Ping An Group aims to reduce the duration gap in the investment portfolio this year, after the insurance regulator introduced new regulation on asset liability management (ALM) early this month. However, a lack of long term debt in the country and elsewhere in Asia could stymie the investment ambitions of insurers.
A duration gap is the difference between the average tenor of an insurance company’s assets and its liabilities. Ping An’s liability duration was 6.9 years longer than its assets, which marked an improvement from the 8.6-year mismatch it had back in 2013.
With interest rates rising, the company will keep lengthening the average duration of its mostly fixed income assets, Timothy Chan, chief investment officer of Ping An, said at a press conference for its annual result announcement on March 21.
“In the fixed income space we’ll maintain last year’s practice and pay attention to the timing of the rise in benchmark interest rate. We will gradually lengthen the duration in our assets and strive to narrow the gap between our assets and liabilities until it stabilises to a certain level,” he said, without giving a target level.
Ping An Group's life and health insurance business is its biggest profit contributor. The unit makes up 40% of the profit of the group, which also has property and casualty insurance, banking and other subsidiaries. Ping An had Rmb2.45 trillion ($387.33 billion) in investable assets under management at the end of 2017.
Chan's statement comes after the China Insurance Regulatory Commission (CIRC) introduced an overarching framework to reduce insurers’ asset liability management (ALM) risk on March 1. Under a trial phase for the new rules, insurers self-evaluate their ALM capabilities over a set of quantitative and qualitative categories, with their final score consisting of a mean of these scores.
The new rules certainly impose a stricter standard on lifers’ ALM, Zhu Qian, vice president and senior credit officer at Moody’s, told AsianInvestor.
Ping An did not make it clear whether it measures the duration gap according to the formulas used in the CIRC’s new framework, or whether its duration gap numbers purely referred to its life insurance business. This makes it difficult to rate its performance based on the self-evaluation form, Zhu said. However, a duration gap of -6.9 years is largely in line with industry average for lifers.
Ping An and other insurers are keen to reduce their duration mismatch. Meanwhile, China’s new central bank governor looks likely to increase the country’s interest rates in the coming months, enhancing a generally tightening credit environment.
Bond yields rise together with interest rate. Insurers will want to invest into longer-term bonds once this happen, in order to lock in these higher yields, Zhu said.
But the insurers may struggle to execute this investing strategy, given the limited choice of long-term bonds available in China and the government’s mounting efforts to deleverage the economy.
“When CIRC sets the [duration gap] range of -10 to 2 [in the ALM rules], it considers the reality that it is difficult to find long-term investments in the mainland market,” Zhu said.
If insurers cannot find longer-term assets to match liabilities duration, they will be forced to sell policies with shorter terms. That’s not what the regulator wants, she said.
Concerns about lack of long-term investments were also highlighted in the Insurance Investment Forum hosted by AsianInvestor on March 1.
Without an increase in long-dated bond issuance in China, there is no way to synthetically generate these cash flows. This could lead regulators like those in China to encourage an improved level of long-term bond issuance, predicted Robert Turnbull, Hong Kong-based director of group asset management at Swiss Re.
But Bin Deng, head of group investment solutions and derivatives at AIA Group, said that even an increased level of domestic bond supply might not keep up with mounting demand in China and beyond.
“In Asia we’re going to see hundreds of millions of people buying insurance products [in the coming years]. Will capital market, will the supply of the bonds, catch up with the demand? I have a big question mark,” he noted.
Ping An’s overall net investment yield dropped by 0.2 percentage points year-on-year to 5.8% as a result of a larger investment portfolio and lower interest rates of debt-related investments. But its total investment yield increased by 0.7 percentage points to 6%, thanks to recoveries in the domestic equity market.
Bond investments accounted for 43.7% of its investable assets, while non-standard debts (investments in infrastructure, real estate and wealth management products) stood at 13.7%.
Its investable assets grew by 22% over the course of 2017 to end at Rmb 2.45 trillion.
Chan said that Ping An has 3.2% of its assets in overseas markets. Its overall asset allocation in 2018 will largely be the same as in 2017.