The Role China’s Insurance Companies Will Play for the Senior Care Industry

It is largely believed that among the many challenges the senior care industry will face as it enters China, obtaining capital will not be one, particularly once a handful of viable pilot projects emerge.  Of the set of North American operators that have already entered China, Emeritus has already been able to bring in domestic Chinese capital.  This trend is likely to intensify as more operators move forward and prove both what a scalable model looks like as well as the appetite Chinese families have for western senior care models.

Marching in tandem with foreign operators entering China are the country’s own entrepreneurs and real estate developers, many of who have come to believe they also stand to benefit by developing a senior housing business.  As I have written about previously, many of these developers have mixed motives.  On one hand they find the senior care business interesting, but their other objective is more obvious.  For many, the compelling reason for their involvement has more to do with the need to unlock dormant real estate they otherwise could not get land rights, or obtain state-sponsored capital for.

What may surprise those Chinese developers who have a more short-term view of senior care is how one of their traditionally most important sources of capital – China’s insurance companies – view the need to develop scalable and profitable senior care models.  China’s major insurance companies have a vested interest not only in helping these developers unlock the value of their land, but more importantly, in seeing viable, sustainable and profitable businesses emerge from their investments.  Later on in this post, I will circle back and address one of the ways in which the involvement of China’s insurance companies could be detrimental that – if it were to prove out – could run at cross-purposes; hopefully the scenario that would make such an eventuality likely is, well, unlikely.

If we accept that China’s insurance companies are going to be major sources of capital for the senior care industry in the country, it is essential to understand who they are, how they are structured, and what early indications have to suggest about their expectations.  With this objective in mind, I had the opportunity once in China recently and then again last week via a call, to spend time speaking with of Atlantis Investment Advisors.  Sharon is a wealth of information on China’s insurance business, and has long-term experience with these companies and their early efforts to enter the senior housing space.

Sharon sees four early players emerging whose moves she is closely watching: Union Life, Taikang Life, New China Life, and China Life.  Of these, she shared “Union Life is the fastest [into senior housing].  Their first project is in Wuhan.  Construction is underway already with a first phase to be completed by the end of this year.  This is going to be a CCRC.  It is their first project and is intended to be a showcase for educating the market.  Second is Taikang Life Insurance.”  Apparently, Taikang has been evaluating senior housing since 2007 but only recently broke ground in Beijing with their first site.   This first development is intended to span 300 hectares in the Changping district, with a total investment of over $730 million.   I had to chuckle when thinking about the fact that Sharon described Taikang Life as being “very careful” given the expansive nature of their plans.  But then again, that is the mystery, magic and excitement of China!

The third Chinese insurance company Sharon is watching, New China Life, is the 3^rd largest life insurance company in China by premium, and is a SOE.  As Sharon added, “New China Life is relatively new to senior housing concept comparing to the other two forerunners.  They happen to have a piece of land in 2 suburban areas of Beijing and they are planning to build CCRCs; one in each of those areas, and they have a showroom in the New China Life Building, but in general the project details are not publicly known.”

China Life, not to be confused with New China Life, is the largest life insurance company in China, also an SOE.  China Life is looking at several pieces of land throughout China as options for their large scale senior housing projects including CCRCs and active adult type of communities.  China Life has some options that other insurance companies do not.  Sharon shared, “Because China Life is a large SOE, they can tap into other SOEs in ways other insurance companies cannot.  They can tap into retirees at other large SOEs as a pool of potential customers.  They can also raise a lot of capital.” Later on during our conversation, Sharon added that China Life has changed their senior housing strategy several times.

Obviously, in an industry where land takings are one of the potential fatal flaws that developers, investors and operators need to understand, SOE status of China Life and New China Life should provide them with some additional leverage that other insurance companies may not have.  Other insurance companies in China which Sharon is also tracking, such as Ping An, China Pacific, and Sunshine, are looking to invest in senior housing industries as equity investors as well, but are uncertain how involved they should be.

