China Insurers Holding More-Lucrative Yet Riskier Assets

Chinese insurers are allocating more of their assets to riskier investments to chase better returns, and analysts warn that risks could creep up again within the financial system.

As of the end of July, the entire insurance industry allocated 39.08% of its funds in “alternative investments,” up from 38.52% as of the end of June, data from the China Insurance Regulatory Commission (CIRC) showed. Those investments, by CIRC’s definition, include private equities, debts and stakes in infrastructure projects, real estate and trusts, as well as wealth management products issued by commercial banks.

Safe-haven assets such as bank deposits and fixed-income instruments remain the biggest asset class in the insurers’ portfolios, although their slice is shrinking to 48.12% as of the end of July from 49.13% as of the end of June, CIRC data show. This portion was as high as almost 80% in late 2012.

Alternative investments are popular among insurers, as returns on riskier assets or projects are usually higher. However, they are deemed “riskier” because such assets usually take longer to be turned into cash, and they have opaque structures and long maturities. Insurers, especially the less-capitalized ones, also issue short-term products to attract yield chasers, amassing funds to invest in other riskier, longer-term investments.

Managing portfolios in these ways, analysts say, creates liquidity pressure on the insurer when it needs to turn assets into cash quickly to pay policyholders or investors.

Zhu Qian, an insurance analyst at Moody’s Investor Services, said that apart from liquidity pressure, risks associated with alternative investments are much more complicated. It is mainly because an opaque transaction structure may involve several counterparties, and that masks the true credit risks of the underlying assets, Zhu said.

Small and midsize insurers have grown rapidly in recent years, in part thanks to innovative — and therefore risky — insurance policy and investment products, as well as the loosening of rules that no longer limit the level of returns the insurers can offer policyholders.

Foresea Life Insurance Co. Ltd, Evergrande Life Insurance Co. Ltd. and Huaxia Life Insurance Co. Ltd. also purchased considerably more alternative assets in 2016, according to their financial statements.

But as interest rates linger at low levels, even large insurers are now jumping in.

In March, senior executives of China Life Insurance Co. Ltd. said during an earnings release event that more funds will be used to buy overseas and alternative assets. Ping An Insurance Group also announced it will heed investment opportunities in private equity, real estate and infrastructure projects.

Smaller and aggressive insurers could suffer the most. “Even though it’s not likely to happen, nearly one-quarter of net assets may evaporate if only one default occurs,” said Moody’s Zhu.

CIRC’s latest data also show that the entire Chinese insurance industry raked in premium totaling 2.53 trillion yuan ($386 billion) during the first seven months of this year, up 21.3% from the same period in 2016.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)