China Life will farm out more money to third-party managers to improve its investment yield after posting a severe drop in its earnings.

Net profit at the largest life insurer in China sank 64.7% to Rmb11.39 billion ($1.69 billion) as of end-2018, which according to the insurer is due to the big declines seen in the A-share market late last year and high reporting standards.

It said last month that it will target high-yield stocks to reduce some of the earnings volatility it has been experiencing with its investments. 

China Life’s net investment yield in 2018 was 4.64%, lower than its smaller peers Ping An’s 5.2% and CPIC’s 4.9%.

To raise its investment yield in 2019, the lifer said in its 2018 result announcement on Thursday that it will diversify third-party entrustments as well as strengthen its asset allocation capabilities and adjust its investment governance system.

“China Life has several important considerations when finding domestic external managers. Firstly, we’ll steadily enlarge the scale of market-oriented entrusted amounts to supplement our internal [investment] system,” Zhao Peng, vice president at China Life, said at the press briefing.

China Life will also place more stress on manager investment philosophies and check whether their investment styles match China Life’s asset-liability management and views of the market, he said when asked by AsianInvestor to elaborate on the plan to entrust more assets to external managers.

“Thirdly, we’ll strengthen our performance review on the entrusted managers; [it will be] survival of the fittest,” he added.

Zhao did not comment on what type of asset class it is looking to outsource.

More than 80% of China Life’s investable assets of Rmb3.1 trillion are managed internally, mainly by its two asset manager subsidiaries – China Life Asset Management Company and China Life Investment Holding Company. The latter specialises in alternative investments.

In 2018, domestic external mandates amounted to some Rmb100 billion, while overseas external mandates totalled $1.4 billion.

Iain Forrester, head of insurance investment strategy at Aviva Investors, has previously told AsianInvestor that larger insurance companies are looking to outsource asset classes where appropriate.

“This typically involves assets such as alternatives – an asset class where they have no prior expertise – or a geography where they don’t want to build a specific investment capability and will, therefore, look to use an external manager,” Forrester said.

DURATION GAP

China Life said last year that it would seek to close the duration gap on its investment holdings by possibly increasing its allocation to non-standard debt. Duration measures an instrument's sensitivity to interest rates and insurers seek to match the asset duration and liability duration in asset liability management.

As of end-2018, China had invested over Rmb410 billion in non-standard debt. Debt-type financial products and other fixed-maturity investments accounted for 11.32% and 6.01% of its investment portfolio, respectively – higher than the 10.96% and 5.61% in the previous year.

However, the pace of increase in non-standard debt has slowed down. Newly added non-standard fixed income investments were about Rmb77 billion in 2018, compared with Rmb200 billion in 2017.

Zhao declined to disclose its duration gap when questioned by AsianInvestor but said that the average maturity of the assets that it invested into in 2018 is more than eight years, up 0.93 years on 2017.

Source: China Life