Despite aggressively boosting their alternative asset allocation, Chinese insurance firms saw their average investment return fall to 2.47% for the first half of 2016 (4.94% annualised) from 7.65% for last year, thanks to sharp falls in mainland equity and credit markets. 

Foreign asset managers should be adapting their approach for the country's fast-evolving insurance industry, argues Ivan Shi, research director at Shanghai-based consultancy Z-Ben Advisors.

Mainland insurers’ assets under management grew 12.37% to Rmb12.56 trillion ($1.89 trillion) in the first six months of this year, from Rmb11.18 trillion, according to data released yesterday by the China Insurance Regulatory Commission (CIRC).

Chinese insurance companies increased their alternatives exposure at the expense of cash and traditional equities and bonds in the first half. They had fully a third (34.2%) – Rmb4.3 trillion – of their AUM in alternatives as of June 30, up from 28.7% at end-2015 (see table below). 

‘Alternatives’ here covers non-standard assets such as long-term equity investments (stakes in both listed and unlisted companies), banking wealth management products, trusts, private equity, venture capital, loans and real estate.

The alternatives allocation has for the first time exceeded mainland insurers' traditional fixed income exposure, which stood at 33.5% as of June. Meanwhile, they further reduced their exposure to cash, equities and securities funds in the first half. Indeed, their cash allocation (18.1%) is almost half what it was in 2012.

Chinese insurers' asset allocation
Year Total invested
assets (RMB trillion)
Cash Bonds Equity/
securities funds
Alternatives
2012 6.85 34.2% 44.7% 11.8% 9.4%
2013 7.69 29.5% 43.4% 10.2% 16.9%
2014 9.30 26.9% 38.7% 10.8% 23.7%
2015 11.18 21.8% 34.4% 15.2% 28.7%
2016  H1 12.56 18.8% 33.5% 13.5% 34.2%

Sources: CIRC

The big first-half drop in insurers’ returns was mainly driven by the first-half A-share correction of 15.7% and a sharp drop in mainland corporate credit prices in April due to rising defaults. In that month, yields of BBB corporate bonds rose 100 basis points to 13.66% while yields on AAA credit rose 56bp to 3.76%.

Xiang Junbo, CIRC chairman, last week reportedly warned about mainland insurers’ investment risks related to credit defaults. He pointed to six insurers with Rmb610 million in exposure to the Sinosteel bond default last October, and predicted that insurers would experience higher credit risk in the future.

The need for long-term assets

While market corrections have influenced the move into alternatives such as private markets in the past two years, the main reason for the shift is that China lacks long-term assets offering five-to-10-year durations for insurers’ liability matching, said Z-Ben's Shi.

China Life – the biggest mainland player, with $341 billion in AUM – started to ramp up its alternative allocations through its subsidiary China Life Investment (CLI) in 2014. The insurer had a 15.31% allocation to alternatives at end-2015, lower than the industry’s average exposure.

Meanwhile, Ping An Life – the second largest mainland life insurer with $227 billion – has 22.7% in alternatives. The firm has been cautious on equity market volatility and credit quality deterioration earlier, while it plans to boost real estate and foreign exposure for higher returns this year, as reported.

Ping An and China Life have not revealed their portfolio changes for the first half of the year.

A Shanghai-based credit analyst, who preferred to remain anonymous, said the decline of investment return in the first half may put more pressure on insurers to seek higher-yielding investments, including alternatives.

The CIRC is encouraging moves into alternatives – for example, it revised rules earlier this month to make it easier for insurance companies to invest in infrastructure projects. Insurers will no longer need to obtain regulatory approval to invest in the asset class, and their scope of  infrastructure investment will be expanded.

Ultimately, then, foreign asset managers need to think about investments or solutions they can offer to suit mainland insurers’ big appetite for long-term assets providing stable income, noted Shi.

Meanwhile, as Chinese insurers are unfamiliar with overseas financial markets, the traditional request for proposal strategy may not be the best approach, he added. Taking a long-term partnership approach could be a better method, for instance.

While they have been gradually raising their overseas investment, mainland insurers’ foreign exposure still stands at less than 2% of their overall AUM, according to CIRC’s Xiang. The figure was 1.44% in last April, as reported. Almost half (46%) of their offshore assets are in equities and securities funds, mainly in Hong Kong equities, noted Shi.

*********

Investment executives from mainland insurance firms, including China Life and Ping An, are joining AsianInvestor's China Global Investment Forum in Beijing on September 22. For further information, visit www.china-investmentforum.com