October 20, 2014 / 1:02 AM / 3 years ago

Fitch: New Rule to Curb Chinese Insurers' Exposure to Trust Products

(The following statement was released by the rating agency) HONG KONG, October 19 (Fitch) Fitch Ratings welcomes the Chinese Insurance Regulatory Commission's (CIRC) decision to impose a stricter solvency rule on insurers' investment in trust products. This would slow the rapid growth in Chinese insurers' assets invested in trust schemes, which are not as liquid or as transparent as conventional corporate debt. The new rule also highlights the regulator's growing concern about the insurers' ability to manage the risks embedded within this asset category. According to the statistics published by CIRC on 14 October 2014, total investments in trust products by 78 insurers came to CNY280.5bn at end-1H14, up 94.5% from end-2013. However, the size of the investment in these products remained modest at about 3% of the insurers' total assets at end-1H14. Although the risk exposure to trust schemes remains tolerable for Chinese insurance sector as a whole, Fitch believes the new rule could strain the solvency margins of high-growth insurers, especially those with material exposure to trust products. These insurers would likely need to reduce their exposure to this asset class. The risk profiles of trust products are more complex: they are highly dependent on the structure of the trust schemes, the quality of the underlying assets, and the credit strength of the guarantors. The investment horizon for trust schemes range from five to 10 years, making them generally less liquid than corporate debt. CIRC statistics showed that 53% of the trust schemes that the insurers are invested in have duration of five years or more. Insurers who invest in trust products also face concentration risk because a large portion of trust schemes are exposed to the real estate sector. CIRC statistics showed that about 33.1% of the trust schemes were connected to the real estate sector and 17.5% were tied to infrastructure-related projects as at end-1H14. Chinese life insurers have been increasing their allocations to trust products and other higher-yielding assets to raise their investment returns for participating or universal life insurance policies, which they launched in response to tougher competition from banking products following the liberalisation of Chinese investment regulations in 2012. CIRC started to tighten the admissible asset value of trust products in the calculation of insurers' solvency margin in late September. It reduced the proportion of admissible asset value for trust products by 5pp. For example, the admissible value of trust schemes with 'AAA' credit rating (on a national scale) will be reduced to 90% from 95% while that of products with 'AA' rating will be lowered to 85% from 90%. Trust schemes with credit ratings below 'A' will be recognised as non-admissible assets in the solvency capital computation. Contacts: Terrence Wong Director +852 2263 9920 Fitch (Hong Kong) Limited 28 Floor, Tower Two, Lippo Centre 89 Queensway, Hong Kong Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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