Mon, Jun 27, 2016 page14

• Chinese insurers undertaking ‘Titanic’ risks

  • Reuters, HONG KONG
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  Years of breakneck growth for China’s top insurers has been partly fueled by a splurge on risky investment products that could punch multibillion-dollar holes in their balance sheets if the slowing economy triggers heavy debt defaults.

  Industry premiums have increased by an average 13.4 percent per year since 2010, according to the China Insurance Regulatory Commission, but in an environment of low interest rates and unreliable stock markets, insurers have increasingly looked to alternative investments to make the returns they need to service their growing business.

  A Reuters survey of the accounts of the top five listed insurers, including Ping An Insurance Group Co (中國平安保險集團) and New China Life Insurance (新華保險), showed their holding of assets other than shares, bonds and cash had more than quadrupled in five years to 984 billion yuan (US$150 billion).

  The alternative investments — which include opaque, risky shadow banking-linked assets, such as trust schemes and wealth management products (WMP) — account for about 16 percent of the top five’s total assets, up from 5 percent in 2011, the second-largest asset class after fixed-income products, the survey showed.

  Analysts say the bulk of these investments, including WMPs and the negotiable certificates of deposit, created by banks, are channeled to debt-laden state-owned and private firms at rising risk of default.

  The insurers’ investments in the assets comes at a time when banks’ non-performing loans are already at an 11-year-high of about 2 percent, according to official figures.

  Assets such as project asset-backed plans, trust schemes and WMPs are also difficult to turn into cash in a downturn since they lack a secondary market and have long investment horizons.

  “The growing investment in risky, higher-return assets is the Titanic, and when it goes down it will take more than one lifeboat,” said Thomas Monaco, portfolio manager for Chinese equity at Hong Kong-based Nighthawk Capital.

  “The real problem for insurance companies is that the overall investment yields are coming down in China, so they are going out of the credit risk curve. They are going for higher interest rate bets and a lot of them could go bad.”

  Top insurers in China, including state-owned China Life Insurance Co Ltd (中國人壽保險) and People’s Insurance Group of China Co Ltd (中國人保控股), get more than half of their premium income from life insurance products.

  Stocks and bonds are not meeting insurers’ requirements; the Shanghai market is down 19.4 percent this year, Asia’s worst-performing market, while yields on 10-year government bonds fell 98.2 basis points in 2014 and 78.6 basis points last year.

  Edmond Law, insurance sector analyst at UOB Kay Hian (Hong Kong), said while investments in government bonds would return about 3 percent, some WMPs offered 4 to 5 percent, along with “very high risk.”

  New China Life Insurance posted a more than five-fold jump in investment in products such as unlisted equity investments, trust products and WMPs last year compared with 2014.

  In contrast, its investment in term deposits fell 23.7 percent and stocks dropped about 2 percent, according to its latest annual report.

  It posted a 34.3 percent rise in last year’s profit, mainly thanks to income on investments.

  However, New China Life said in the report that since early last year it had “drastically tightened its risk appetite for non-standard assets” and regularly assessed and stress-tested their exposure.
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