China insurers are facing tighter rules on their risky business and equity investment activities, according to media reports, following rare criticism of their activities in the stock market by the securities regulator.

Chen Wenhui, vice chairman of the China Insurance Regulatory Commission, said the industry watchdog planned to issue new restrictions on aggressive long-term equity investments, reports state newspaper People’s Daily. This came after the CIRC gathered senior industry executives for a meeting on December 13, and some firms have already been hit with sanctions.

The new rules will prohibit insurers and their affiliated units from acquiring listed companies and require them to report to the regulator before they buy "huge" equity stakes in listed companies. In addition, insurers will only be able to use shareholders’ capital (rather than insurance capital taken from policy premiums) to buy additional significant stakes in listed companies.

The regulator did not make it clear what it meant by "huge" stakes (though it may be 5% because that is the cut-off point over which they must be repoted). Nor did it give more details of what it meant by additional significant stakes. But it appears to mean an additional stake after they have declared the first big holding.

The regulator also plans to reduce the cap on insurers’ total equity exposure to 30% from 40% and on equity holdings in blue-chip companies to 5% from 10%. Chinese insurance firms have Rmb1.86 trillion ($269 billion) in equities and equity funds, accounting for 14.4% of their Rmb12.9 trillion in investable assets as of October.

The CIRC is looking to ensure that insurers are targeting higher investment returns rather than acquiring targets to potentially participate in their businesses, said Joyce Huang, director at rating agency Fitch.

The new rules also seek to ensure insurers diversify their investments, she said. In fact, the CIRC has reverted to the same equity exposure allowances as were in place before July 2015.

The move is part of an ongoing clampdown on insurers’ riskier investments and business.

Evergrande, Foresea penalised

Last Friday, the CIRC suspended any new stock investments by Chongqing-based Evergrande Life’s due to its high volume of short-term equity speculation. The insurer, with Rmb60 billion in AUM, was told to follow a better asset allocation plan with sound risk controls before the regulator would allow it to make any new equity investments.

Evergrande Life does not have an internal equity investment team and uses external mandates for its stock allocations.

Last week the CIRC also banned Shenzhen-based Foresea Life from offering new universal policies.

The regulator has warned about the increasing risks involved in asset-liability matching for such popular policies and urged insurers to focus on long-term and value-type investments, to prevent asset-liability mismatches.

Chinese insurers – such as Anbang Life, Foresea Life, Funde-Sinco Life, Hexie Health and Huaxie Insurance – have recorded high growth in premiums and assets. But that growth has mostly been driven by universal policies, which are high-cash-value life products, containing investment components rather than life protection.

These are single-premium, short-term products, usually with three-to-five-year maturities (the regulator banned one-year universal policies in August). They are usually sold via banks or online as substitutes to wealth management products, which typically offer about 3% annual yield or as much as 5-6% from aggressive insurers.

CSRC broadside

Such insurers seek higher returns to cover their high liability costs. A typical strategy is to make big bets on listed companies – usually banks or property developers – due to their high dividend yields. Chinese banks offer average dividend yields of around 4.3% (A-shares) and 5.5% (H-shares), according to Goldman Sachs research.

The CIRC clampdown follows an unusual move by the mainland securities watchdog to warn Chinese insurers off making leveraged hostile takeovers. At a conference on December 3, Liu Shiyu, head of the China Securities Regulatory Commission, said such insurers were “barbarians” and “robbers” in the stock market.

In the People’s Daily interview, the CIRC’s Chen criticised Foresea Life and several affiliated parties under the firm’s parent group Baoneng for their high-profile battle to take over China Vanke, the largest mainland property developer, in the past year.

Xiang Junbo, CIRC chairman, said insurers’ core asset allocation should rely on fixed income, with stocks a supplementary allocation for the purpose of financial investment.

He added that Chinese insurers had 80% equity exposure for diversification and financial investment purposes, with the remaining 20% in strategic investments, through which they could participate in company operations.

Going overseas

Credit analysts have sounded numerous warnings about mainland insurers’ risk levels as they have ramped up equity exposure.

Still, Fitch’s Huang expects mainland insurers to continue to seek out new types of allocations, such as overseas equities, which offer a greater choice of large capitalised companies.

The CIRC in September relaxed the rules on insurers buying Hong Kong-listed stock via the Stock Connect scheme – such exposure will not be counted in their overseas exposure, which is capped at 15% of their total assets.