China's biggest life insurers show divergence in their fixed income portfolios as investment performance was under pressure in the first quarter of 2022 amid global market volatility.
They recently released first quarterly reports since China's new solvency regime came in on January 1. The reports for the first three months ended March show that China Life Insurance, for example, has sought to cut its investments in long-duration assets, in favour of investments in short- to medium-term fixed-income categories.
On the other hand, China Pacific Life Insurance says it has increased allocation into long-term fixed income assets to extend asset duration, while Ping An Insurance is maintaining the risk appetite of its investment portfolio and holding long-duration assets including central and local government bonds.
The new solvency regime in China - Risk-Oriented Solvency System (C-ROSS) phase 2 - increases the risk factors for all assets, especially for private equity and long-term equity, and adds a concentration risk charge to encourage insurers to reduce risks on their balance sheets.
Insurance strategists believe short-term capital market volatility is unlikely to change the way major Chinese lifers formulate their investment strategies or asset allocation significantly. But they think there are certain opportunities in green bond and infrastructure, while sectors with weaker economic fundamentals, such as airlines or real estate are to be avoided under a new solvency regime.
Ping An’s investment portfolio of insurance assets grew 4.6% year to date to nearly 4.10 trillion yuan ($610 billion) as of March 31. Debt schemes and debt wealth management products accounted for 11.3% of its total investment assets.
In the reporting period, the annualised total investment yield was 2.3%, down 0.8 percentage points compared to the same period in 2021. The company’s net first-quarter profit of 20.66 billion yuan ($3.07 billion) was down 24.1% year-on-year.
Interest rate hikes in the US, the Covid-19 pandemic and inflationary pressure, as well as the more intense mismatch of economic cycles between China and developed markets all had an impact on the group's activities, Ping An noted.
“Downward pressure on China’s economic growth increased and risk premiums expanded significantly in the first three months of 2022. Major onshore and offshore stock indexes fell significantly, along with range-bound interest rates and widening credit spreads,” said Ping An, the largest Chinese life insurance company by market capitalisation, in its report.
Similarly, China Life’s investment assets reached 4.72 trillion yuan ($700.8 billion), up 10.2% year on year in the first quarter. But gross investment income was 44.6 billion yuan ($6.63 billion) slumped by 31.5% compared to the same period last year. The annualised gross investment yield was 3.88%.
The company attributed the decreased return to China’s low level of interest rates and drawdowns in the equity market. Battered by the investment income drop as well as 2021's high base, its net quarterly profit was 15.2 billion yuan ($2.3 billion), down 46.9% year on year.
“We don’t think that the current domestic market backdrop will materially change the asset allocation of Chinese life insurance companies. The growth and maturation of the domestic capital market, as well as the product development at life insurers are likely to be more meaningful determinants of the long-term asset allocation,” said Max Davies, insurance strategist at Wellington Management.
Domestic corporate bonds in China are of a shorter duration compared to other markets such as the US, while as regards domestic private debt the insurance industry can't find enough assets to invest in. Before China’s crackdown on the high-yield credit market since September last year, long-duration debt of property giants used to serve as stable fixed income-like assets that met their return targets.
“But there are some government bonds available up to 30 years domestically in China that serve as a valuable duration extension tool for Chinese life insurers,” noted Davies.
Under C-ROSS 2, insurers get a 10% discount for the credit risk factor when they invest in green bonds to align with national strategies towards net-zero. They get a similar deduction for certain infrastructure investment.
“It will be interesting to see how these might drive interest in those asset classes,” Davies told AsianInvestor.
Chinese lifers are unlikely to be aggressive about pursuing higher returns by increasing risky assets, notably, because they carry higher capital charges and will pressure their solvency ratios under C-ROSS phase 2, said Stella Ng, director of APAC insurance at Fitch Ratings.
“We believe prudent insurers will continue to diversify their bond portfolio as well as to reduce or limit their exposure to those sectors with weaker economic fundamentals, for example airlines or real estate sector,” she told AsianInvestor.
Join the discussion on how insurers are diversifying under rising rates at the Insurance Investment Briefing Hong Kong 2022.