China banks invest in insurance companies

Recently there has been some news about Chinese regulators approves some of China banks to invest in insurance companies:

• Bank of Communications got approval to purchase from China Life 51% of China Life CMG.

• Bank of China (BOC) got approval to purchase 25% of Heng An Standard Life, through its wholly owned property/casualty insurance subsidiary Bank of China Insurance Company.

• Bank of Beijing got approval to invest in ING Pacific, and then got approval to invest in ING Capital, by purchase share from local company Capital Group.

In 2008, China’s banking regulator (CBRC) and insurance regulator (CIRC) signed a memorandum on strengthening cooperation between banks and insurance companies and on cross-sector supervision. In principle, this allowed banks to invest in insurance companies and insurance companies to invest in banks. The Bank of Communications was the pilot of this type of investment. Next, Bank of China and Bank of Beijing got approval from regulators. It has been said that China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) are also interested in investing in insurance companies, and some insurance companies are interested in investing in banks.

I see all of those cases mentioned above could benefit both buyer and seller.

Bank of Communications/China Life CMG case:

• For the seller: China Life CMG is a joint venture set up by China Life and the Australia’s Colonial Mutual Group, and it accounts for less than 0.01% of the China life insurance market. As the largest life insurance company in China, China Life had been trying to sell its share of China Life CMG for a long time to avoid internal competition.

• For the buyer: By purchasing China Life CMG, Bank of Communications formed a financial group with banking, insurance, trust, and financial leasing businesses.

• This is a case of local bank buy share from local insurance company.

Bank of China/Heng An Standard Life case:

• For the seller: for Standard Life, it is “a move which would likely bolster its cash position,” according to Dow Jones Newswires.

• For the buyer: BOC Insurance leverages BOC’s branches for distribution and BOC’s customer base for cross-selling. By taking a majority stake in Heng An Standard Life, BOC would be able to provide both life and property/casualty products. This is another milestone for Bank of China in the process of forming a financial group.

• This is a case of local bank buy share from foreign insurance company.

Bank of Beijing/ING case:

ING has two joint ventures in China, ING Pacific Life Insurance and ING Capital Life Insurance. It wants to consolidate these businesses.

• ING Pacific is a joint venture set up by ING and the CPIC Group. CPIC has a life subsidiary, CPLIC, which is the third largest life insurance company in China, and P/C subsidiary, CPPIC, which is the third largest P/C insurance company in China. CPIC was looking to sell its stake in ING Pacific to avoid internal competition.

• ING Capital is a joint venture set up by ING and a local company, Capital Group.
• ING owns a share of Bank of Beijing as a strategic investment.
• Bank of Beijing taking a share in both ING Pacific and ING Capital could make ING’s China business integration easier, since the two joint ventures would have a similar ownership structure. Also, ING could leverage Bank of Beijing’s distribution channel.
• This is a case of local bank buy share from local insurance companies.

From analyses above, we can find out that the ING case is completely different with Standard Life case. Standard Life sold shares to "bolster its cash position", while ING’s case is aimed at consolidate its operation in China.

What is the trend I see from these cases? Firstly, allowing banks to invest in insurance companies and insurance companies to invest in banks will form new financial groups and consolidate the China insurance market; And another trend is, the bancassurance business model in China may change, moving from agency-level cooperation to deeper and broader capital-level cooperation. Banks and insurance companies could cooperate in various stages, from product development and distribution to customer service.