Increased trust holdings raise risks for insurers

Companies' shadow banking assets hit 1.14 trillion yuan, or 13 percent of investments, reports Bloomberg.

A doubling in the trust holdings of China's insurers has prompted ratings companies to warn the industry may be taking on too much shadow banking default-risk.

Insurers held 281 billion yuan ($46 billion) of trust products on June 30, surging from 144 billion yuan at the end of last year, China Insurance Regulatory Commission data showed.

The companies' shadow bank assets, including wealth management products and other financing kept off commercial lenders' balance sheets, reached 1.14 trillion yuan, or 13 percent of their investments, Standard & Poor's Financial Services LLC estimated, adding that this made them "vulnerable in times of stress".

China Pacific Life Insurance Co, Taiping Life Insurance Co and Du-Bang Property & Casualty Insurance Co all expanded their trust investment fivefold or more in the first half, a "credit negative" for companies traditionally focused on fixed-income securities, according to Moody's Investors Service.

Fifty-one percent of the trust investment was directed at real estate and infrastructure, making insurers vulnerable to a cooling property market, according to Fitch Ratings Inc.

"If the insurers experience any liquidity problems, they won't be able to easily turn these trust investments into cash," said Sally Yim, a Moody's analyst in Hong Kong.

"These assets also tend to be more volatile. The yield may be higher, but there may also be defaults."

Chinese insurers' assets have doubled in the past five years to 9.6 trillion yuan last month, as premium income climbed an average of 14 percent annually. Squeezed by competition from wealth management products sold by banks and online funds, insurers started offering policies with investment characteristics to compete for money.

"Over the last two or three years, banking product rates have been quite competitive compared with some of the rates offered by the insurers," said Terrence Wong, a director at Fitch in Hong Kong. "So to enhance the yield, they have to seek investment instruments with higher returns."

The CIRC started allowing insurers to invest in wealth management products, collective trusts and asset-management plans in 2012.

By Sept 30 this year, the industry had 28.6 percent of its assets in bank deposits, 40.5 percent in bonds, 10 percent in stocks and funds buying securities, and the rest in other investments, the regulator said.

Trust products delivered an average annual yield of 6.87 percent in the second quarter, according to the China Trust Association, compared with the average 5.92 percent on five-year corporate bonds rated AA- and 3.55 percent for similar government debt.

While there were 24.7 trillion yuan of bonds in China's interbank market as of Sept 30, only 8 percent was held by insurers, with commercial lenders owning 63 percent, Chinabond data showed.