Mainland insurers downbeat about prospects for investment yield in world of falling interest rates
PICC says total investment returns may fall below 5.5 per cent for 2016
China’s insurers are under mounting pressure to maintain their investment yields and at the same time avoid investment risk, as the turbulent financial markets and the low-rate environment make it more challenging for asset allocation, according to two mainland based insurers.
The People’s Insurance Company (Group) of China (PICC) and China Pacific Insurance Group reported upbeat growth in 2015 net profit on Monday, thanks to lucrative returns from China’s stock market in the first half year of 2015. However, concerns are growing that the situation is unsustainable, as senior executives concede it will be challenging to maintain high investment yields in 2016.
“The year of 2016 will be very difficult, as returns from the fixed-income products keep dropping remarkably, while we have to limit the exposure on the A-share market as it is still volatile and remains risky for insurers’ capital. We also need to prudently evaluate and manage the risks from a possible default on the bond market,” PICC general manager of the investment and finance management department Sheng Jin said.
“Our target for medium and long term investment return is above 5.5 per cent, while it seems challenging to reach this target this year given the current situation,” he said.
PICC recorded a 7.3 per cent investment yield in 2015, 1.3 percentage points higher from the previous year. Its investment allocation to stocks and equity funds reached 14.8 per cent of the total assets by the end of the year, up 4.8 percentage points from the beginning of 2015, while investment to fixed income products fell 5.5 percentage points, to 66.5 per cent by the end of 2015.
The People’s Bank of China (PBOC) has cut both interest rates and banks’ reserve requirements six times since November 2014.
The yield of the 10-year government bond and corporate bond of companies with high credit ratings have dropped to below 3 per cent, so “relying only on fixed-income investment can no longer cover the policy cost,” said Sheng.
Guotai Junan International analyst Dayton Wang said mainland based insurers had benefited from the bull run on China’s A share market and locked most of the gains before the market softened last May.
“Equity investment returns have largely boosted the insurers' earnings for 2015. But it is unlikely to be the same case in 2016.”
Sheng said PICC had been actively looking for and attending investment into projects conducted by local governments or leading state-owned enterprises. “The returns are more stable for these projects, although the investment cycles are longer,” he added.
Similarly, another Hong Kong-listed, mainland based insurer China Pacific Insurance also saw total investment yield hit a five-year high at 7.3 per cent for the year 2015, up by 1.2 percentage points from 2014, according to its annual report.
The company plans to pay dividend at 1 yuan per share, compared to 50 fen a share in 2014.
Equity investment rose by 3.8 percentage points to 14.4 per cent, while investment to fixed-income products fell 4.6 percentage points to 86.1 per cent in 2015
Yu Yeming, general manager of the insurer’s asset management subsidiary, said: “Equity investment is facing a big challenge this year, as uncertainty remains for both domestic and overseas markets, in addition to the low-rate environment.”