China Re's acquisition of Chaucer from Hannover will complement the Chinese reinsurer's existing product offerings and increase its geographic diversification, say Mr Kelvin Kwok, analyst, and Ms Sally Yim, associate managing director, Financial Institutions Group of Moody's Investors Service.
Chaucer is China Re's first major international acquisition. The international rating agency, in an article in the 20 September issue of Moody’s Credit Outlook, expects the deal to mark the start of an acceleration in China Re's overseas expansion and the development of its international business capabilities, which is in line with China Re's ”go global” focus. Chaucer’s footprint and established customer base in Europe, North America and Latin America will augment China Re’s position as the largest reinsurer in Asia by premiums and reduce its geographic concentration in China.
China Re will also benefit from Chaucer’s significant presence in the Lloyd’s market, helping it to expand its market share in the global specialty reinsurance segment. Chaucer owns two Lloyd's syndicates, 1084 and 1176. Syndicate 1084 was the 11th largest Lloyd’s syndicate by premiums in 2017. On a pro forma basis, the acquisition will raise China Re’s overseas premiums to 35% of its overall P&C reinsurance premiums from 13% in 2017.
The proposed acquisition is credit positive for China Re, says Moody's. The transaction is also credit positive for Hanover because it will boost Hanover’s capital adequacy by reducing its catastrophe and other underwriting risk, and will lower its financial leverage.
Chaucer’s focus on underwriting specialty risks, in particular marine, aviation and political risk, will complement China Re’s existing P&C (re)insurance products, which are concentrated on the traditional motor and property sectors. The motor sector represented 73.5% of China Re’s domestic primary P&C premiums in 2017 and 41.2% of its domestic P&C reinsurance premiums. The added underwriting capability will reduce China Re’s reliance on its domestic motor business, whose growth is under pressure from moderating new car sales and the liberalisation of commercial motor pricing in China.
Additionally, China Re will benefit from Chaucer’s technical know-how. As the operator of two Lloyd’s syndicates, Chaucer specialises in infrastructure and utility construction projects, which usually entail complex engineering, energy and geopolitical risks and demand specialised risk assessment and underwriting. This expertise will support China Re’s efforts to serve growing insurance demand from China’s Belt and Road Initiative.
The acquisition will improve China Re’s profitability based on its latest return on equity (ROE) performance. Chaucer reported a three-year average ROE of 12.1% between 2015 and 2017, much higher than China Re’s weighted average ROE of 7.2% in 2017 and 6.2% in the first half of 2018.
The transaction is small compared with China Re’s large capital base of CNY85.6bn ($12.5bn). The proposed consideration would equal 7% of China Re’s shareholders’ equity at the end of June 2018. According to China Re’s announcement, the Chinese reinsurer will fund the purchase from both internal resources and through external financing, the latter capped at $550m. If China Re raises the full $550m via senior debt, its pro forma financial leverage would increase to 14% from 11% as of 30 June 2018, which is not significant.