It’s a deal linking Shanghai and Zurich, but the real target looks to be London.
China Pacific Insurance (Group) Co. is in talks to invest at least $2 billion in Swiss Re AG, Manuel Baigorri of Bloomberg News reported Wednesday, citing people familiar with the matter. Shanghai-based China Pacific is the country’s third-largest insurer, while Zurich-based Swiss Re is Switzerland’s biggest reinsurance company.
At the current market price, $2 billion would buy China Pacific less than 6% of its target. That won’t give the Chinese insurer any sway over how Swiss Re spends its cash — thought to be the motivation for SoftBank Group Corp.’s ultimately abandoned interest in the company last year. As a passive financial investment, a deal would make sense for the acquirer: Swiss Re shares have gained 17% this year, and the reinsurer trades on a chunky 5.3% dividend yield. The real prize for the Chinese company, though, would be the parallel investment that Swiss Re would make in China Pacific.
This is where London comes in. China Pacific said in September that it’s planning to sell global depository receipts to be listed in the British capital. This would be only the second listing under the Shanghai-London Stock Connect program. There’s a lot of political capital riding on this endeavor: China Pacific is controlled by the Shanghai government, and an anchor investor such as Swiss Re would boost the profile and attractions of the offering.
Huatai Securities Co. became the first company to start trading under the cross-border listing program in June. While the brokerage’s shares have gained more than 20% since their debut, trading volume has been anemic: An average of about 250,000 GDRs out of 735 million outstanding have changed hands daily. Anything that helps to burnish interest in the China Pacific sale will be welcome.
Swiss Re said in a statement that it’s been exploring a potential investment in a sale of new securities by China Pacific. The Swiss company would spend $500 million to $1 billion for a minority stake under the deal being discussed, according to the Bloomberg News report.
China Pacific has a good story to tell. It’s one of the key players in a market where insurance demand is surging as incomes rise and state-run health and welfare systems remain underdeveloped. The insurer’s net income has climbed by half in the past two years and earnings per share are forecast to grow 60% in 2019, according to the consensus estimate compiled by Bloomberg. The shares have gained 20% in Hong Kong this year.
To be sure, there would be other benefits from a tie-up. China Pacific may gain access to the Swiss reinsurer’s product development expertise and a wealth of data that can help in pricing risk. These advantages are gaining in importance as China opens up its already competitive financial markets to further foreign participation.
Swiss Re already has interests in the region, via stakes in New China Life Insurance Co. and FWD Group Ltd., the Asian insurer backed by Hong Kong tycoon Richard Li. The company has also held discussions with Chinese authorities about an investment in Beijing-based Anbang Insurance Group Co., Bloomberg New reported last year.
Still, after suffering losses from major claims like Hurricane Dorian in the Caribbean and suspending its U.K. insurance IPO, it’s smart for Swiss Re to do more with its China connections. A $1 billion slice of China Pacific’s London offering could buy a lot of goodwill.
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