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Asia-Pacific | Fixed Income | Economy

China: Reshaping Global Capital Flows (Part 4 of 5)

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Citi expects China’s Insurance sector to benefit from the development of the bond market as bonds are usually the target asset class for insurers’ investment portfolios. Insurers are required to maintain a conservative investment portfolio in order to honour policyholders’ claims, lapses/surrenders during policy tenure, and policy maturities. Meanwhile, insurers also look for income-earning investments that generate stable/visible income streams so as to fulfil the regular, ongoing cash outflow needs arising from inforce policies.

 

For life insurers, liabilities are usually of long duration due to the sale of whole life, long-term health insurance products, as well as retirement products (e.g. annuities). In order to match the long duration of liabilities, assets (primarily investment assets) would also need to have long duration so as to reduce the asset-liability duration mismatch.

 

 

To fulfil these purposes, insurers (esp. life insurers) usually invest a significant proportion of their assets in fixed-income instruments, long-term bonds in particular. China insurers are lagging US/global peers in bond investment given the limited availability of long term domestic bonds and poor liquidity. For example, China insurers invest about 1/3 of their investment portfolio in bonds and 17% deposits, while US life insurers on average have half their investment book in long-term bonds.

 

As China develops its domestic bond market, this is likely to benefit insurers through better duration matching, more stable operating trends and reduced concerns about asset quality, which would support higher valuations. Citi forecasts Chinese insurance assets to grow 16% (compounded annual growth rate) to Rmb57trn through 2025E. Citi’s positive view is also premised on an improved regulatory environment, an earnings upcycle and ongoing robust Net Book Value (NBV) growth.

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This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
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