Last July, a little-known Chinese insurance company started buying up shares in China Vanke, one of the country’s largest property developers. Qianhai Life Insurance, a subsidiary of conglomerate Baoneng, was founded just four years ago – it has not taken the company long to cause a stir.
Qianhai’s hostile bid for Vanke ultimately failed, but it generated a great deal of publicity in the process. Vanke’s chairman Wang Shi, apparently exasperated by the sheer audacity of a hostile takeover in China of all places, derided Baoneng as a “barbarian”.
Regulators seem to be taking a similar view. Over the last five weeks the China Insurance Regulatory Commission (CIRC) has issued a series of rule changes to clamp down on fast-growing insurers, limiting their scope for acquisitions and forcing them to look beyond the equity market for returns.
That is a smart move, unlike some knee-jerk reactions by the mainland authorities – such as their ill-fated attempts to control stock levels in the past year.
China’s emerging insurance firms have changed the industry dramatically; the barbarians have breached the gate and are inside the walls causing trouble. But domestic regulators can still do much to direct such investors’ energy where it is needed.
China’s new breed of insurers have engaged in a price war with more established firms. They have won business by offering investors eye-catching returns with so-called ‘universal life insurance’, which in reality is little more than a short-term wealth management product.
They have also grown exponentially. Hexie Health, a life insurance subsidiary of conglomerate Anbang, had annual premiums worth around $14.5 million in 2013, according to equity brokerage CLSA. By June, the company’s premiums had grown to $9.79 billion. Qianhai’s premiums have grown 3,475% over the same period.
It is hard not to find such numbers alluring. After all, isn’t this sort of disruption good for an industry?
Perhaps. But it is not good for a country.
China’s emerging insurers have moved so far beyond the conventional notion of insurance that instead of helping reduce volatility, they are exacerbating it. They often buy large stakes in individual companies and take many times more equity market exposure than their older peers, while eschewing the relative safety of fixed income products.
CLSA analysts Patricia Cheng and Lloyd Xu were damning about the risks of this approach in a report last September. “The asset allocations that unlisted players have created is a recipe for disaster,” they wrote. They said the risk of such concentration was that “just one stock having trouble may be enough to destroy their capital position”.
It should come as no surprise, then, that China’s regulators have taken notice. The CIRC has announced a raft of changes over the past five weeks.
First, it tried to reduce the control that conglomerates had over insurance firms, limiting the possibility that insurers would be used as glorified acquisition vehicles. On December 29, it set the maximum individual shareholding in an insurance company at 33%, increased its oversight of major shareholders and lengthened lock-up periods.
Next, the CIRC went after asset allocations, telling firms they could not invest more than 30% of their portfolios in equities. Nor could any one stock represent more than 5% of a portfolio.
These regulations appear to be aimed solidly at China’s emerging insurers. Anbang Life has 48% invested in stocks and mutual funds, including long-term equity investments, according to CLSA. Huaxia has 52% equity exposure and Sino Life a whopping 68% allocation to stocks. Qianhai’s numbers are a little fuzzy, thanks to 25% of its assets being billed as ‘available for sale’.
Seeking further portfolio growth?
These firms will clearly have to reduce some of this exposure, but that may not happen through share sales. They might instead decide to grow even larger, adding more assets to reduce the size of their single-stock exposure.
This will be possible because it appears the CIRC is not planning to rush insurers to comply with the rules. There is no set deadline and regulators might instead impose firm-by-firm deadlines in private meetings, a credit rating analyst focused on Chinese insurers told FinanceAsia.
Once these deadlines have been agreed, what exactly should insurers buy?
China's emerging insurers have already shown a propensity for acquisitions, both onshore and at home. Anbang’s failed bid for US hotel chain Starwood may have grabbed the headlines, but plenty of deals have been done, including the same firm’s acquisition of the Waldorf Astoria in 2014.
All this suggests the clampdown may in fact have the unintended effect of pushing insurers to be even more aggressive in their investments.
But this is not part of the government’s plan. China recently tightened the rules on foreign acquisitions, and there is reason to think that insurers will get short shrift if they try to get new deals approved. They will also need CIRC approval before they complete any takeover in future.
What about property? It represents a relatively minor part of most Chinese insurers portfolio, but real estate — especially commercial real estate — could offer a great option for funds quickly hoping to alter their portfolio mix with new, big investments.
Yet China’s attempt to control the residential property market, and the likely inaccessibility of foreign real estate in the near term, means this will not be the solution either.
Hence the real beneficiary of the clampdown on Chinese insurers looks set to be the country’s domestic bond market.
The name’s bond
Insurance companies play a vital role in any capital market, even when they are not writing credit default swap contracts or offering credit wraps. By carefully matching their assets to their liabilities, insurers ensure a reliable pool of liquidity for long-term bonds. That can help fund infrastructure projects or the construction of new factories.
Mainland insurers have so far had little impact on the bond market, which is dominated by commercial banks. The latter held 62.84% of outstanding bonds as of last May, according to Deutsche Bank research. Local debt capital market heads, who include end-investors in funds in their calculations, say the real figure is closer to 80%.
That is an absurd source of instability for a country as big and important as China. Insurance companies can provide an essential release valve to bond markets, shifting credit risk away from the banking system. This role is essential in reducing the possibility that any one bank will fail in a crisis — which, in a modern financial system, could lead to the whole system coming down.
China’s big and boring insurers are already large fixed income investors. China Life, the country’s biggest insurer, holds around 46% of its portfolio in bonds, for instance. But more firms will need to allocate to bonds at this kind of level before there can be real relief for China’s over-exposed commercial banks.
The real change, though, will come if Anbang and its peers can pull off a masterful juggling act: keeping up their heady growth while shifting more of their assets to bonds. That is not going to be easy. But the huge opportunities available in China’s growing insurance market make it likely these firms will all try, say analysts.
China’s government is right to clamp down on the new breed of swashbuckling insurers. Their risk appetite has gone too far. And by giving these firms the incentive to re-allocate towards bonds, regulators may be able to kill two birds with one stone: building a stronger insurance sector and a more resilient financial system.