February 20, 2017 / 7:38 AM / 3 years ago

Chinese insurers put too many eggs in one basket

People walk outside the headquarter building of China Life insurance in Beijing, China, March 24, 2016. Picture taken with a fisheye lens. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - Chinese insurers have developed a taste for equity, and regulators are rightly worried. They are increasingly concentrating their assets on individual company names. The danger is that a single default could hit them hard. The Chinese insurance watchdog is trying to curb this practice - but doing so could put paid to the industry’s penchant for large acquisitions.

Companies like Anbang, owner of the Waldorf Astoria hotel, have grabbed the world’s attention by frantically gobbling up assets. Abroad, they have engaged in $19 billion of purchases in three years, Thomson Reuters data shows, driving asset prices up along the way. Back in China, they have aggressively bought into equities to boost returns amid falling interest rates. But while moving away from low-yielding fixed income is not a bad idea, concentrating exposure to certain corporates – some rated just above junk - is worrisome.

Anbang Life Insurance’s 6.5 percent stake in Shanghai-listed Minsheng Banking, for example, was worth nearly 40 percent of the insurer’s net assets at the end of September, according to Moody’s. The life insurer has since hiked the investment to 8 percent and the group owns an even larger stake through subsidiaries.

Elsewhere the pattern is similar. China Life controls 44 percent of Guangfa Bank, a lender to which Moody’s has awarded a Baa3 credit rating – the lowest one above junk. The stake’s size is akin to 14 percent of the insurer’s equity. The situation is even more extreme at Funde Sino Life. Its investment in Shanghai Pudong Development Bank was equivalent to nearly five times its equity at the end of September.

The China Insurance Regulatory Commission – until recently pretty dormant - has started to bite. In January, it capped equity investments at 30 percent of insurers’ total assets and individual stock investments at 5 percent. It also introduced a measure to dissuade insurers from using short-term funds for their shopping sprees.

With average equity investments currently half the top limit, mainland life insurers still have room to go. But stricter curbs may make large targets more difficult to digest. That would be healthy overall, but for would-be sellers of assets around the world hoping to benefit from the acquisitive tendencies of China’s insurance giants, it could make life a bit less exciting.


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