Ping An Insurance (Group), China's No.2 life insurer, bought a 4.2 percent stake in Dutch-Belgian financial services firm Fortis for $2.7 billion, the latest overseas investment by a Chinese financial firm.
The deal, which makes Ping An the top shareholder in Fortis, is the largest foreign purchase by a Chinese insurer, and follows Ping An's recent $154 million buy of 9 percent of Hong Kong fund manager Value Partners Chinese financial firms, flush with $2 trillion in household savings, world-beating valuations and limited investment opportunities at home, are scouring the globe for acquisitions, with subprime-hit western counterparts looking like bargains.
"China's own capital markets are not sufficient to absorb all of this," said Binay Chandgothia, chief investment officer for Principal Asset Management's Hong Kong operation.
"They also need to diversify because if something goes wrong in China, the entire value of savings goes down."
The ambitious Fortis was part of the Royal Bank of Scotland consortium that paid 71 billion euros for ABN Amro That deal gives Fortis ABN's Dutch retail and commercial banking units and its wealth and asset management arm, but also raised worries that it bit off more than it could chew.
"We see no reason to change our concern that as the underlying banking cycle continues to deteriorate, Fortis's capital looks tightly positioned for a downturn," UBS wrote.
Fortis, whose shares jumped 7.5 percent on Thursday, has also built a presence in China, where it has joint ventures with Taiping Life and is part of Fortis Haitong Investment Management. Earlier this year, it bought Hong Kong's Pacific Century Insurance Holdings.
"The entry of Ping An in Fortis's capital is a clear vote of confidence in Fortis. In addition, it provides Fortis with a stable shareholder and allows it to gain enhanced access to high growth markets, in particular China," Bank Degroof wrote.
Ping An's investment caught some observers by surprise, given that it is putting such a big chunk of its policyholder funds into one stock. Under Beijing's rules, Chinese insurers can invest up to 5 percent of their assets overseas, and the Fortis stake accounts for roughly two thirds of Ping An's quota.
Shares in Ping An, which is 17 percent-owned by HSBC Holdings, rose as much as 9 percent in Hong Kong before closing up 6.7 percent.
The shares have almost tripled in the past year, making it the second-most valuable insurer in the world after larger rival China Life Insurance.
"They've used policyholder funds or investment funds rather than their own capital to make the investment, so it has to stack up in investment terms," said Credit Suisse analyst Bill Stacey.
Ping An President Louis Cheung will take a seat on the board of Fortis, which is the sort of diversified financial services holding company that Ping An aspires to be. The companies did not outline any specific cooperation plans going forward.
Fortis shares had fallen 39 percent from an April 11 peak and the firm posted disappointing third-quarter results, with the threat of subprime mortgage-related losses still lingering.
Still, UBS analyst Sally Ng said the deal makes sense for Ping An: "You get a euro hard currency, you get a a pretty good 4 percent yield, so for a long-term fund like life insurance, it's probably worth investing."
China Life Insurance has also expressed its interest in buying abroad, but has not yet made a significant investment.
Ping An bought its Fortis shares in the open market over the past few months with the knowledge of Fortis, which has been looking to diversify its shareholder base and board structure.
JP Morgan represented Ping An, while Merrill Lynch advised Fortis.
Ping An bought 95.01 million Fortis shares at an average of 19.05 euros each. The price values it at about 7 times forecast 2008 earnings and 1.1 times forecast book value for next year.
By comparison, HSBC trades at 12.5 times 2008 earnings, and Citigroup trades at 7 times 2008 earnings.
Chinese financial firms have been diversifying their holdings at a time when high-flying local markets are starting to slide.
The deals also have strategic value, allowing China's big but inexperienced financial firms to learn from their global peers.
Last month, China's biggest lender, Industrial and Commercial Bank of China, agreed to pay $5.6 billion for 20 percent of South Africa's Standard Bank, the biggest foreign purchase by a Chinese commercial bank.
In May, China's new state investment fund bought a $3 billion stake in U.S. private equity firm The Blackstone Group.
China's outbound acquisition volumes have nearly doubled this year to $26 billion, according to Thomson Financial.
Beijing has been encouraging insurers to invest in sectors such as banking, asset management and infrastructure to grow their profit streams. China Life said on Wednesday it planned to boost its equity investments, especially in the financial, power and ports sector and expand its asset management business.