China Life, the country’s largest lifer by assets, plans to increase its exposure to real estate investments, which have a lower risk capital charge under the current solvency regime, a top executive at the firm said after announcing its interim result for the first six months of this year.

The plan to raise property exposure comes as the solvency regime gears up to enter its next phase.

“Real estate projects are a very important aspect of our alternative investments….We’ll ride on policy incentives to gradually increase allocation of this investment,” Zhao Lijun, vice president at China Life, said during a media event announcing the results. Currently, most of the insurer’s property  investments are in office buildings, he said. 

Beijing-based China Life has been steadily increasing its property investments over the past two years.

It currently owns 27 domestic property projects, including office buildings for self-use, and eight overseas projects. Apart from office buildings, investments have also been made into hotels and logistics facilities, Zhao said in response to an AsianInvestor query for more details on the insurer's alternative investments plan.

That said, China Life's allocation to property investments accounted for a mere 0.2% of total assets at the end of June 2018, 0.08 percentage points higher from the end of 2017.

An insurance analyst who declined to be named told AsianInvestor that the “policy incentives” referred by Zhao could be related to a guideline released by the China Banking and Insurance Regulatory Commission (CBIRC) on June 1 that encourages insurers to invest in long-term rental housing projects.

However, it could also be related to the China Risk-Oriented Solvency System (C-Ross) introduced in 2016, a risk-based solvency regime that aims to strengthen capital requirements, risk management and governance in the Chinese insurance industry.

Under C-Ross, real estate assets have a lower risk capital charge than assets like equities; investments in assets with a lower risk capital charge improve the solvency ratio of insurers, and could be partly the reason why China Life is keen on investing in real estate, he said.

The risk charge for real estate is pegged at 8%-12% under C-Ross, while it can range from 31% to 48% for listed equities and 28% on unlisted equities, according to a Moody’s report released in September last year. Risk charge on financial bond, meanwhile, ranges from 0% to 20% and between 1.5% and 14.85% for corporate bonds, the report pointed out.

Real estate investments typically involve a relatively high transaction cost and is accompanied by a lack of liquidity as the investor often cannot sell the property quickly without a significant price discount.

However, real estate properties offer fixed rental income, which provides stability in returns and enables investors to better manage their cash-flow needs.

Even as insurers are adapting to the first phase of C-Ross, the second phase is set to be introduced: In May, the CBIRC said that the next set of guidelines would be finalised before June 2020. Currently, insurers have been instructed to respond to a questionnaire issued by regulators before August 30 in preparation of the next phase, Shanghai Securities News reported on August 20. 

As of June 2018, China Life’s core and comprehensive solvency ratio both stood at 262.25%, much higher than the minimum required -- 50% for core solvency and 100% for comprehensive solvency. Nevertheless, there has been a slight decline from the 277.61% and 277.65% (core and comprehensive solvency ratio, respectively) seen at the end of 2017.

NON-STANDARD DEBT

China Life's increased focus on real estate comes at a time when the opportunities in other alternative assets have started to diminish, according to some analysts.

The biggest lifer in China said in March that it planned to increase investments in non-standard debt and other long-term bonds in order to lengthen its asset duration. But on Friday, Zhao said China Life’s allocations in alternative assets, most of which are in debt-like investments, were relatively lower in the first half of this year because of "market conditions".

Other insurers such as Ping An are also keen to raise exposure to non-standard debt, particularly infrastructure debt investments, after the erstwhile China Insurance Regulatory Commission (CIRC) released an overarching framework for asset liability management in March. 

Despite the appeal of debt investment with insurers, overall supply of products has been falling, partly due to a regulatory clampdown, said Zhu Qian, an insurance analyst at Moody’s. 

China Life had Rmb 317.2 billion in non-standard debts, or “debt-type financial products”, as of June 2018. The amount represented 11.71% of China Life’s total investment assets and was up 0.06 percentage points from the end of last year. 

The increase in non-standard debt investments was much higher previously: such investments were up year-on-year by 6.27 percentage points at the end 2017 at Rmb302 billion, and accounted for 11.65% of its investment assets. 

ASSET ALLOCATION

China Life’s investment assets stood at Rmb2.71 trillion as of June 2018, up 4.57% from the Rmb2.59 trillion at the end of last year.

Bond investments, at 47.23% of investment assets, accounted for the lion’s share. Allocation was 1.37 percentage points higher from six months ago and represented the biggest change among all asset classes.

Net investment yield for the first half of the year was 4.64%, down from 4.71% seen in the same period last year.

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