Fitch: Chinese Life Insurers Face Greater Asset Risks

Chinese life insurers are taking on higher asset risks due to greater equity exposures and surging alternative investments such as debt investment plans, trust schemes and wealth management products, Fitch Ratings says in a new report.

Increased alternative investments make Chinese life insurers' credit profiles more vulnerable to an economic downturn as these types of investments are generally less liquid than straight bonds, and are focused on the infrastructure and real-estate sectors. Alternative investments accounted for about 5%-17% of surveyed insurers' assets as of end-1H15. Higher equity exposures also indicate greater vulnerability of their capitalisation to unfavourable stock market movements. However, the impact of China's stock market correction in 2H15 should be manageable given their stronger solvency positions following the stock market's rally since mid-2014. Flexibility to reduce policyholders' dividends can also mitigate the impact of poor investment yields.

The more granular capital regime under the China Risk Oriented Solvency System is spurring Chinese life insurers to issue more equity-like hybrid securities. China Life Insurance Company Limited issued the first Core Tier II instruments under the new regime in June 2015. Subordinated debts remain the primary supplementary capital; the major life insurers' financial leverage stayed at 19%-28% at end-2014.

Fitch expects Chinese life insurers to price their policies more aggressively following the regulator's removal of the 2.5% cap on guaranteed returns for policyholders. However, the cap (3% for participating, 3.5% for universal life and 3.5%-4.025% for non-participating products) on the discount rate used to determine statutory insurance reserves will prevent excessive competition. The 2.5% cap on guaranteed returns on insurance policies was fully removed in October 2015.

Fitch is maintaining its Rating and Sector Outlooks at Stable for the Chinese life insurance sector as it believes that the rated insurers' resilient market positions, and adequate capitalisation and external funding capabilities will keep supporting their credit strength. Continued earnings volatility and fierce competition among homogenous products are key rating constraints.

The report, "2016 Outlook: China Life Insurers", is available at www.fitchratings.com or by clicking on the link in this media release.