Published by Asia Asset Management – 10th Sep 2018
China’s life insurance companies are trimming their exposure to alternatives and shifting into mainstream assets because of stricter regulatory rules and lower yields from alternative investments, according to senior executives at Moody’s Investors Service (Moody’s).
Qian Zhu, vice president – senior credit officer at the ratings agency, points out that China’s insurance regulator this year imposed “stringent restrictions” on insurance asset allocation and investments, including limiting their holdings of equities.
The clampdown has curbed insurers’ taste for alternatives, with allocation to such assets, including debt investment schemes and infrastructure-structured investment schemes, dropping from a peak of 40.2% of total assets last December to 39.4% this May, Ms. Zhu told reporters at a press conference in Hong Kong on September 7.
According to Ms. Zhu, most of the insurers’ high-yielding investments are maturing in the next few years and therefore the proceeds will likely be invested at a lower yield under the new rules.
“Many of these investment schemes are structured as ‘fake equity real debt’ investments, which have been banned [by the regulator],” she says.
Insurers have also become less attracted to alternatives because yields have dropped from previous levels, adds Sally Yim, associate managing director at Moody’s, who notes that yields are currently around 5%-6% per annum, down from the 7%-8% range of recent years.
Yields have declined since Beijing tightened controls on asset-backed debt issued by local governments so they can deleverage.
At the same time, interest rates are rising, so life insurers are raising their exposure to “more traditional assets” such as deposits and government bonds on a risk-adjusted basis, making their risk exposure “more healthy”, Ms. Zhu says.
The insurance industry is also shifting its product mix to long-term regular premium products to reduce liquidity pressure from redemptions. The product restructuring will improve their underwriting profits and offset the decline from investment returns, she adds.
