China Life mandates reflect allocation trend

New mandates from China’s biggest life insurer, which aim to quadruple its exposure to alternative assets, come as its mainland peers are said to be making similar moves.
China Life mandates reflect allocation trend

China Life’s move this week to increase its exposure to alternative assets and trust products gave a rare public glimpse of how mainland insurers are allocating their capital. It also reflects moves they are making to diversify away from equities, said industry observers.

The biggest mainland life insurer, with Rmb1.99 trillion ($325 billion) in assets under management, is fast raising its allocation to mainly domestic alternatives, largely private equity. A mandate announced this week could boost it by a further Rmb150 billion next year, taking it to as much as 10% of total AUM from less than 1% last year. This came after it nearly trebled its allocation in the first half of this year to Rmb46 billion from Rmb16.2 billion.

The Beijing-based firm has handed the one-year mandate, starting from January 1, 2015 to China Life Investment (CLI), a wholly-owned subsidiary of the China Life group. CLI is the insurer’s alternative investment platform, which has a heavy focus on private equity and real estate-related assets. China Life also has some alternatives exposure beyond that managed by CLI.

The firm's rapid move into domestic alternatives reflects a trend among mainland insurers, with most having increased exposure to these investments since last year, said Lillian Zhu, research manager at Shanghai-based consultancy Z-Ben Advisors.

Other insurers are adding alternative exposure without publicising details, she added, but China Life’s mandate involve affiliated parties and therefore had to be disclosed.

Their alternatives allocation is rising much quicker than that to foreign assets. Chinese insurers’ total overseas exposure rose 10% to Rmb93.5 billion in the year to the end of September, according to CIRC data. That figure still represents only 1% of their total AUM of Rmb9.5 trillion as at the end of August, as reported.

Meanwhile, Chinese insurers are looking for long-term investments with stable income generally and gradually shifting exposure away from listed equities, noted Joyce Huang, director in the Asia-Pacific insurance team at rating agency Fitch.

China Life had just 7.56% of its AUM in equity investments (which includes both public and private equity) at the end of June. Its exposure to listed stocks and equity funds fell to 5.26% from 7.50% of total AUM, while its private equity allocation nearly trebled to 2.3% over the same period.

But this does not yet spell opportunity for foreign fund houses – most of the PE allocation is in onshore assets. Huang pointed out that China insurers are not aggressively allocating overseas due to foreign-currency risk and the need to get regulatory approval.

Another source of high-yielding assets for Chinese insurers are non-standard products such as trust products, banks’ wealth management products, securities companies’ asset management plans and instruments related to infrastructure investment plans.

China Life also this week announced plans to invest Rmb10 billion in so-called trust products issued by Shanghai International Trust via China Life Asset Management (CLAM), but it did not provide a time frame for this. The money invested will be used to provide loans to China Huarong Asset Management, the biggest bad-loan manager in China.

Trust products can invest in a wide range of assets, including stocks, other securities, loans and real estate.

Chinese insurers’ total allocation to these products has nearly doubled in the first half, rising 94.5% to Rmb280.5 billion, to account for 3% of their total assets, according to data from the China Insurance Regulatory Commission (CIRC) dated October 14, quoted by Fitch.

One driver of this demand is insurers’ need to match the higher investment yield offered in universal life insurance policies, Huang noted, and another is that China still lacks a mature corporate bond market.

However, CIRC issued a warning on insurers’ exposure to the risks of trust products in late September, asking for more risk control around these assets. This means Chinese insurers need to be cautious and do more due diligence, Zhu said.

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