(Beijing) — China’s financial regulator is sending a strong message to insurance companies investing in stocks: Be a long-term value investor or risk being shut out of the stock market.
Evergrande Life Insurance Co. Ltd. learned the message the hard way.
On Saturday, the China Insurance Regulatory Commission (CIRC) banned it from buying stocks for one year following what the regulator found was “an irregular use of insurance premiums” in stock investing last year.
Evergrande, which ranked the 16th out of the country’s 77 life insurers in terms of the premiums collected last year, said on its website that it will comply with the regulator’s requirements and correct its operations.
The regulator’s move against Evergrande is the latest in a crackdown that began in December against insurers that rely too much on selling short-term, high-return polices to generate income and, in some cases, use the funds to buy listed company shares in controversial deals.
Overreliance on these policies is risky because the funds collected were often used in high-risk investments, or those that take more time to pay off, which creates liquidity mismatch problems that may affect the whole insurance industry, according to the regulator.
From January to November, Evergrande made 2,480 purchases and sales in the stock market, holding the shares on average for 73 days before selling them, the CIRC said in a notice posted on its website.
Some of those transactions, made from late September to early November in particular, were short-term, speculative investments that had led to “grave social consequences,” the notice said.
At least eight companies in addition to Evergrande — including Foresea Life Insurance — have been censured by the CIRC for failing to meeting requirements regarding universal policies. In China, universal insurance policies function more like bank wealth-management products and enable investors to make money over a relatively short period of time.
The regulator also reduced the ceiling on equity investments that Evergrande Life can make in the future from the industry norm of 30% to 20%. The CIRC accused two Evergrande Life executives of being directly responsible for making the investments. One was barred from working in an insurance company for five years, and the other for three years.
The CIRC expected insurance companies to be less likely to chase momentums like retail investors do and could thus help prevent sharp market swings. But Evergrande apparently didn’t meet that expectation, a source close to the regulator said.
The regulator in particular criticized Evergrande for buying low and selling high repeatedly over a short period of time with a number of Shenzhen- and Shanghai-listed companies last year.
In many of those investments, based on Caixin’s examination of related corporate filings with the stock exchanges, Evergrande increased its stake in the listed company to just below 5% of the listed company’s total shares. Above that threshold, more stringent disclosure requirements kick in. Then Evergrande would sell the holdings, which pushed the company’s share price down.
Such investments “reflected badly on insurance companies as stock investors as well as hurt the reputation of Evergrande,” the source close to the regulator said.
The CIRC announced the penalty for Evergrande Life one day after it hit Foresea Life Insurance with a maximum possible fine of 300,000 yuan ($43,700) for “fabricating information” and “misusing insurance funds.” The regulator also removed billionaire Yao Zhenhua, chairman of Foresea and the owner of the insurer’s parent company Baoneng Group, from his chairmanship in Foresea and prohibited him from working in the insurance industry for 10 years.
Foresea declined to comment on the regulator’s determinations. Meanwhile, calls to Yao were not answered.
The regulator started examining insurance companies for risk tied to universal policies in the middle of last year, and launched its crackdown in December based on problems it said it found.
More than 92% of the 56.5 billion yuan that Evergrande Life received from sales last year came from universal policies, according to the CIRC.
Xu Jiayin, also known as Hui Ka Yan, the billionaire who controls Evergrande Life, vowed in an internal meeting in February to reduce that ratio to less than 50%, according to people who attended the meeting. But it is unclear how he plans to achieve that goal.
By Lin Jinbing, Yang Qiaoling and Wang Yuqian