Overseas investments by Chinese insurers could trigger risks

Rapid growth in the overseas investments being made by Chinese insurers could lead to rising risks in a number of areas, including asset-liability duration and currency mismatches, according to a new report by Fitch Ratings.

The growth could also lead to asset concentration risks and execution risks from mergers and acquisitions (M&A), the firm said.

Chinese insurance companies ramped up their overseas investments after the China Insurance Regulatory Commission liberalised offshore investment regulations in October 2012, according to the report.

The rule change was aimed at boosting returns on insurers' portfolios and it allowed for a greater diversity of overseas investments, including in more products and destination markets, said Fitch.

“Chinese insurers' investments are predominantly in long-tenured, illiquid asset classes such as property, infrastructure projects and private equity, said Fitch. “Rapid growth in these investments could lead to greater asset-liability duration mismatches if insurers rely mainly on premiums from short-tenured insurance products, such as universal life policies, to fund the offshore investments.”

Currency risks will also increase alongside growing overseas portfolio assets as insurers mostly carry Chinese yuan-denominated liabilities, said the firm. It stated more Chinese insurers, including China Life, Ping An, and China Taiping, have issued offshore debt to mitigate some of this currency risk.

Asset concentration in certain sectors or regions may make Chinese insurers' capitalisation more vulnerable to potential impairments.

Insurers with limited experience in investing overseas may also face execution risks as they significantly expand their portfolios or engage in M&A, said the report.

Chinese insurers have thus far largely invested in real estate, including hotels or office buildings, or formed investment vehicles such as China Insurance Investment (CII) to target offshore infrastructure projects.

CII was launched in December 2015 by 46 Chinese corporate shareholders comprising 27 insurance companies, 15 insurance asset management companies and four other private companies with initial capital of CNY1.2bn. Private equity investments have mainly targeted the acquisitions of controlling stakes of overseas insurance companies or financial institutions.

Insurers are allowed to invest in 45 stipulated national or regional markets and in asset classes, including fixed income, equities, real estate and funds. Offshore and offshore emerging market investments must not exceed 15 percent and 10 percent of insurers' total assets in the previous year, respectively.

Real estate investments abroad must be in mature commercial properties with stable incomes in central areas of the main cities of developed countries listed by the regulator.