China Life favours equity but wary on foreign assets

China Life Insurance Company is optimistic about the long-term prospects of equities, encouraged by the asset class’s performance in the first half of the year and a recent ruling by regulators to lift the cap on insurers’ equity investments. However, it is cautious about investing overseas.

“Over the second half of the year, we are seeing multiple factors favouring the equity market over the long term,” Zhang Di, the head of China Life’s investment management department, said at the firm’s interim results webcast on Thursday (August 27).

“That includes China's continuous economic growth, a rise in earnings following capital market reform, changes in how locals structure their asset allocations, and ample liquidity levels in the market.”

What cemented Zhang’s confidence in the asset class is a 5.12% year-on-year increase in investment income from equity in the first half of the year. In the first six months of 2020, net investment income totalled Rmb 77.4 billion ($11.24 billion), with equity contributing about Rmb10 billion. Equities were the second-largest contributor, accounting for 13% of total net investment income. Fixed income investments formed the largest component of its net investment income.

Overall, the firm’s net investment yield stood at 4.29%, 37 basis points lower than that in the first half of 2019, after it suffered income losses from investment properties (see table below).

Over the six months, from the end of 2019 to the end of June 2020, China Life posted a 5.82% increase in its total investment portfolio at Rmb3.78 trillion, with the equity portion rising from Rmb606 billion to Rmb625.38 billion. Its comprehensive solvency ratio dropped 9.22% to 267.31%.

The drive to invest in equities also stems from the need to match its liabilities. Stella Ng, director of insurance at Fitch Ratings, told AsianInvestor that China Life had been gradually raising its long-term equity investments, mainly in the financial sector such as banks.

“Their 10-year or longer premiums have increased quite healthily, so I think in terms of asset-liability management, they will continue to invest in equities to match the lengthening liability duration,” Ng said.

CONDUCIVE ENVIRONMENT

Zhang’s positive outlook towards equities asset class came as the country’s regulator, China Banking and Insurance Regulatory Commission (CBIRC), recently moved to raise the cap on equity investment for insurers to 45% of their total assets from 30%. The proposed capital charge for listed stocks on mainboards under the upcoming C-Ross II regime is 35%, four percentage points up from the current charge but lower than the increases in other asset classes.

Indeed, China Life’s allocation to equities has plenty of room to grow. It had allocated16.54% to the asset class as of June’s end, down from 16.95% at the end of last year. Zhang did not elaborate on specific plans to increase its equity exposure.

Despite the returns generated from equities, Zhang admitted that the market presented “very complicated conditions” due to the Covid-19 pandemic in the first half of the year as high levels of volatility has jolted investors’ sentiment. Some of the short-term challenges in equity investments included geopolitical issues and a rebound in coronavirus cases, Zhang said.

She added that the firm will adopt a flexible approach while seeking to tap structural opportunities. It has announced plans to raise its stake in China-based software and service provider Wonders Information to 24% from 18% on August 26 as the insurer looked to leverage the tech firm’s expertise to support its insurance operations. China Life is currently Wonder Information’s biggest shareholder.

CAUTIOUS OVERSEAS

Zhang was less sanguine about investing overseas. While the insurer had been on the lookout for suitable managers and overseas investment assets over the past few years, China Life will be more cautious towards allocating funds overseas in terms of the pace of deployment, regions, and specific assets, she said.

“Partly owing to the pandemic's impact, and also an increasingly complex global macro-environment, we have to take a lot more factors into consideration such as the [macro] environment and regulatory direction when we plan our global investment strategies this year,” she said.

“I would imagine companies with a sophisticated risk management framework would be more cautious [towards investing globally], especially during the current volatile times,” said Ng.

Zhang's comments came against the backdrop of a worsening bilateral relationship between the US and China over issues including human rights and national security. The tension is also expected to escalate as the US is approaching a presidential election in November. China Life's offshore investments made up around 2% of its total assets.

Overall, China Life has turned somewhat defensive. It has gradually built safety margins into its portfolio as it has more than doubled its cash-related holdings since the end of December from 1.62% to 3.76% at Rmb142.1 billion. (See table below)

While the insurer’s allocation to fixed-maturity assets dropped slightly to 73.32%, the absolute amount stood higher than last year’s figure at Rmb2.77 trillion.

“Considering the relatively volatile capital markets now and challenging investment conditions, I believe the increased holdings of fixed income-type assets will help them mitigate investment risks,” Ng said.