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Announcement:

Moody's: Chinese life insurers' shift to riskier asset allocations amid low interest rates, a credit negative

 The document has been translated in other languages

13 Feb 2017

Hong Kong, February 13, 2017 -- Moody's Investors Service says that the shift by Chinese life insurers towards riskier asset allocations to support their business growth and investment returns amid the persistent low interest rate environment is credit negative.

"The shifting asset allocation is pressuring four of the key rating factors -- asset quality, capital adequacy, profitability and liquidity -- that are central to our rating assessment for life insurers," says Kelvin Kwok, a Moody's Associate Analyst.

"In particular, the industry's rising exposure to single-name equity investments is increasing concentration risk, and leaves the insurers' profitability and capital profiles sensitive to capital market movements," adds Kwok.

Kwok was speaking on the release of a Moody's report entitled "Life Insurance -- China: Credit Profiles Under Pressure From Shifting Investment Allocation".

According to the Moody's report, riskier investments -- which include "other investments" and equities -- accounted for 49% of the industry's invested assets at end-November 2016, up sharply from 27% at end-2013. Common instruments include project debt schemes and long-term equity investments, in particular in banks and property companies.

The higher yields these investments offer contrast the broad drop in investment returns on many traditional investment vehicles, such as bonds and deposits. Moreover, the industry's increased allocation to these non-traditional investments has supported several business and operating trends, including bancassurance opportunities and vertical integration via investments in related industries like retirement homes and healthcare projects.

But the shift in asset allocation is pressuring the industry's capital buffer relative to the intrinsic volatility of its risky assets. As a headline measure of insurers' exposure to risky assets, the weighted average high risk assets as a percentage of shareholders' equity increased to 181% at end-2015 from 154% at end-2013 among Moody's rated life insurers.

Moody's expects the current policy and financial market environment will continue to encourage risky investments by life insurers over the next 12-18 months. This is notwithstanding that recent announcements by the China Insurance Regulatory Commission indicate a more restrictive regulatory approach to curb some insurers' aggressive equity allocation.

Although life insurers' exposure to such assets still remains at manageable levels, Moody's notes a further build-up in the absence of a corresponding strengthening in their capital and liquidity profiles could translate into negative rating actions.

Subscribers can access the report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1055316

The report may also be found through Moody's topic page "China's Trilemma: Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing. This page provides a centralized source for Moody's research related to key credit issues in China as the country's macroeconomic story continues to unfold.

Recent Moody's publications relating to China's Trilemma include:

• Inside China: January 2017

• Banking System Profile: China

• China Curtails Growth of Short-Term Savings Products, a Credit Positive for Insurers

• Insurance -- China: China's Proposal to Tighten Insurers' Shareholding Management Is Credit Positive

• State-Owned Enterprises -- China: Reform to Remain Gradual With Credit Implications Varying Across Sectors

• China Credit: Implications of Government's Plans to Reduce Corporate Leverage Are Mixed

• Banking System Outlook -- China: Deteriorating Operating Environment and Asset Quality Drive Negative Outlook

• Securitization -- China: 2017 Outlook -- Asset Performance Stable for Auto ABS and RMBS, Negative for CLOs

• Regional and Local Governments -- China: 2017 Outlook -- High Leverage of State-Owned Enterprises Drives Negative Outlook

• China's Proposal to Revise Banks' Off-Balance-Sheet Exposure Regulations Is Credit Positive

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Yat Man Sally Yim
Senior Vice President
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Simon Harris
MD-Gbl Ins and Mgd Invests
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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