AI300: Risky business behind Chinese insurers’ rapid asset growth

Chinese insurance firms were Asia's fastest growing asset owners last year, according to AsianInvestor’s AI300 list of the region's biggest investors. This was driven by stellar growth among small and medium-sized life insurers on the back of fast-rising policy premiums.

But these firms could be storing up trouble, as they are increasingly relying on long-term, illiquid investments to achieve the returns they need to meet what are much shorter-term liabilities.

Mainland insurance firms recorded premium income growth of 20% last year, up from 17.5% in 2014 and 11.2% in 2013, according to the China Insurance Regulatory Commission (CIRC). This is in line with their asset expansion, as the 17 firms on our list averaged AUM growth of 20% in 2015. The combined total assets of the 84 Asian insurers expanded by 6% in the same period (table 1). 

Among Chinese players, Anbang Life Insurance, Hexie Health Insurance, Huaxie Insurance, Funde-Sino Life and Anbang Property Insurance recorded the biggest percentage rises (see table 2). (Note that two of the figures are for different periods.) This growth was driven by high-cash-value life insurance policies, which contain investment components rather than life protection and are usually called universal policies or high-dividend policies. 

Most notably, Anbang Life's AUM soared nearly ninefold to $82 billion as of end-2015, from $8.6 billion at end-2014, based on AsianInvestor's estimation. This expansion was partly down to the firm's acquisitions of foreign insurance businesses, but mainly the result of onshore premium growth. 

These popular products are single-premium, short term products, usually of three-to-five-year maturity, or as little as one year. They offer yields of about 3% per annum and potentially up to 5-6%.

Policyholders of such products focus on the returns rather than on buying life protection, said Joyce Huang, a Hong Kong-based director at rating agency Fitch.

Because of the high yields available, small and medium-sized insurers can raise money and grow their businesses aggressively, said a Shenzhen-based insurance equity analyst who preferred to remain anonymous. 

Analysts said it was difficult to estimate the value of high-cash-value products, as the CIRC did not disclose such data, but that “deposits from policyholders” would act as a useful indicator.

According to the CIRC, Chinese insurers saw their deposits from policyholders grow 22% and 96% in 2014 and 2015, respectively. These deposits stood at Rmb2.4 trillion at end-2015, representing 32% of the industry’s premium income. Anbang Life, Huaxie Insurance and China Life are the top three players, accounting for 22%, 14% and 11% of this segment last year -- almost half the total market share between them.

Fitch pointed out the boom in these products further accelerated in the first quarter of this year, as policyholders’ deposits soared 214% to account for 37.5% of total industry premiums. Anbang Life and Huaxie Insurance dominated this segment, with an 80% share of new business between them in the first quarter.

However, this strong premium growth is testing life insurers' asset-allocation ability, said Fitch’s Huang.

Such products require insurers to obtain higher investment returns because most of their policies need to pay annual yields of 3-5%. Combined with banks' distribution fees, annual liability funding costs for aggressive small to medium-sized mainland insurers’ are about 8-9%, compared to 4-5% for large insurers, estimated the anonymous analyst. 

On top of that, Chinese insurance firms were already under growing pressure to boost returns, thanks to a backdrop of falling bond yields, volatile equity markets and an economic slowdown.

As a result, they have moved aggressively into alternatives in the past few years. They had allocated more than a third (34.2%) – Rmb4.3 trillion – of their total AUM to alternatives as of June 30, up from 23.7% at end-2014, according to CIRC.

These “alternatives” cover mostly non-standard assets, including long-term equity investments (stakes in both listed and unlisted companies), banking wealth management products, trusts, debt and loan projects.  

Mainland insure reliance on short-term premiums and rising demand for illiquid alternatives and long-term assets has exacerbated the asset-liability duration mismatch, as investments in alternatives, long-term equities and property usually demand a long investment horizon, said Huang.

Zhou Xing, China insurance leader at consultancy PwC in Shanghai, agreed that the sector faced "enormous potential risks", such as the liquidity risk of non-listed equities, volatility risk in equity markets and the potential for breakdown in strategic partnerships based on large equity holdings.

Anbang Life and many other mainland insurers have bought big equity stakes in both listed and unlisted companies, mainly banks and property developers. For instance, Anbang Life is well-known for its particularly big stakes in listed companies, such as Mingsheng Bank (20.73% via A-shares and 5.18% via H-shares), China Merchants Bank (13.11% via A-shares), Shenzhen-based developer Gemdale (20.49%) and Beijing-based Sino-Ocean Land (29.98%).

When an insurer holds an equity stake of over 20% in a company, it can account for such exposure as long-term investments on its income statement. They are looking for dividend yields and return on equity (RoE), but will not be affected by equity price changes, as they do not mark their holdings to market, said the anonymous analyst.  

Chinese banks offer average dividend yields of around 4.3% (A-shares) and 5.5% (H-shares), while their RoE averages 16%, according to Goldman Sachs research.

Anbang Life did not respond to AsianInvestor requests for comment.