Chinese life insurers are growing increasingly vulnerable to the ongoing domestic slowdown and equity market turmoil as they boost exposure to riskier assets in the chase for higher returns, warns rating agency Fitch.
Smaller firms are thought to be particularly at risk, as they are believed to have more equity exposure than their larger peers, said Joyce Huang, a Hong Kong-based director at Fitch. This could be among topics discussed during a breakout discussion on Chinese insurers at AsianInvestor's third annual Insurance Investment Forum in Hong Kong on February 18*.
Less well established insurers mainly rely on banking channels to sell savings-type products, such as single-premium universal life policies, which must offer high enough returns to compete with banks' wealth management products.
They tend to offer high investment returns of 4% to 6.5% to policyholders, so must invest aggressively in equities. But their stock exposure will have led to substantial potential investment losses following the A-share crash in the second half of last year, Huang added.
Top-tier life insurers – such as China Life, Ping An, China Pacific and Taiping – had also boosted their equity investments, to 15-20% of their assets in the first half from 10-15% at the end of 2014, noted Fitch.
Ping An, China’s second largest life insurer, had allocated 17.5% of its Rmb1.64 trillion ($249 billion) portfolio to equities as of the end of June last year, up from 14.1% in 2014. The firm subsequently said in August that it had become more cautious on allocation in light of the slowing economy.
The impact of the stock correction should be more limited for the bigger firms, because they have better risk control and loss-stop mechanisms, said Huang.
Fitch said it was difficult to estimate small insurers' allocations, because they are not listed and do not have annual reports. The rating agency's arguments are based on the policies the firms offer.
Xiang Junbo, chairman of the China Insurance Regulatory Commission (CIRC), ranked equity capital market risk as the biggest concern for mainland insurers during a speech in late December. He also warned them to be cautious about the risk of asset-liability mismatches.
Insurers' growing investment into alternatives is also boosting risks around asset credit quality and liquidity, said Huang. Such assets pose higher credit and liquidity risks than bonds, and the risk will grow as the economy slows, she added.
The CIRC has been liberalising investment channels, and as life insurers’ assets are increasing, they must invest more, noted Huang. This has led them to move more into offshore assets and new investment types, such as multi-asset, private equity and venture capital.
That said, the term "alternatives" for Chinese insurers still tends to refer to debt investment plans, trust investment schemes, banks' wealth management products and policy loans in China, where asset owners are limited in terms of assets that are available.
Mainland insurers, particularly the top-tier firms, had between 5% and 17% allocations to such 'alternative' assets at the end of June last year, according to a Fitch report released last month.
These assets are less liquid than bonds because they usually have long-term investment horizons of five to 10 years, and they are usually backed by infrastructure and property projects, which are especially vulnerable to economic slowdowns.
Economists are forecasting China’s GDP growth to slow further in 2016, with UBS and Goldman Sachs expecting it to grind lower to 6.2 and 6.4%, respectively, the slowest pace since 1990.
Overall, Chinese insurance firms’ assets grew 18.9% to Rmb12.1 trillion in the first 11 months of last year, from Rmb10.2 trillion at end-2014. Life insurers have Rmb9.6 trillion in assets, accounting for 79% of the industry.
* AsianInvestor's third annual Insurance Investment Forum is due to take place at the Ritz-Carlton Hotel in Hong Kong on February 18. The event will feature a CIO roundtable to discuss industry best practice and future concerns, as well as macro-economic analysis, a debate on emerging markets, risks inherent in alternative credit and simultaneous investment workshops.