Chinese life insurance companies are ramping up their alternative assets to seek higher yields, prompting analysts to disagree on the risks they are taking on board by doing so.
The China Insurance Regulatory Commission (CIRC) has been opening up the asset classes that mainland insurers can invest in while stressing the importance of risk management. This environment is expected to create a greater divergence between big and smaller players.
In the first six months of the year, China's five listed life insurers—China Life, Ping An Life, CPIC Life, New China Life and Taiping Life—raised their allocation to risky assets by 4.4 percentage points to 41% on average, according to a Moody’s research report released on September 14. The additions to risk assets were primarily focused on equities and alternative investments.
Zhu Qian, senior credit officer at Moody’s, one of the authors of the report, told AsianInvestor that the risk with equity investments mostly lies in the volatility of A-shares.
“Though some insurers’ strategy is to focus on high-dividend stocks, still it’s not a principal-protected investment, and it requires good investment and risk management capability [on the part] of insurers,” she said.
The risks when it comes to alternatives include credit risks, liquidity risks, counterparty risks, legal risks, and concentration risks. These are principally a result of alternative assets' complicated transaction structure, lack of transparency and low liquidity, Zhu said. Many alternative investments such as bank wealth management products are concentrated in sectors such as infrastructure or real estate, she added.
However, Jennifer Law, director of Asia ex-Japan insurance, equity research at BOCI research saw the changes to insurers' investments differently. She said that most Chinese insurers had not greatly increased their equity investment exposure. And while the companies have raised their alternative investments, Law said was hard to make assumptions about the risk this accrued.
“I won’t generalise the situation that Chinese life insurers’ increasing exposure to alternatives is risky, because there are many different schemes, such debt or PE schemes, investing in infrastructure or property projects. And the risks vary."
Indeed, even Zhu admitted large insurers have better capabilities than their small peers when it comes to investment and risk management. She noted that if the insurers do successfully source good private investment projects they would benefit from higher returns.
The key issue is the amount of resources the companies can bring to bear on what can be risky assets. Zhu said it’s likely there will be increasing divergence among Chinese insurers, with smaller, less well resourced companies facing bigger challenges.
Smaller insurers have been facing a struggle to survive ever since Beijing began cracking down on aggressive selling and investment practices at the end of last year.
Despite the potential risks, the CIRC has gradually opened up the asset classes that insurers can invest in, including alternatives. This includes instruments such as private equity, real estate, trust, preferred shares, venture capital and PE funds.
The watchdog has done so because it sees the importance of ensuring insurers can have sufficient investment choices to make sensible asset allocations, said Ren Chunsheng, director of CIRC’s insurance capital usage supervisory division. He spoke about CIRC's perspective on September 15 (last Friday) at a forum about asset allocation in Beijing, which was organised by China Life.
Ren stressed that it is important that the insurers only invest into areas where they are capable of ascertaining the risks. He noted that CIRC will strength the regulation on risk management and increase punishments for malpractices.
The need to add diversity to insurers' investable assets comes down to simple issues of diversification, Ren added. He pointed to studies on investor returns that attribute over 90% of a portfolio’s level of investment return to asset allocation. That was far more important than the timing or specific asset class selected for investments, he asserted.
Hong Lei, chairman of the Asset Management Association of China (Amac), also stressed the importance of asset allocation in helping pension funds to improve their investment returns, on the association’s first meeting of a newly-established pension fund committee on September 6. Hong noted that the most important thing was to choose a strategy and be patient.
CIRC efforts at encouraging insurer asset diversifiation have borne fruit.
As of August 31, the total investable assets by insurers reached Rmb14.5 trillion ($2.2 trillion). Of this total, bank term deposits accounted for 13.6%, bonds took up 34.8%, stocks 7.4%, securities funds 5.6%, long-term equity investment 9.4%, infrastructure investment schemes 8.5%, insurance asset management products 5%, trusts and other financial products 10%.
The insurers' annualised investment yields for the first eight months of 2017 stood at 5.27%, Ren said. He didn’t provide comparable figures for other sectors.
Wang Sidong, vice president of China Life Insurance said at the same event with Ren that his firm is transforming from focusing on tactical to strategic asset allocations.
And China Life will continue to have most of its allocations in fixed-income assets while optimising equity investments, increasing alternative allocations and “steadily pushing forward global asset allocation”, he added.
CIRC is happy to see that insurers continue to place most of their asset investments into fixed-income products, which have lower risks and “comparatively reasonable” investment returns, Ren said at the conference.
He also appeared to offer a sliver of state pressure on the insurers, stating that the watchdog hopes they will continue to support the development of China's real economy.
Insurers have already been backing a lot of infrastructure. As of end August, they had directly invested in more than Rmb4 trillion in major infrastructure projects as well as the construction and expansion of elderly-care communities and the renovation of shantytowns, through debt or equity schemes, Ren said.
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