Ping An Insurance's allocation to non-standard debt has slipped significantly, highlighting the growing challenges faced by China's insurers as they look to improve returns and lengthen duration amid a dearth of suitable assets.

The group's interim results released on Friday show these loan-type assets made up 4.7% of its Rmb2.96 trillion ($419.82 billion) investment portfolio at the end of June compared with 5.6% at the end of 2018.

It was the standout allocation change in its first-half report, although also notable was the concentration in its equity investments. 

Typically seen able to deliver higher yields, non-standard debt assets generated a 5.86% nominal yield for Ping An. This compares with an annualised total and net investment yield for the first-half period of 5.5% and 4.5%, respectively.

The allocation drop comes after the regulations governing riskier products were tightened and amid a dearth of suitable assets in China.

It’s becoming harder to source quality assets to repackage in this way, Zhu Qian, a senior credit officer at Moody’s Investors Service, told AsianInvestor.

A senior executive at a consultancy firm who declined to be named echoed the same point when contacted.

“In China, there’s what we call asset shortage, which means we have more capital waiting to be invested than asset formation,” he told AsianInvestor.

Further constricting the supply of new assets on both the fixed income and alternatives side, he added, is the fact that companies have scaled back their financing activities as Chinese economic growth slows, he added.

And with most investors buying and holding to maturity, there's little scope for making up the difference with secondary fixed-income assets, he said.  

During Ping An's results announcement, senior representatives said the company had made efforts to allocate to long-duration, low-risk bonds, and would continue to do so to help narrow the gap in duration between its assets and liabilities.

“We will optimise our debt assets and lengthen our duration for the debt,” Timothy Chan, Ping An's chief investment officer, said, before adding that this gap was now 5.9 years.

One of the perceived benefits of alt debt assets is their capacity to lengthen portfolio duration. 

In Ping An's case the duration on its non-standard debt portfolio is only 3.58 years, although for specifically infrastructure debt-investment schemes it is 5.2 years.

UP IN STOCKS

In contrast, Ping An's allocation to stocks rose by 0.6 percentage points to 8.9% in the first half.

That's still lower than the double-digit figures seen before it began to follow International Financial Reporting Standards 9 (IFRS 9) last year, when Ping An cut its stock holdings because the new accounting standard increased the volatility of the investment income.

So it's all the more striking that Ping An's stock holdings are not widely diversified to spread the risk.

"We invest in a concentrated and not a scattered way [for our stock selection]. We hold stocks for a long time and won't speculate on them," Chan said.

One example is HSBC. The institution is a global bank with steady operations and gives out handsome and stable dividends, Lee Yuansiong, co-chief executive at Ping An, said at the press meeting.

Ping An's strategy is to focus more on blue-chip stocks like HSBC and ICBC and hold them for the long-term. “It’s good for the insurer from the perspective of investment returns. But from the risk perspective, this increases the concentration risks,” Moody's Zhu said.

Source: Ping An (click for full view)

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