Risk Management of Overseas Direct Investment AmCham Shanghai Chinese Investment to USA Conference Eric Zheng AIG Insurance Company China Limited June, 2013
1. Trend of Chinese Companies Going-out Agenda 2. Risks of Overseas Investment 3. Managing Overseas Investment Risks 4. Q&A Page 2
1. Trend of Chinese Companies Going-out Page 3
China Overseas Direct Investment to the U.S.: Overview In recent years, China s overseas direct investment to the U.S. has increased significantly and achieved 2004-2011 CAGR of 40.4% Data source: National Bureau of Statistics of China Page 4
Transaction Volume ($ hundred million) China Overseas Direct Investment to the U.S. : M&A In 2012, China announced 329 M&A cases with total transaction value of $66.5billion, of which 40 deals were in U.S. with transaction value of $11.1billion. M&A Investment to U.S. ranked 2nd in 2012. 2006-2012 China M&A Deals in U.S. 2012 China M&A in U.S. Investors Breakdown # Case In 2007, China Investment Corporation acquired 10% stake in Blackstone with $3 billion and 9.9% stake in Morgan Stanley with $5.58 billion. State-owned Enterprises Private Enterprises Data source: Thomson One & Dealogic Case: Lenovo acquires IBM s PC Division In 2005, Lenovo completed the acquisition of IBM's Personal Computing Division, making it the third-largest personal computer company in the world. Page 5
Chinese Direct Investment to U.S.: Green-field Projects By the end of 2011, Chinese enterprises set up over 1,700 overseas subsidiaries/branches and employed more than 14,000 people in 35 states in the U.S. Case: Haier s green-field projects in U.S. Haier broke ground on the Haier Industrial Park in South Carolina in 1999 Greenfield projects in U.S.: 1 Industrial Park 1 R&D center 3 trading companies 2 manufacturing Data source: Asia Society Center on U.S.-China Relations Page 6
2. Risks of Overseas Investment Page 7
Risks of Going-out Political Risk Natural risk Legal Risk Credit Risk Going-out Market Risk Environmental Risk Economic Risk Page 8
Chinese Overseas Direct Investment Risks of Overseas Investment Financial Risks Information asymmetry Legal Liability M&A Fraud Credit risk Receivables Misrepresentations Warranty issues Third party liability Employer liability Environmental pollution Breach of local laws & regulations Risks Green Field Projects Off-site storage risk Operational testing risk Maintenance Contractor s plant & equipment Traffic accident Terrorist attack Diseases Kidnapping Earthquake & tornado Storm Flood Risks Construction Risks People Safety Natural Disasters Page 9
Types of Risks of Overseas Investment First Party Loss Exposures Property Loss Natural catastrophe Supply chain management Marine Cargo Trade Credit Political Risk Product Recall/Sabotage/Extortion Crime/Fidelity Intellectual Property Third party Liability Exposures General Liability Professional Errors & Omissions Surety Environmental Motor Liability Employers Liability Directors & Officers Liability People Exposures Foreign workplace injury exposures Foreign non workplace injury exposures Kidnap & Ransom exposures Reputation Risk Exposures Loss of contract or license Decrease in sales revenue Loss of goodwill & future potential Credit downgrade Investing community Difficulty with retention & recruitment Increased oversight by regulators Fines, penalties or imprisonment Page 10
3. Managing Overseas Investment Risks Page 11
Risk Management: Utilization of Commercial Insurance Expertise in loss prevention and engineering Professional Risk Engineering Compensation for operation issues Operating Security Secured project implementation Utilization of Insurance Financial Security Claim indemnities Defense costs within limited liability Employee Stability Improved labor relations Page 12
Risk Management: an Ongoing Process Understand and define risks Establish risk management mechanisms Review the implementation of risk management solutions Assess the effect Risk Management Develop risk management plan Define risk management target Carry out risk management plan Implement risk management solutions Page 13
Overseas Investment Risks Analysis Non-covered Risks Investment risks Changes in demand and supply Social and political risks Wars and political risk Economic risks Inflation and price changes in construction materials Natural disaster risks Flood Typhoon Earthquake, tsunami Collapse Mudslides, landslides Covered Risks Construction risks Collapse of foundations and temporary works Transit and off-site storage Theft Faults in erection, lack of skill Testing and commissioning Legal liability risks Third-party property damage and bodily injury Environmental pollution legal liability M&A risk Overseas personal accident Traffic accident Kidnapping Riot Terrorist attack Diseases Financial risks Credit risk Loss of deferred profit Page 14
