China’s Biggest Insurance Companies Are Taking On Massive Gambles to Boost Performance

File this one under idiotic.

Typically, insurance companies rip people off through high premium and then take those premiums to buy stocks and bonds. But because stocks have been sucking wind and the low interest rate environment has been something of a bad experience for cash flow needing insurance giants, they’ve taken to ‘alternative investments’ to make up the difference.

What these shady, non-traditional invests are, is anyone’s guess. I imagine they’d make wise decisions and perhaps invest in some comic books or maybe some Honus Wagner tobacco cards.

A Reuters survey of the accounts of the top five listed insurers including Ping An Insurance Group Co (601318.SS) and New China Life Insurance (601336.SS) showed their holding of assets other than shares, bonds and cash had more than quadrupled in five years to 984 billion yuan ($150 billion).

These alternative investments – which include opaque, risky shadow banking-linked assets such as trust schemes and wealth management products (WMP) – account for roughly 16 percent of the top five’s total assets, up from 5 percent in 2011, the second-largest asset class after fixed-income products, the survey showed.

Analysts say the bulk of these investments including WMPs and the negotiable certificates of deposit, created by banks, are channeled to debt-laden state-owned and private firms at rising risk of default.

The insurers’ investments in these assets comes at a time when banks’ non-performing loans are already at an 11-year-high of nearly 2 percent, according to official figures, and many analysts believe the situation is much worse, as some banks are slow to recognize problem loans or park them off balance sheet.

Assets such as project asset-backed plans, trust schemes and WMPs are also difficult to turn into cash in a downturn since they lack a secondary market and have long investment horizons.

“The growing investment in risky, higher-return assets is the Titanic, and when it goes down it will take more than one lifeboat,” said Thomas Monaco, portfolio manager for Chinese equity at Hong Kong-based Nighthawk Capital.

“The real problem for insurance companies is that the overall investment yields are coming down in China, so they are going out of the credit risk curve. They are going for higher interest rate bets, and a lot of them could go bad.”

The top five Chinese insurers did not respond to requests for comment.

Edmond Law, insurance sector analyst at UOB Kay Hian (Hong Kong), said while investments in government bonds would return about 3 percent, some WMPs offered 4-5 percent, along with “very high risk”.

New China Life Insurance posted a more than fivefold jump in investment in products such as unlisted equity investments, trust products and WMPs last year compared with 2014.

In contrast, its investment in term deposits fell 23.7 percent, and stocks dropped nearly 2 percent, according to its latest annual report. It posted a 34.3 percent rise in 2015 profit, mainly thanks to income on investments.

New China Life said in the report, however, that since early 2015 it had “drastically tightened its risk appetite for non-standard assets” and regularly assessed and stress-tested their exposure.

Powder keg.