Chinese insurance companies' eagerly awaited shift into alternative and overseas markets is well and truly under way. 

The country's biggest insurer is to allocate more to offshore private equity funds and raise and diversify its foreign property exposure as part of a drive to build up its overseas and alternative investments. To this end, China Life plans to make more use of alternative managers, though it will be cautious on issuing mandates focused on traditional assets for the time being.

The state-owned firm aims to raise its 2% offshore allocation to 15% of its Rmb2.4 trillion ($360 billion) under management, but vice president Zhao Lijun said it was unlikely achieve that this year. At the portfolio's current size, that would mean China Life pouring another $46 billion into foreign assets.

“We aim to boost exposure in non-listed equity investments through private equity funds, because global [PE] managers have better performance due to their professionalism,” said Zhao at a briefing on Friday.

China Life will also buy more overseas real estate, but with an eye on a wider range of asset types, he noted. The firm has mainly focused on overseas office buildings in the past two years, but is now also looking at logistics, warehouse, retail property and hotel assets.

Today's announcement is the first time China Life has publicised details of overseas investment. This follows rival Ping An’s announcement last week that it had doubled its foreign exposure in the first half of 2016 and was targeting a 10% offshore allocation in the coming few years.

Overseas investment potential

Zhao said China Life's current offshore exposure was very low and that it saw huge potential to expand the portfolio. Overseas assets accounted for Rmb48 billion ($7.2 billion) of total AUM as of June 30. This included Rmb9.1 billion in direct property investment and Rmb8.66 billion in mandates in public market assets. The rest is largely in stocks and bonds publicly traded in Hong Kong and Singapore. 

China Life did not reveal the size of the allocation to private equity, but one of its investment managers told AsianInvestor that it had already invested in "six or seven" overseas PE funds, mainly buyout and M&A strategies with a focus on US asset exposure.

The insurance firm is cautious about awarding more public-market mandates, because the US market has enjoyed a bull run for a few years and uncertainty is rising, said the investment manager, who asked not to be named.  

The $1.3 billion total in external mandates suggests China Life handed out another $500 million to managers last year after awarding its first batch of overseas mandates – for a total of $800 million in global equity and multi-asset strategies – in January last year, as reported. The firm's private equity allocation is not included in the $1.3 billion.

Despite China Life's wariness about overseas mandates for traditional assets, Zhao said it was looking to make changes to its investment model by adding external fund houses, both domestic and overseas.

The insurer saw its total assets grow 5.1% in the first half to Rmb2.4 trillion from Rmb2.3 trillion. It generated an annualised gross return of 4.36% in the same period, down from 9.34% in the first half of 2015, mainly due to losses from Chinese equity volatility. This return is slightly below its peers’ average annualised return of 4.94% in the first half.

Onshore changes

As for China Life’s onshore allocation, one notable change this year is its increased exposure to so-called financial investment products. The allocation was Rmb215 billion as of June 30, representing 8.9% of its portfolio, up from Rmb171 billion or 7.4% at end-2015. This includes exposure to debt financing for infrastructure and real estate, and equity financing for corporates, as well as trust products and banks’ wealth management products.  

Zhao said the firm saw such assets as a new focus area for its fixed income portfolio, with a view to higher yields and long-dated investments. He said more than 92% of underlying assets in these financial investment products were rated AAA and had not been involved in any credit default event.

Chinese insurers are moving aggressively into assets such as illiquid debt plans for higher returns. But the industry regulator and credit analysts have warned that such activity is risky, as mainland asset quality is worsening and credit risks have risen during the economic downturn, as reported.

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Chinese insurance firms, including China Life and Ping An, are joining AsianInvestor’s China Global Investment Form in Beijing on September 22. For further information, please visit www.china-investmentforum.com