China's insurance companies have enjoyed explosive growth in their assets under management (AUM) over the past few years. But beneath this rapid rise in assets has been a massive switch from relatively safe fixed income investments into riskier areas.
Insurance companies have increasingly bought minority stakes in companies, banking wealth management products, trust products, and invested in infrastructure finance linked to local government financing vehicles.
“Greater asset risks make [Chinese] life insurers more vulnerable to adverse capital market fluctuations and credit quality deterioration caused by an economic slowdown,” said Joyce Huang, a Hong Kong-based director at credit rating agency Fitch, in a report to clients in July.
Only publically listed Chinese insurers reveal a breakdown of how they are putting their money to work but the CIRC says the industry allocated a third of total AUM to asset classes beyond the usual bank deposits, bonds and equities as of June 30, up from 23.7% at end-2014 and 9.4% at end-2012. This was the first time their allocation to other product areas has exceeded their fixed income exposure, which stood at 33.5% as of June.
Specific examples include Funde Sino Life, which invested in the debt of Guangzhou-based developer Evergrande in February, while the People’s Insurance Company of China backed bridge and highway projects in Shandong and Ma’anshan in April.
“The biggest difficulties that mainland life insurers are facing are the falling asset yields and worsening quality of alternative assets,” said a senior investment officer at AIA China in Shanghai in an email to AsianInvestor. He defined alternatives as anything beyond secondary market securities, a common moniker in China.
Insurers have also been buying stakes in listed and unlisted commercial banks and property developers to boost the yield on their investments. For Anbang Life, large equity stake holdings reached Rmb158 billion, representing 29% of its total assets. For example, it owns 20.73% of the A-shares in Mingsheng Bank and 5.18% of its H-shares. China Life bought a 4.87% stake in Postal Savings Bank of China last December.
Chinese banks’ return on equity averaged 16% at end-2015, above the 13.2% in the country’s benchmark CSI300 index.
These exposures could be hard to get out of in a hurry. “We see the attractiveness of high returns and strategic partnerships, but we also see enormous potential risks, for instance, liquidity risk of non-listed equities, volatility risks in equity market, and the possible failure of such strategic partnerships,” said Zhou Xing, China insurance leader at PwC in Shanghai.
The China Insurance Regulatory Commission (CIRC), the country's insurance watchdog, asked insurers in July to improve disclosure on investments in unlisted companies.
Meanwhile, Chinese insurers have increasingly been chasing higher-yielding investments overseas since the renminbi started depreciating against dollar last August. Anbang has added $22.6 billion in foreign assets in the past 21 months.
Such currency diversification would seem sensible. As Duan Guosheng, the chief investment officer of China’s sixth biggest insurer Taikang Life Insurance said in July: “If Chinese insurers want to maintain investment returns and to diversify asset risks, one important direction is to look for returns in global market.”
So far insurance companies have predominantly stuck to equities and multi-asset strategies, but they are tentatively moving into overseas alternatives as well.
This is not easy. Most mainland insurers lack the experience and capability to make global investments, and risks abound.
The CIRC’s chairman said in July that UK real estate funds fell in value by 5% to 15% after June’s Brexit vote, hitting the returns of mainland insurers who have a total of £1.7 billion ($2.2 billion) of exposure to UK properties.
Asset managers hoping to help will need to think about investments or solutions that offer long-dated assets and stable incomes, said Ivan Shi, Shanghai-based research director at consultancy Z-Ben Advisors. Investment in overseas private equity funds are typically locked up for around 10 years.
Early last year, China Life, the mainland largest life insurer, issued two batches of overseas mandates worth a total of $800 million: one batch for global equities and the other for multi-assets. A total of eight foreign fund houses won these mandates under a ‘request for proposal’ approach. Taikang issued its first round of mandates for multi-assets in the fourth quarter of last year.
“We have seen a number of high–profile direct investments into direct private equity and real estate over the past two years, as well as private equity funds,” said Stephan van Vliet, head of insurance asset management at PineBridge Investments in Hong Kong.
Foreign asset managers are expanding their onshore presence in order to approach mainland insurers. Many have set up wholly foreign-owned enterprise to service these potential clients.
“We prioritise China as the top market offering the most significant opportunities for institutional business growth in the region,” said Rachel Farrell, head of sovereign and institutional strategy for Asia Pacific ex Japan at JP Morgan Asset Management.
CIRC has cracked down on individual risk takers. In May, the CIRC said it had sent inspectors to Anbang, Foresea Life and Funde Sino Life, to examine their portfolios. The move came after the regulator stopped Anbang’s $14 billion bid for Starwood Hotels in March, which would have tipped Anbang’s overseas assets over the regulator’s limit of 15%.
AsianInvestor asked an executive at Anbang whether the overseas push would continue as the hunt for yield intensifies. The answer? “Don’t worry, you will see more deals.”
To read part one of this AsianInvestor September magazine feature story, please click here.