Chinese insurers are being forced to seek more higher-risk investment opportunities as the country’s economic growth slows and as fixed-income returns shrink, but stricter rules are limiting what they can do.

Faced with a double-whammy, the industry increasingly appears to have little choice but to consider increasing its already-significant holdings of alternatives, according to industry analysts and insiders.

On the one hand, insurers will likely struggle to grow their premiums as activity weakens; on the other hand, investment yields will probably continue to compress as monetary policy is loosened to stimulate the economy, Zhu Qian, senior credit officer at rating agency Moody's, noted.

So the hunt for high-yielding assets – such as infrastructure projects, private equity funds, and non-standard debt – has fresh impetus, Zhu told a media briefing yesterday (October 30).

Zhu Qian, Moody's

She was later backed by the chief investment officer of a Shanghai-based insurer contacted by AsianInvestor, who declined to be named.

The alternatives quest has Beijing's partial backing too. The Chinese government is encouraging insurers to invest into alternative assets that can support the real economy, having, for example, eased restrictions on private equity investments

However, it has also laid down more stringent investment rules for financial institutions.

Infrastructure projects are can help drive an economy but insurers do not normally invest directly in them. Instead they do so through structured products like debt/equity investment schemes or trust plans, which previously often carried serious counterparty and legal risks because they involved multiple "layers" of investments from different parties.

But such structures have been banned since unified asset management rules were published in 2018, restricting the supply of these products.

“It’s kind of a balancing [act]. We think potentially there is a risk there … because of the pressure [of] looking for high yields,” Zhu said. "But all these new regulations put a lot of constraints for them to [increase] their actual risk exposure. That’s why we say, overall, the asset risk is still stable."

“Basically insurer companies say I want to buy good-quality, high-yield alternative investments, but I cannot find the good ones,” she added.

ALTERNATIVES PLATEAU

Chinese insurers' holdings of alternative assets rose to as high as 40.2% of total investment assets in 2017, from less than 23.7% in 2014.

But it has since plateaued, and any further rises are seen as likely to be limited.

CHINESE INSURERS' ALLOCATIONS, 2014-2018
Source: Moody's (click to enlarge)

 

“We wouldn’t see that kind of quick growth [from 2014 to 2017] anymore because of the regulatory tightening … [even though] insurers have demands for alternatives because of the high yield,” Zhu said.

Away from alternatives, insurers are increasingly investing in long-term central government bonds and in regional and local government bonds. They are also shifting towards long-term equity and blue-chip stocks with higher dividend payouts.

Insurance firms understand the accumulated credit risks in the corporate sector in a slowing economy, so are moving away from regular corporate bonds. Government bonds also have longer terms, which can help insurers to lengthen asset duration, Zhu said.

Ping An, for one, has been eyeing long-term equity investments and investing more into value stocks with higher dividends after adopting International Financial Reporting Standard 9 last year.