China Pacific Life Insurance (CPIC Life) is eyeing Belt and Road-related investment opportunities, but principally on the Chinese mainland, and is using alternative investments to maintain stable returns.

That's according to a senior executive familiar with the matter at China's third-largest life insurer, who declined to be named but spoke to AsianInvestor in a phone interview last month.

CPIC Life’s Belt and Road interest chimes with that of other mainland asset owners, including bigger peer China Life and China Investment Corporation, the country's $814 billion sovereign wealth fund, which has allocated $10 billion to Belt and Road-linked projects.

What makes it different, though, is that whereas China Life has indicated that it is looking at foreign Belt and Road investments to help raise its offshore asset allocation, CPIC Life is initially taking a more indirect, domestic approach.

Belt and Road investments can be made two ways: by investing in the mainland Chinese industrial producers that serve to drive its projects, like those expert in railway construction, engineering works, and steel goods, or by directly investing in any one of the infrastructure projects located in the 60-plus countries dotted along the designated Belt and Road region. 

“Our initial focus is on various investments in Belt and Road-related enterprises in the mainland,” the senior executive at CPIC Life said, without specifying whether the insurer will invest in the shares, bonds, or private debts of these companies.

The infrastructure financing needs of countries along the Belt and Road route (excluding China) are estimated to be $1.4 trillion between 2016 and 2020, according to the Research Institute of Finance under the Development Research Centre of China's State Council.

Zhao Lijun, vice president and chief financial officer of China Life, has said that the China Insurance Regulatory Commission (CIRC) "has been encouraging insurers to invest into Belt and Road projects, and they will get fast-track approval and support from the foreign exchange authority.”

Alternatives exposure

CPIC Life's unnamed senior executive also said that alternative investments, which account for more than 20% of its portfolio, has helped it to maintain a stable yield.

Alternatives have lower levels of liquidity but they offer higher yields and have lower correlations with traditional investment assets, which has helped to keep CPIC Life yields stable over the last five years, he said.

The life insurer has about Rmb900 billion ($136 billion) of investable assets and the return on its overall portfolio was about 5.3% as of November, according to the executive. The investment book is the third-largest among listed Chinese insurers, after China Life and Ping An Life.

When asked whether the insurer will increase its exposure to alternatives in the medium term, he said that will depend on each investment’s risk-adjusted return and whether that investment fits into CPIC Life’s asset liability management strategy.

But he also said big life insurers like CPIC Life are better able to manage liquidity risk in alternative investments.

“The challenge for us of course is we have to be good in cash flow matching. But we have advantage in this. Our investable assets are Rmb900 billion. We need to be good in liquidity [management] but cash flow matching is not as challenging as smaller companies,” he said.

CPIC Life has been increasing its exposure to alternatives over the past few years. If private equity, real estate, and non-standard assets are all counted as alternatives, CPIC Life has more than 20% of the portfolio in alternatives, the executive said.

The industry average for insurance company exposure to "other investments" was 38.52% for the first 10 months in 2017, according to the data from the CIRC, which helps to explain why Moody’s senior credit analyst Zhu Qian described CPIC Life as “very conservative” in its asset allocation. The CIRC number, however, includes property insurance companies as well as lifers.

Infra investments to increase

China life insurance company investments in infrastructure projects have been increasing because of the low interest rate and regulatory environment and the Belt and Road initiative. This trend looks set to continue next year, Moody’s Zhu said.

More than half of their alternative investments are estimated to have gone into infrastructure projects, she said. 

The growing Chinese lifer exposure to alternatives has raised some debate over the increased risk levels. 

But alternative investments can help insurers to secure higher yields, which is especially desirable amid the low interest rate environment, Zhu said.

The CIRC has also encouraged them this year to issue insurance products with longer durations. As a result, insurers need to invest in assets that have longer durations and infrastructure debt is a good choice for duration match, she said.

The government has also made it clear that it wants insurers to invest in big infrastructure projects and support One Belt, One Road, she added.

AsianInvestor is hosting its fifth Insurance Investment Forum in Hong Kong on March 1. For more details, contact Terry Rayner via email or on (+852) 31751963.

To offer more Belt and Road insights, our sister title FinanceAsia is hosting its first Belt and Road Connected: Invest Philippines conference in Manila on January 30. For more information, contact Andrew Wright on +852 31751926 or via email.