Earlier, I promised to circle back to what I saw as one critical factor that could prove problematic for insurance companies making investments in senior housing specifically.  While Sharon and I spoke, we discussed how insurance companies view the investment they are making.  Sharon suggested that to these large investors, the operating profits were not the immediate reason they were making the investment; rather, it was the opportunity to unlock the value of the land and then recognize the appreciation of land value on their balance sheets.  Here is the way this could look in a purely theoretical example:

Land Rights Value (prior to development) @ Y0 = 10m RMB

Land Rights Value (development authorized) @ Y1 = 50m RMB

Land Rights Value (development completed) @ Y5 = 150m RMB

Regardless of what is happening within the context of the senior care operation (i.e. is it profitable or not), the massive appreciation developers are used to seeing is expected to continue, especially when the insurers are able to obtain the lands at a deep discount off the market price, which is why insurance companies are eager to make these investments.  If the government will release land rights for senior housing and insurance companies can tap into the sort of appreciating land prices they have seen in other more commercial and residential developments, this becomes a no-brainer.  Unless, of course, China’s real estate market is primed for a major correction.  If this were to happen, it is unclear whether China’s insurance companies would have to recognize losses against balance sheet values.  You can see how this could get thorny very quickly.

Sharon explained, “Because life insurance companies have long-term liabilities, their needs for asset-liability match make investments that generate stable long-term cash flows attractive to them. Senior housing investment would fit their needs quite well.” She also added, “Unlike real estate developers, insurance capitals are patient with capital.  Furthermore, insurance companies see synergies between their insurance business and senior housing investment as their high net worth customers may become suitable clients and residents in senior housing communities.  However, the problem in China now is that there is no successful operational model.”

While these concerns are ones I think the industry will need to watch, Sharon was right to also point out that the large Chinese insurance companies are savvy businesses and that they recognize the need to find competent North American partners, specifically operators.  On this point, Sharon added several thoughts that I think are important to keep in mind:  “Chinese insurance companies are not convinced many North American operators are committed to China.  They do not want to be used to test market without any risk being born by the US operator.  In many cases, the US operator wants to get involved without a meaningful capital contribution and usually also wants some form of licensing fee.  Chinese companies are not willing to pay for this given there is no evidence that any success in the U.S. can be readily translated into success in China.  The insurance companies are happy to finance a joint venture to help an American company start their first project, but not before the American operator has some skin in the game.”

During our conversation, Sharon raised a point that I think should be front and center as American and European operators ponder going into China.  In my words, this is whether your business has the cultural DNA and management bandwidth to enter China given other opportunities to grow your top line and improve your bottom line as well.  Sharon reinforced this point:  “Very successful US operators have tremendous opportunities in their own country.  They can acquire distressed properties in the US right now and generate a very high IRR, and generally can partner with US funds and US capital providers to do this.  It is difficult for this sort of operator to enter China because the risks here are much higher.”

Here is why this sort of honest gut check is related to the topic of Chinese insurance companies:  if you don’t ask these questions yourself, if you get wrapped up in the excitement of this industry’s emergence in China, rest assured potential large-scale Chinese investors like these insurance companies will.  Sharon noted, “From the Chinese point of view, they are not sure foreign firms are really committed [given other low hanging fruit in the American market].”  These insurance companies are willing to make a large investment, but they want to see you put boots on the ground, complete a comprehensive market analysis to illustrate what the market wants, needs and are willing to pay for (a process the insurance companies don’t understand themselves, hence their interest in seeing an operator complete it), and a meaningful capital contribution.

China’s insurance companies will play an important, maybe even essential, role in the evolution of the senior care industry in China.  Their motives go beyond real estate valuations.  Longer term, these investors will become more sophisticated and learn to ask better questions about best practices and which of the most sustainable business models in senior care are right for China.