Insurers emulate China Life's alts investing plans

The country's insurance companies are aggressively looking to invest into alternatives assets, with many following the multi external mandates route piloted by China Life.
Insurers emulate China Life's alts investing plans

China's insurance companies are increasingly seeking international fund managers to help them invest into alternatives, as they pursue offshore investing.

Industry sources said the country's four leading insurers - China Life, Ping An Life, China Pacific Insurance and Taikang Life - are typically looking to invest into alternatives fund vehicles or directly acquire large-sized landmark properties.  

In this desire, they are following many of their regional peers. Macquarie Investment Management estimates 30% of the mandates outsourced by Asia ex-Japan insurance companies in 2015 were for alternative investments, versus an 8% average in 2013 and 2014. And UK-based consultancy Spence Johnson found that last year Asian insurers most frequently outsourced mandates for investment grade bonds, private equity, infrastructure debt funds and real estate. 

The country’s more conservative insurers are considering how best to deploy their assets, given the 15% offshore asset investment limitation imposed upon them by the government. 

“The thinking of asset allocation is moving into new assets, for instance, real estate, alternatives, private equity holdings and overseas assets,” said Larry Wan, chief investment officer at AIA China, in AsianInvestor’s China Investment Forum in late September. 

Indeed, their interest is such that they are rushing where international rivals are walking.  

“Chinese insurers are jumping few steps in their learning curve,” said Janet Li, Hong Kong-based director of investments for greater China at Willis Towers Watson. “They are using five years’ time to gain the knowledge which usually needs 10 years.”

China Life leads
China Life, mainland’s largest life insurer with Rmb2.4 trillion of assets under management (AUM), has become the role model for its peers when it comes to offshore alts investing.
In 2015 it conducted two rounds of external mandates, each focusing on a separate asset class: multi-assets and global equities, and then European equities. This year it focused on overseas alternatives, and has so far invested into seven US-focused private equity funds. 

Zhao Lijun, China Life’s vice president said in a press conference in August, “we aim to boost exposure in non-listed equity investments through private equity funds, because global [private equity] managers have better performance and professionalism.” 

Ping An, which manages Rmb1.83 trillion ($271 billion) in AUM, has followed. It added private equity, infrastructure projects, real estate and private debts by co-investments or via funds vehicles over the first half this year, By June it had handed out 26 external separated accounts. 

Not every insurer is choosing exactly this model. Some, such as Anbang Life, are enjoying rapid asset growth due to selling risky and costly policies, which pressurises them to deliver high investment returns. So they are making large-scale overseas property acquisitions. Early examples of this include Anbang Insurance and Sunshine Life, which respectively bought the Waldorf Astoria and Baccarat Hotel in February 2015. 

These purchases help underpin the controlling shareholders’ overseas business expansion, and can often offer returns in the mid to high single digits. 

For now, the 15% asset cap and depreciating renminbi makes it unlikely much larger outbound capital flows will be allowed soon. 

But CIRC has set a goal to double the insurance industry AUM to from Rmb12.4 trillion at the end of 2015 to Rmb25 trillion by 2020. Even if insurers allocate just 10% of this to foreign assets from today’s 2% industry average that would represent Rmb2.5 trillion – much of which would likely be outsourced. 

For foreign fund managers, that presents a big opportunity. For China’s insurers, it may proved more of a mixed blessing.

Solvency solution

The interest of insurers in China in alternatives is partly down to the incoming Solvency II capital regime – or in China’s case the China-risk oriented solvency system (C-Ross), the local version of Solvency II that the CIRC implemented in the first quarter this year. 

Under C-Ross, private assets such as private equity funds or private credit funds receive lower risk capital than in ‘riskier’ assets such as equities. That makes them appealing. “The largest two [Chinese] insurers have started in this new field (private market), and some mid to small-sized insurers will follow them,” said Towers Watson’s Li.

But investing into alternatives is not easy. One of the biggest difficulties facing Chinese insurers is to select the right managers. 

“Asset managers are pitching them aggressively for new projects and products, so it’s not easy to select external managers delivering good return,” Towers Watson’s Li said.

Typically, asset owners mandate the most recognised players when entering a new asset class. But boutique managers often stand out within niches of alternatives investment.  

Another issue is for insurer investment teams to understand enough about alternatives to question their outsourced experts. “When you start going into this sophisticated and illiquid world, insurers need to know how to challenge the managers,” said Axa IM’s Sauvé.

A Beijing-based anonymous manager argued that Chinese leading insurers are hiring overseas-educated talent when establishing overseas investment teams. Ping An has already established a dedicated team responsible for third party outsourcing from its Shanghai investment centre. 

Patience is also key. Cathay Life, the largest insurer in Taiwan, is the regional leader in overseas allocation, having invested NT$4.69 trillion ($149 billion). Yet despite having a dedicated team focusing on alternatives, it is still looking to outsource more mandates. 

A lack of team experiene also makes it harder to source deals. Private equity investing is particularly opportunistic, as investors have to make decisions while managers are raising funds. 

“Some overseas alternatives firms do not have sales coverage in China, resulting in a rather limited fund pool for choosing. Eventually, these private investments are really case-by-case; you cannot make a list of managers and then go to select one,” the Beijing-based anonymous manager said.

¬ Haymarket Media Limited. All rights reserved.