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Chinese Insurer Warns of Liquidity Crunch

By Lin Jinbing and Wang Yuqian

(Beijing) — China’s crackdown on the sale of short-term, high-yield investment-linked products is in danger of triggering a liquidity crunch at some insurance companies that may leave them unable to pay policy holders the money they are due.

The risk has been highlighted by Shenzhen-based Foresea Life Insurance, one of the biggest players in the market for so-called universal life insurance products, and which is believed to be among the most exposed to the maturity mismatch between assets and liabilities caused by these short-term policies.

Foresea Life has issued a stark warning to the China Insurance Regulatory Commission (CIRC) that the liquidity squeeze, which is preventing it from earning new premium income, could lead to mass defaults and social unrest as policyholders fail to get their money back. In a letter to the commission in early March and again in late April, it called for a ban on the sale of new policies imposed on the company to be lifted so that it can raise money to repay policyholders and prevent the cash squeeze from spreading to other companies. 

The insurer, which has relied heavily on so-called universal life insurance products for its rapid growth over the last few years, saw its premium income slump 70% to 13.5 billion yuan ($1.96 billion) in the first quarter, according to Caixin calculations based on CIRC data. It also saw a net cash outflow of 9 billion yuan from operating activities, compared with a net inflow of 36.6 billion yuan in the same period last year, a source close to the company told Caixin.

Foresea was one of nine insurers censured by the CIRC in December for problems associated with universal insurance products. These are basically wealth management products offering a combination of life insurance protection, normally in the form of a death benefit, with an investment that offers a guaranteed return far higher than bank savings rates. They were popular with consumers because they offered high yields and short maturities, but regulators became increasingly concerned about the risks attached to the products because of the maturity mismatch between the short-term policies and the longer-term investments they were funding.

The company, whose billionaire chairman, Yao Zhenhua, was banned in February from the insurance industry for 10 years, was ordered to stop selling universal insurance policies altogether and was slapped with a three-month suspension on the issue of other policies.

Premiums Shrink

The December censure marked the beginning of a broader clampdown on short-term, high-risk policies, mostly in the form of universal life insurance, that’s now left many insurers unable to raise money to fund their liabilities.

From January to March this year, total premium income raised from the sale of universal insurance for all 81 life insurers in China plunged by more than 61% year-on-year, data from the CIRC show. More than half of the companies reported a decline in sales of universal insurance policies, and the drop was large enough to lead to a decrease in overall premium income for 33 firms, according to Caixin calculations based on the data.

At the same time, the companies have had to continue making payments on maturing policies and on refunds stemming from cancellations.

Foresea, for example, paid out 18.8 billion yuan in refunds on cancellations in the first quarter, more than double the amount for the whole of 2016, a source close to the company said.

In a letter to the CIRC in early March seen by Caixin, the company warned that it was facing “huge cash flow risks” from its universal insurance business partly because of pressure from cancellations. Most of the stock and real estate assets bought with the premium income were subject to lock-up periods and couldn’t be sold quickly, it said.

“We request your favorable consideration of our petition in order to avoid liquidity-related marketwide, systemic and contagious risks, risks to the industry caused by mass policy cancellations, and social unrest,” the company said.

In late April, Foresea wrote again to the regulator, warning of the dangers and repeating its request for the ban to be lifted.

At least 16 other life insurance companies saw a net outflow of cash in the first quarter, compared with only eight in the same period last year, according to data published by the CIRC and the companies themselves. Those with the highest outflows were the biggest promoters of short-term, high-yield universal insurance policies, including Foresea and Anbang Life Insurance. Their net cash outflow in the first quarter was 13 billion yuan and 5.7 billion yuan respectively, according to Caixin calculations based on company and regulatory data.

A source close to the commission said the regulator has ordered all insurance companies to submit reports on their liquidity conditions and management more frequently in order to control risk. “For some companies that merit special attention, they have to report their data in real time,” he said.

Liquidity Risks

Speaking at an internal work conference in April, Chen Wenhui, the vice chairman of the CIRC who is running the commission following Xiang Junbo’s dismissal on corruption allegations, said the entire industry was facing growing pressure from increased cash outflows, with payouts on maturing policies and cancellations both seeming to have reached a “peak season.” 

“For some companies which have operated too aggressively in the past, this means greater potential liquidity risks,” he said.

But some industry analysts say that higher cash outflows won’t necessarily translate into a liquidity crunch for an insurance company, and that much depends on the severity of the outflows and how long they last.

Foresea could tap into its capital reserves, which stood at 42 billion yuan at the beginning of the year, a source close to the firm told Caixin.

If the outflows persist, it may have to sell assets, as would other insurers facing similar liquidity problems. However, a fire sale of assets by companies to help fund their liabilities could lead to a slump in prices and also lead to instability in financial markets, experts say.

So far, the CIRC has shown little intention of relaxing controls on the sale of universal insurance products. “The commission is determined to keep the brakes on, but it will do so skillfully so that problems can be solved gradually to avoid triggering shocks,” said the source close to the regulator.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)

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