Some Chinese insurers face ‘material’ profit risk from property exposure: Moody’s

Some insurers have exposure in excess of 15 per cent of shareholders’ equity, report says

Reading Time:2 minutes

An aerial photo taken on June 5, 2024, shows a housing complex by Chinese property developer Fantasia Holdings Group in Tianjin. Photo: AFP

Published: 6:30pm, 17 Jun 2024

A protracted downturn in China’s property market could hurt the profitability of the country’s insurers, who are exposed to the sector through commercial real estate and may lack sufficient provisions to cover potential losses, according to analysts.

While the size of the insurers’ property investments are “generally moderate” relative to their asset bases, some insurers have exposure in excess of 15 per cent of shareholders’ equity, according to a report published on Monday by Moody’s Ratings. For these groups, the impact of losses from property investments on their profitability and capital could be “material”, the report said.

New home prices in China fell by 0.7 per cent month on month in May, the steepest drop in almost 10 years, according to official data.

Alternative investments pose the greatest potential challenge for insurers, the report said. These investments include debt-investment schemes, asset-management products and trust plans that use commercial properties as underlying assets.

“The exact amounts of exposure to property developers through alternative investments are hard to gauge because of limited public disclosure and complicated transaction structures,” Moody’s analysts said.

“For example, certain trust plans or asset-management products may invest in a diversified portfolio of financial assets,” the report said. “A subset of these assets could subsequently invest in debt instruments or equities issued by property developers, thus creating a layer of indirect exposure to the property sector.”