Duan Guosheng, the chief investment officer of China’s sixth biggest insurer Taikang Life Insurance, issued a stark warning to his peers in July against taking investment risks amid an economic slowdown. “The result could do more harm than good,” he said.

Chinese insurance firms were Asia’s fastest growing asset owners last year, according to AsianInvestor’s annual AI300 ranking of the region’s biggest institutional investors. This was driven by stellar growth among small and medium-sized life insurers on the back of fast-rising policy premiums and in some cases overseas acquisitions.

But these firms could be storing up trouble for the future as they are increasingly relying on long-term, illiquid investments to pay off ever shorter-term liabilities. “Investors in our industry should reduce their return expectations, putting focus on assets’ safety and income stability,” said Duan during the speech, at a wealth management forum in Beijing attended by his industry peers. 

The warning signals are already there: tanking profits so far this year; a crackdown by the industry’s regulator; and rising defaults by the companies insurers have backed. So far the industry response has been to accelerate its push into riskier, higher-yielding investments at home and oversees. 

Foreign asset managers are eyeing this undisciplined splurge as an opportunity to step in and manage Chinese insurers’ growing pot of money. The challenge will be to devise investments or solutions to meet Chinese insurers’ need for long-term assets in immature Asian capital markets with stable income, and help them navigate unfamiliar markets further afield. 

“The next step [for mainland insurers’ investments] is to work with [overseas] professional asset managers who have a good performance track record,” said Stephen Shi, chief executive officer of Union P&C Insurance Company, a small insurer based in Beijing, who is scheduled to speak at AsianInvestor’s ‘China Global Investment Forum’ in Beijing on September 22.  

Boom times

China’s insurance companies have been on a growth tear. 

Take Ping An Insurance, the mainland’s second-largest insurer. It expects to have 10% of its Rmb1.83 trillion of AUM overseas in the coming few years, up from 2% at the end of last year. 

As a group, mainland Chinese insurance firms recorded premium income growth of 20% last year, up from 17.5% in 2014 and 11.2% in 2013, according to industry watchdog the China Insurance Regulatory Commission (CIRC). 

This is in line with their asset expansion, as the 17 mainland Chinese firms in our AI300 list averaged AUM growth of 20% in 2015. But it was markedly higher than the 6% asset expansion by the other 84 Asian insurers in the list. 

Among Chinese players, Anbang Life Insurance, Hexie Health Insurance, Huaxie Insurance, Funde-Sino Life and Anbang Property Insurance recorded the biggest percentage rises. Their growth was driven by high-cash-value life insurance policies, which contain investment components rather than life protection and are usually called universal policies or high-dividend policies. 

Most notably, Anbang Life’s AUM soared nearly ninefold to $82 billion as of end-2015, from $8.6 billion at end-2014, based on AsianInvestor’s estimation. This expansion was partly down to the firm’s acquisitions of foreign insurance businesses, but mainly the result of onshore premium growth. Anbang did not respond to requests from AsianInvestor for details of its strategy. 

In contrast, Taikang’s more conservative focus on products offering protection policies was reflected in its AUM, which slipped 1.3% in 2015. 

There’s a simple reason some companies have pursued rapid product growth: they want to maintain profits at a time when bond yields are falling, stock markets tumbling and economic growth decelerating.

Falling growth in particular has led some seemingly safe onshore investments to fail. Six insurers invested Rmb610 million ($92 million) in a Sinosteel bond issued in 2010. The steelmaker defaulted on interest payments last October. The seven year-dated Sinosteel note paid a 5.3% annual coupon, a relatively high yielding asset compared with government debt and bank deposits. 

“The economy is slowing down and onshore investment returns are dropping, but overseas assets are potentially offering stable returns, particularly infrastructure projects and properties,” said Tina Tai, Shanghai-based senior manager at insurance consultancy Enhance International. 

Added to this, the government has been keen to see increased returns to policyholders in an aging population and more insurance protection as the state strains to provide for its citizens. As a result the industry watchdog has allowed, even encouraged across recent years, the sector to take more risk for higher returns. 

Last year, the CIRC allowed insurers to invest up to 10% of their AUM in a single blue chip company and upped the limit on total equity exposure to 40% of total assets from 30%. Then last October it allowed insurers to set up funds to invest in start-ups in new industries, while in March this year it allowed them to begin investing into private equity funds and venture capital funds. 

In the wake of the subsequent explosion in AUM and risk-taking, the regulator has rushed to rein in the sector. In a speech last month, Xiang Junbo, the CIRC chairman, warned that small-to-medium-sized insurers were using insurance money as financing capital, taking big risks in expanding assets. 

While staving off panic by saying he was still comfortable with life insurers’ solvency ratio of 217%, reflecting their ability to meet liabilities, he urged mainland insurers to focus on offering “protection”, such as life insurance, health care policies and accident cover. 

Short-term liability 

What has particularly disturbed the regulator has been Chinese insurers’ rush to sell universal policies, or high-dividend policies, rather than protection policies. 

These popular products are single-premium, short-term products, usually of three-to-five-year maturity or as little as one year. They offer yields of an average 3% per annum to the policy holders, and potentially up to 5% to 6%. 

Analysts said it was difficult to estimate the total value of high-cash-value products held by Chinese insurers, but swelling deposits from policyholders for the products act as a useful barometer. According to the CIRC, Chinese insurers saw their deposits from policyholders grow 22% and 96% in 2014 and 2015, respectively. Anbang Life, Huaxie Insurance and China Life are the top three players in this area, accounting for 22%, 14% and 11% of the segment last year – almost half the total market share between them. 

However, this strong growth in premiums is testing life insurers’ asset-allocation capabilities.

Such products require insurers to chase higher investment returns to meet their payout obligations, which are on top of the usual fees paid to banks for distribution of products over their networks. 

Annual liability funding costs for aggressive small to medium-sized mainland insurers are tracking at about 8% to 9%, while they are 4% to 5% for large insurers, estimated one insurance analyst based in Shanghai who declined to be named. Insurance companies in China do not disclose their funding costs. 

Insurers still mostly invest the proceeds from selling universal policies into markets; when stocks tanked this year, insurers’ margins were squeezed. The CIRC said mainland insurers’ average investment return fell to 2.47% in the first six months of the year from 7.65% in the same period last year. Life insurers’ profits dropped by 65% year-on-year. At least 30 insurers dipped into the red during the second quarter, the Insurance Association of China said in August. 

The fall in profits has left the insurance companies with little choice: they need to diversify their investments. And they are increasingly seeking to do so offshore.

Look out for part 2 of this feature on China's life insurance companies from AsianInvestor's September magazine, which considers their drive to invest more of their burgeoning premiums into offshore assets.