Across The Border

Riskier investment likely by China’s insurers

Analysts expect the trend to continue in the next 12 to 18 months

PUBLISHED : Tuesday, 14 February, 2017, 3:32pm
UPDATED : Tuesday, 14 February, 2017, 10:14pm

A low interest rate environment is pushing Chinese life insurers towards riskier asset allocations to support their business growth and investment returns.

While as their exposure to single-name investees in the banking and property sector grows, the risks they face are also enlarging.

Chen Wenhui, vice chairman of the China Insurance Regulatory Commission (CIRC), told a gathering of top insurance executives last week in Guangzhou to expect a “very difficult” 2017 when it comes to investing in insurance funds.

“Political and economic uncertainty is rising globally, with black-swan events happening from time to time…while China is still facing relatively high downward pressure for the economy, the low-interest rate environment will last for some time yet,” he said.

“Short-term liquidity risks facing some small- and medium-sized insurance companies should be kept under close scrutiny, while risks stemming from the bond market are also alarming,” he added.

According to the CIRC data, the industry’s investment yield dropped to 3.95 per cent at the end-September 2016, down nearly 2 percentage points from the previous year.

On the other hand, insurance companies are competing to offer higher return to policyholders, and that has pushed then away from traditional bond investments that have seen returns decline, while default risk continues rising.

“Riskier investments, which including equities, accounted for 49 per cent of the industry’s invested assets at the end of November 2016, up from 27 per cent from the end of 2013,” said a report issued by Moody’s on Monday.

“Insurers are also increasingly taking on large single-name exposures rather than a portfolio approach, in particular in the banking and properties sectors,” the Moody’s report said.

According to official industry figures, at the end of September 2016, China Life held a 43.7 per cent stake in China Guangfa Bank, 4.1 per cent stake of Postal Saving Bank of China, while 30 per cent in Sino-Ocean Group Holding Limited.

Anbang Life Insurance had a 6.5 per cent stake in Minsheng Bank, and a 14.6 per cent holding in the real estate firm Gemdale Corporation.

Analysts with the rating agency say the shift in direction is pressuring four key rating factors of the insurance industry: asset quality, capital adequacy, profitability and liquidity.

“Insurers will face increasing concentration risk to certain industries and single-name entities through their sizable equity stakes...On the other hand, their rising exposure to project debt schemes, asset management products and trust plans will heighten their credit risk,” the report said.

In late January, the CIRC introduced a new set of rules that restrict equity investment by insurance companies. According to the new regulations, any equity stakes purchase exceeding 5 per cent of a listed company’s total shareholdings must be reported to the regulator, in addition to making a stock exchange filing.

The regulatory move has mitigated the cut-throat competition among life insurers, and thus could bring down the liability costs of insurance companies
Huang Jie, an analyst with China Insurance Regulatory Commission

Huang Jie, an analyst with CICC, said the regulator had been taken moves since late last year to restrict insurers from issuing high-return universal life insurance policies, while also setting up stricter requirements to regulate their investment behaviours.

“The regulatory move has mitigated the cut-throat competition among life insurers, and thus could bring down the liability costs of insurance companies,” she said.

Moody’s said in the report the trend by insurers’ to move into risky assets would last for the next 12 to 18 months for insurers’.

“The current low interest rate environment and a lack of depth in the local corporate bond market will continue to provide strong economic incentives for higher equity allocations.

“Industry-wide, current equity allocation is only around 14 per cent, which suggests that most insurers can still add to their equity holdings comfortably without breaching the 30 per cent regulatory cap,” the report said.

Besides equity investment, a larger portion of life insurers’ investment has flown to project debt schemes, asset management products and other alternative investment vehicles such as trust plans, and investment properties, which include investments in retirement home projects.

These investment, together with long-term equity investment, is defined as “other investments” by the CIRC, and

accounted for 35 per cent of the industry’s invested assets at end-November 2016, compared to 17 per cent at end-2013.

The shift in asset classes has come at the expense of investments in bonds and cash equivalents, which dropped to 51 per cent from 72 per cent over the same period.

China’s insurance premiums have shown a steady average annual increase of 16.8 per cent since 2011. The country overtook Japan as the world’s second largest insurance market by premium in 2016, having jumped from sixth, surpassing Germany, France and Britain within three years. The US still takes the top spot.