China Dodges an AIG Moment With Anbang's Parting Whimper

Beijing’s interventions in the economy don’t always merit applause, but the government’s unprecedented seizure of Anbang Insurance Group Co. deserves a round.

Anbang was a toxic threat to China’s financial system after a debt-fueled global acquisition spree — including trophy assets such as New York’s Waldorf Astoria hotel — that was funded by the sale of high-yield insurance policies. Those risky products propelled the company from obscurity into the ranks of the country’s biggest insurers in the space of a few years.

The government will take temporary control of Anbang for a year starting Friday and prosecute its founder Wu Xiaohui for “economic crimes,” the China Insurance Regulatory Commission said in a statement. Wu, who was the company’s chairman, was detained in June.

(Related: Asia’s Craze for Bancassurance Deals Is Just Madness)

As I have written previously, the insurer was always going to crash and burn if left untouched.

The heart of the Anbang dilemma is a duration mismatch. The company funded itself with the sale of short-term policies, some of which promised 8% returns in six months. The proceeds were often invested in long-term, hard-to-sell assets such as overseas real estate.

In its size and entanglement with China’s financial system, Anbang is comparable to Lehman Brothers Holdings Inc. or American International Group Inc. in the U.S. before the global financial crisis. The company’s total assets were equivalent to a staggering 3.4% of China’s GDP, UBS Group AG analyst Jason Bedford estimated in a report in August.

By the end of last year’s first quarter, Anbang was the country’s second-largest insurer after state-owned China Life Insurance Co. Its voracious dealmaking included an aborted $15 billion bid for Starwood Hotels & Resorts Worldwide Inc. It was also once in talks to invest in 666 Fifth Ave. in New York, the marquee holding of Kushner Cos., the family company of President Donald Trump’s son-in-law Jared Kushner.