Advertisement
Advertisement
A woman walks past a Ping An Insurance building in Shenzhen, as the country's insurance companies' strong profitability may be undermined by the Chinese government's order to buy securities to shore up its sagging markets. Photo: Reuters

China insurance companies are lurching from success story to risky proposition as official pressure to invest in securities threatens to distort insurers’ asset mixes and undermine their strong profitability.

Since the Shanghai Composite Index plummeted more than 30 per cent from its June 12 high, Chinese authorities have thrown every conceivable solution at the problem – instructing state-owned enterprises and brokerages to buy A-shares, permitting hundreds of listed companies to suspend their shares from trading, even banning sell-offs.

The China Insurance Regulatory Commission (CIRC) joined the party on July 9 when it increased the permissible equity assets ratio for insurers from 30 to 40 per cent of their total assets to accommodate buy-ups of blue chip stocks. An insurer can now dedicate up to 10 per cent of its total assets to a single blue chip.

Reportedly, the CIRC has also been urging insurers to buy shares on a daily basis.

“Chinese insurers were called in to do ‘national service’ earlier this month to help shore up the Chinese equity market,” said Arjan van Veen, a Credit Suisse analyst. “The key issue on investors’ minds will be the level of equity exposure after the insurers started buying equities following the CIRC ruling.”

That concern has manifested in the steady share price slide of heavyweights like Ping An Insurance and China Life over the past month, particularly in Hong Kong where H-shares of Chinese companies have remained weak since the crash. Insurers have been hit worse than banks and brokerages which are riding on more variable sentiment.

Ironically, this comes as most insurance companies roll out triumphant first half numbers, with earnings growth between 60 and 80 per cent and impressive leaps in profit. All have credited solid investment decisions for a portion of their success. The CIRC puts the industry’s annualised investment yield at 10.2 per cent.

But insurers have a sweet spot when it comes to securities exposure.

Analysts at Jefferies say most allocated 10 to 13 per cent to equities in 2014, extending to 15 per cent for large cap insurers and slightly more for smaller players by the time of the crash. Since July, insurers have obliged authorities by buying up more than 110 billion yuan in equities and equity-heavy mutual funds, state-run Shanghai Securities News reported last week.

“We see any equity exposure above 20 per cent as very risky for life insurers given the asset-liability mismatch and see little reason for P&C insurers to have significant equity exposure given their short-tail business nature – and would be concerned if exposure rises further,” van Veen said.

According to Baron Nie, an analyst at Jefferies, every 20 per cent drop in the A-share market could drag 6 to 11 per cent from insurers’ embedded value.

Equities aren’t the only problem. The current low interest rate environment also means low bond yields. But Nie says this could be offset by the sector’s growing use of alternative asset classes, like debt investment schemes, which is up to 25 per cent from 11 per cent two years ago.

Analysts remain positive on most insurers, particularly those with good business fundamentals and low leverage. But a full view of the sector’s risks awaits further disclosure of its equity exposure.

Post