed of Chinese reinsurance company formidable competitors on their own soil.

Oceanwide Holdings said in a statement today (hat tip to Reuters for the tip-off) that it, alongside a number of other Chinese enterprises from the real estate, investment and food industry, will seek to finance and launch Asia-Pacific Reinsurance Ltd. with 2 billion yuan of initial capital (approximately $313m).

The name of the reinsurance company (Asia-Pacific Reinsurance Ltd. or Asia-Pacific Re) is not yet official, so could change as the registration application progresses, the holding company notes.

The Oceanwide Holdings board has voted unanimously in favour of the plan and will now seek approval for the reinsurance company formation from the China Insurance Regulatory Commission.

The 2 billion yuan initial investment is the 20% of regulatory capital required for establishing the reinsurer, but Asia-Pacific Re will ultimately require 10 billion yuan of regulatory capital in place. It’s not clear at this time how the remainder will be raised, but perhaps through a share issuance to the Chinese public and investors.

Asia-Pacific Re will follow a business plan including the underwriting of property insurance, life insurance, reinsurance and also international retrocession. The addition of international retrocessional reinsurance is likely to aid Asia-Pacific Re’s diversification.

Interestingly, Oceanwide Holdings is also an investor in the China Minsheng group, which recently agreed to acquire insurance and reinsurance company Sirius from White Mountains.

So it seems Oceanwide Holdings has a significant appetite to operate in the reinsurance space, leading it to seek to establish a China focused company. However its investments and operations span finance, insurance, energy, real estate, media and more.

As diversified conglomerates in China seek to put their cash to work and to more broadly diversify themselves away from their often industrial and real estate roots, along with the clear opportunity to secure a share of the growing Chinese and Asian re/insurance space, we can expect to see new capital entering the space over the years to come.

That will, of course, affect the global insurance and reinsurance market, further boosting capital and competition and bringing new competitors into the space which follow a diversified approach that can result in a more competitive capital cost.

As more Chinese companies look to enter re/insurance it is also going to make it increasingly competitive for global reinsurance firms to access that market. What was once seen as one of the biggest opportunities for the large re/insurers, may in the future be seen as a more competitive place to operate.

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