Chinese insurers, particularly smaller ones, should hand out more assets to third-party managers to tap niche areas and enhance investment returns.

That's the advice of industry veteran Larry Wan, the former chief investment officer of AIA China.

Speaking in Beijing last week at AsianInvestor's 5th China Global Investment Forum, the former senior executive of mainland China's biggest foreign-owned life insurer, said large parts of the industry were ill-equipped to deal with the challenges they faced.

Larry Wan

“For the institutional investors in China, the in-house investment capabilities of a lot of insurance companies are not sufficient…they should outsource a certain amount of their [investment] business to external managers,” Wan said.

Before working at AIA China, which he left last year, Wan was CIO at  Shanghai Life and Zhongrong Life. On the sidelines of the forum, he declined to elaborate where he was headed next but told AsianInvestor that news of a new role would be forthcoming soon. 

In-house investments have their own advantages, as investment decisions can be put into action more quickly. However, even at insurance firms with comprehensive businesses, like China Life and Ping An, investment teams are not strong in every area, he said.

And for smaller companies, it is too expensive to establish investment teams to focus on real estate or other investment alternatives. They have to learn from the start and it costs a lot, Wan added.

Wan’s remarks resonated with a Beijing-based general manager of a joint-venture insurer who was among the delegates. With assets of about Rmb20 billion ($2.9 billion), all invested onshore and managed by its own asset-management subsidiary, he said on the sidelines of the event that his company was looking to change that.

On condition of anonymity, because of the potential repercussions for the subsidiary, he told AsianInvestor that the life insurer was mulling whether to award mandates to external managers, mainly domestic ones, as it seeks to invest more in private equity and stock funds.

The aim is to earn a return that is higher than the current 5%, the general manager said.

BACKS A-SHARES

When asked about which asset class investors can find opportunities in the next six to 12 months, Wan recommended A-shares, particularly for smaller insurers that have a higher cost of funding and thus need higher returns to match their cash needs.

China's A-share market has been among the world's worst-performing markets over the past three years, with the Shanghai Stock Exchange Composite Index down 17% so far in 2018 alone. Mean regression, a statistical phenomenon in which the numbers gradually regress to the mean, is inevitable, he said.

“In fact we can be more optimistic. We can see that in the whole market, most insurance companies’ allocations in equities are too low. It’s just a little more than 10%, much lower than the upper limit of 30%,” he said.

A-share valuations are lower compared with most other markets and investors should be picking leading stocks with good fundamentals in selective industries, he said.

Wan’s A-share market optimism is shared by People's Insurance Company (Group) of China (PICC Group), which in late August said it would look to take advantage of marked drops in A-share valuations to raise its equity allocation from 4.1% of total investment assets.

“[The A-share] market risk has been released after a series of declines," said Wang Xiaoqing, vice president of PICC Asset Management Company. "The valuations in a batch of the listed companies reflect a margin of safety after the declines.” 

Wan said that partly because of the domestic stock market declines, the average investment returns of Chinese insurance asset managers was only 2.4% for the first half of the year, compared with 5.8% in all of 2017.

If the stock market fares better in the second half of 2018, the return may rebound and reach about 5% for this year, he predicted.

For now, the benchmark returns are not pointing to a optimistic direction. While the Shanghai Composite is down more than 4% since the mid-year point, the Shenzhen Composite Index is down 25% year-to-date and down almost 13% in the third quarter alone.