Risk Management Model Insurance Solutions Global Claims Services Risk Engineering Services Underwriting Expertise Page 15
Risk Management: Warranty and Indemnity Insurance Strategic Benefits: Buyer Supplement protection for breaches of warranties both in terms of value and certainty of payment Extend the duration of warranties, affording buyers additional time to detect and report problems that may exist with the acquired business Distinguish a bid in a competitive auction by negotiating more limited resources from sellers by supplementing the contractual recourse with insurance Protect relationships with sellers who may become the buyer s key employees or commercial business partners after the transaction Strategic Benefits: Seller Reduce the risk of contingent liabilities arising from future claims, allowing sellers to exit a business cleanly Distribute all or most of the sale proceeds to investors or use proceeds to pay down existing debt; there is no need for an escrow account Help sellers of distressed assets and/or sales in turnaround situation Expedite a sale and potentially increase the purchase price by eliminating obstacles to closing Cover Whether seller-side or buyerside, the policy will indemnify the insured for loss resulting from a breach of warranty or tax deed/covenant in a Sale and Purchase Agreement A seller-side policy covers the seller for its own innocent misrepresentations A buyer-side policy covers the buyer against the seller s misrepresentations (innocent or otherwise). The buyer claims directly against the insurance policy and does not have to seek recourse against the seller Page 16
Risk Management: Construction Insurance Construction/Erection All Risks Coverage for direct property damages caused by natural disasters or accidents during the construction period. Construction All Risks also cover third party liability Loss of Expected Profit Coverage for the loss of profits and other economic losses caused by the delay in projects due to direct property damages during project construction period Commercial General Liability Coverage of bodily injury liability and property damage liability during construction period After turning over a project upon completion Indemnify the insured against liabilities of bodily injury and property damages to a third-party due to maintenance services provided per the contract Indemnify the insured against liabilities of bodily injury and property damages to a third-party due to defective products or services Indemnify the insured against legal defense costs Page 17
Risk Management: Marine Insurance Project Cargo Insurance Coverage for project cargo damages during transit. The insurer is responsible for loss recovery Marine Delay-in-Startup Insurance Coverage for loss of profit due to delay in construction caused by material and/or equipment damage due to natural disasters or accidents during the course of transportation Page 18
Risk Management: Personal Accident Insurance Overseas Contractor Personal Accident (CPA) Insurance The protection covers accidental injuries, disability, burns, death, medical reimbursement for accidents and illnesses, emergency medical evacuation, repatriation of remains Accidents Diseases o Traffic accidents o Other accidents o Illness o Vaccination Security Protection Insurance Financial losses caused by the following incidents during employees working overseas : Kidnapping or extortion Wrongful detention Airplanes, vehicles or vessels being hijacked Page 19
Criteria for Choosing an Insurance Company Capable of providing tailor-made insurance solutions to protect businesses against various types of financial losses: Safe and sufficient underwriting capacity Tailor-made products that meet the needs of the customer Global applicability of main clauses Global claims network and services that meet international standards Value-added services such as risk engineering service Page 20
Arrange policy issuance Process of Arranging Insurance for Overseas Projects China-based Insurance Company Conduct requirement, quote, negotiation and confirmation Company in China Regulators Overseas affiliate(s) of the China-based insurer Issue policy Overseas Project Company Page 21
4. Q&A Page 22