Market 'overreacts' to new equity policy for insurers

Analysts say impacts from the CBIRC's move to raise the equity investment cap for insurers is likely to have a greater impact in the mid-to-long term

Market overreacts to equity investment policy for insurers
Surveillance cameras are seen outside the China Banking and Insurance Regulatory Commission (CBIRC) building in Beijing in this file photo from December 2018. Photo: Str/ Reuters.

(ATF) China’s banking and insurance regulator announced last week that it is raising the equity investment cap for insurers to 45% in an effort to bring more long-term funds into the capital market. The stock market bounced on hearing the news, but analysts say the impact is likely to occur in the mid- to long-term rather than immediately.

In its statement released after market close on Friday, China’s Banking and Insurance Regulatory Commission (CBIRC) said it was introducing a more precise multi-tier equity investment regulation scheme to give insurers more flexibility in investment management.

Based on criteria such as solvency ratio, asset-liability management capability, and risk status, an insurer’s equity investment cap can range from 10% to 45% of total assets recorded at the end of the previous quarter. Previously, all insurance companies were subject to a 30% equity investment cap.

For example, under the new scheme, players with a solvency ratio of 200% and above can invest more than 30% of their total assets in equity investment. To take advantage of the 45% cap, an insurer must have a minimum solvency ratio of 350%.

Investments in any single listed company must not be more than 10% of its total share capital, the regulator added.

Effective immediately

The new scheme is effective immediately, which means insurance companies can literally purchase more stocks this week, some media reports said.

“If the overall equity investments of insurers increase by 1 to 5 percentage points, it means 200 billion yuan ($28.6 billion) to 1 trillion yuan ($143 billion) incremental capital will flow into the equity market. This is expected to boost market confidence,” Juan Shen, an analyst from Huatai Securities, said in a commentary note.

Not all insurers’ equity investments are in A-share stocks though. According to first-quarter data released by the CBIRC, about half of total insurers’ equity investments are long-term equity holdings. A small portion go to equity and balanced funds, and a little over one-third are invested directly in stocks.

China’s A-share market reacted positively to the news with Shanghai Composite Index bouncing 3.1% to reach 3314 on Monday after its worst weekly drop in five months. Stock prices of the “big five” publicly-traded insurance companies, namely PICC, Ping An, China Life, CPIC, and NCI, all surged with several of them hitting the daily price band of 10%.

However, after a deeper look, analysts found that most insurance companies hadn't used up their 30% cap on Monday, and are likely to be prudent in the short term to increase their equity investment.

Statistics show that the equity investments by the “big five” listed insurers range from 15% to 23% of their total assets at the end of 2019, well lower than the 30% cap. As of the end of the first quarter, the overall balance of all insurers’ equity assets stood at RMB 438 million, which accounts for 22.57% of total insurance funds used.

To further complicate the situation, the new scheme means stricter regulation for insurers with lower solvency ratios.

Some have to lower investments

In a note to answer reporters’ questions, the CBIRC said that some, but not many, insurers will have to lower their equity investments because of the new scheme, and they will be given a grace period of 12 months to gradually reduce the equity investment.

Out of the ‘big five” insurers, PICC is entitled to a 40% cap in equity investment judging by its solvency ratio for the first quarter of 2020. Ping An has 30% while China Life, CPIC, and NCI all have 35%.

Out of the 170 companies that have released their solvency data for the first quarter, 37 meet the 350% solvency ratio criteria. They are mostly small- to medium-sized insurance companies, some of them international firms. Many are taking a prudent investment strategy with little equity investment, China Business News reported.

Yifeng Wang, Everbright Securities’s chief analyst on banking, does not expect insurance companies to significantly increase their proportion of investment in stocks or mutual funds in the short term.

“In China, most products offered by insurance companies bundle the insurance and savings functions together. Insurers need to bear high investment risks and do not have the incentive to raise the proportion of stocks and mutual funds in their investment. But they may increase equity investment in the long term,” Wang said in a note.

State Council decision

Just two days before the CBIRC raised the equity investment cap for insurers, the State Council announced a decision at an executive meeting to remove the limitation on industries in which insurers can have long-term equity holdings. Previously, direct equity holdings by insurers were limited to financial services companies and insurance service-related industries such as retirement, medical and automobile services.

Shen from Huatai Securities said that the two policies will expand both the breadth and depth of equity investments by Chinese insurers, helping them to gain more robust returns on investment.

Wang from Everbright Securities expects the policies to benefit the micro, small and medium-sized companies, making it easier for them to raise money through equity financing. Insurers will also be able to participate more in private equity and venture capital investments in the high-growth tech industries for higher gains to alleviate the risks of an ageing population and the decline of interest rates.

Insurance companies will likely record higher-than-forecast investment income in the second half of this year, he said.