Chinese insurers feel hampered from investing overseas by internal incapability, fear of failure politically and limited opportunities in slow-growing developed markets, an AsianInvestor forum heard yesterday.
Larry Wan, chief investment officer of Zhongrong Life Insurance, told our China Investment Forum that domestic peers were very interested in the opportunity but were hesitant at the same time following deregulation to increase the scope of securities they can invest in.
“We are not that optimistic,” he said through a translator, explaining that foreign exchange ratios were not something Chinese insurers were used to dealing with and as such would take time to adjust to.
He noted, too, that decision-makers at insurers would feel additional pressure from the greater risk of being seen to fail in international markets.
“If you lose 5% and the media report how Chinese insurance companies are losing money in overseas markets, the head of that insurance company has a greater chance of being punished by the CIRC [China Insurance Regulatory Commission].
“That is something new and it will make domestic investors scared of going overseas. They do not have much experience in the [overseas] market. If there are opportunities to invest in China, they would rather do that.”
Wan pointed to a herd mentality that Chinese insurers were adopting to see how peers were responding to the liberalisation. “We are all watching each other,” he said. “If some players start investing overseas [and are successful], everyone will follow them.”
But he stressed how regulatory loosening was a necessary step to counter industry losses. He noted that average industry return on investment (ROI) was 4% per year from 2002-2012, yet industry costs stood at more than 6%, and 8-10% for aggressive small and medium-sized enterprises. “It became impossible to cover costs with ROI. Insurance companies were not making any money.”
As a consequence, the CIRC moved to enhance their investment scope, starting in 2012. It has allowed insurers to invest in start-ups, and increased their allocation thresholds in stocks, direct property and wealth management/credit products to 30% of assets. It also raised the permitted overseas allocation from 5% to 15%.
Asked what the expected ROI would be for offshore investment alone, Wan said 8% in dollar terms, pointing to stocks (particularly preferred stocks) and stock-related products, private equity and property as the assets of choice for insurers.
Asked if an 8-10% return from overseas markets was a realistic target given current market conditions, Michael Kelly, global head of asset allocation at Pinebridge Investments, said, “yes, and no.”
With quantitative easing having increased the size of global capital markets in relation to the economy, he argued that at some point it would be hard for the economy to deliver sufficient earnings.
Moreover, if insurers took a broad approach to investing in everything, that would also fail. “That’s not diversification, it’s di-worsification,” he quipped. To achieve 8%, he said insurers would need to be opportunistic.
Asked by AsianInvestor whether domestic insurers were restricted to having to focus on slow-growing developed markets since China made up such a significant proportion of emerging markets, Wan agreed.
“China accounted for 12% of the world economy last year, but more than 40% for emerging markets. There is that kind of correlation risk for Chinese investors,” he said. “Most Chinese insurers will be interested in the developed world of North America, Europe and Japan, as well as Africa – parts of the world not correlated to China.”
He added that not only did Chinese insurers lack experience in investing overseas, but that it would be hard for them to hire reasonably priced talent with appropriate experience. “The first step [by insurers] will not be to build in-house teams, although we will definitely do that eventually. To start with, we will use third-party managers,” he said.
Asked how they would select external managers and what they would be looking for, Wan noted they would call on the help of consultants. “We are not looking for brand names with big teams that do not care about China. We are looking for small teams with good experience in dealing with Chinese institutional investors and a good track record. We will shop around.”
In response to a question on whether Chinese insurers would be hampered in overseas investment by their short-termist approach, the panel’s moderator, Leslie Mao of Towers Watson, said the industry well understood the benefits of long-termism.
“But at an institutional level long-termism is a luxury,” Mao noted from his dealings with clients. “It won’t be easy for Chinese insurers to adapt their approach over the next two to three years at an institutional level. Hopefully they will be able to do that when the governance level reaches an ideal standard.”