As it assesses the impact of the coronavirus outbreak, China’s largest lifer said its short-term aim is to minimise risk by focusing on long-term value investing, asset-liability management and maintaining its preference for high-dividend stocks.

China Life Insurance Company’s onshore investments face two main challenges, said Zhang Di, the head of the investment management department. Firstly, long-term investors are finding it difficult to source fixed-income investments as the risk-free interest rate is falling. Secondly, the volatility or sharp fall in equity markets is also a concern, she said during a teleconference on Thursday (March 26) to announce 2019 results.

The current situation is a stark contrast to the benign environment in the previous year, when the lifer’s year-on-year investment returns leapt more than four times, thanks to A-share market’s strength.

“We have been paying close attention to Covid-19’s impact on our investments since the very beginning, and have started a series of stress-tests and scenario analysis to judge the pressure on our short-term business and long-term allocation as a result of the outbreak,” said Zhang. 

That said, China Life believes that the situation will gradually improve. There is a possibility that the domestic interest rate will reverse its course as the coronavirus outbreak gets under control and economic activities slowly return to normalcy. While dramatic falls in the stock market are set to drag down investment returns, they also present buying opportunities for long-term investors like China Life, she said.

Overseas investments only account for about 2% of China Life’s investment assets, and so convulsions in the global capital markets have a limited impact on the lifer’s portfolio. The performance of alternatives like private equity tends not to differ too much across different economic cycles also,  she added.

There are reasons for Zhang’s confidence about the mid to long term outlook. The 10-year government bond yield stood at 2.68% on Tuesday (March 24). Although it hit a three-year low, the yield is falling faster elsewhere as central banks around the world cut interest rate to pump liquidity into the market.

The Shanghai Composite Index is down about 10% year-to-date, but it has outperformed most equity markets elsewhere, which are down 20% to 30%. Coronavirus infections in China have come down quickly in recent weeks while the number of confirmed cases are still growing in other major economies.

SUPERIOR RETURNS

In 2019, China Life’s net profit increased more than fourfold to Rmb58.29 billion ($8.23 billion) from Rmb11.94 billion a year ago, thanks to strong investment portfolio returns rather than premium income.

Investment income soared 11.8% year-on-year to Rmb 139.92 billion due to an increase in interest income from fixed-maturity investments and dividends from stocks. Its investment assets reached Rmb 3.57 trillion as of end 2019, up 15.1% compared with the previous year, according to its 2019 annual report.

The insurer has increased exposure to equities while slashed bond investments at a time when the Shanghai Composite Index was up 22% during the year. Its fixed-income investments accounted for 74.85% of its investment portfolio as of end 2019, down by 2.7 percentage points compared with end 2018, while equity investments were up by 3.27 percentage points to 16.95% during the period, the report shows. 

Gross investment yield and net investment yield were 5.24% and 4.61% respectively as of end 2019, while they were 3.29% and 4.64% in the previous year. The core solvency ratio and comprehensive solvency ratio were 266.71% and 276.53% respectively.

Source: China Life (click for full view)