The life units of China's half-dozen listed insurers all have healthy solvency ratios, but many of their smaller rivals face much less rosy prospects, according to regulatory data compiled by S&P Global Market Intelligence.

The smaller insurers are likely to remain pressured as they contend with stock market volatility and struggle to reorient their business models to comply with strict new regulation, industry analysts said.

The six listed companies, which are all state-backed except for Ping An Insurance (Group) Co. of China Ltd., prefer to maintain their comprehensive solvency ratios above 200%, because they need to be self-financed rather than waiting for shareholders to inject capital, said Tian Dan, senior associate in the research department of China International Capital Corp. in Shanghai. Data submitted by insurers under the China Risk-Oriented Solvency System, or C-ROSS, indicates that the six did just that as of year-end 2017, when they reported ratios between 219% and 282%.

The ratio measures capital as a percentage of the minimum an insurer is required to hold, so a 100% ratio indicates that a company has exactly enough.

The listed Chinese insurers' business models are well-suited for the C-ROSS regime, Tian noted, because they primarily sell long-term policies that carry high new business value and consume very little capital, while the bulk of their investments are in low-risk fixed-income assets, also favorable to solvency ratios under C-ROSS rules.

As of the end of 2017, the six insurance companies had allocated between 65% and 82% of their investments to such assets. Although some insurers have begun holding more alternative assets in pursuit of higher yields, they remain a small portion of overall portfolios, with a marginal impact on solvency.

By contrast, some owners of smaller, privately held life insurers tend to have higher risk appetites and are more willing to tolerate solvency ratios of between 100% and 150%. Among other measures, they can choose to inject capital to quickly boost solvency levels, said Lu Yunting, an analyst at TF Securities in Shanghai.

Shifting business models

But Chinese regulators have been keen to push insurers away from a once-popular business model that revolved around selling short-term policies that were more akin to wealth management products than to bona fide life insurance. Many insurers, particularly smaller ones, used the assets gathered through sales of such products to play the stock markets.

In late 2016, however, China's insurance regulator told companies to curb their sales of wealth management-type products as it sought to slow the rate of acquisitions by insurers both at home and abroad. Whereas larger insurers have been able to make the necessary adjustments rather quickly and had less to do to start with, Lu said smaller insurers need longer to adapt.

"Protection-type products are harder to sell and rely more on individual sales agents," Lu said. "Small and midsized life insurers usually don't have strong agent sales forces, and it takes time for them to build up their own."

Smaller insurers also tend to have a higher proportion of their investment portfolios in the stock market, raising capital consumption, Tian noted.

Fourteen of the 77 life insurers to have reported 2017-end solvency figures had ratios between 100% and 150%; falling below 120% is seen as particularly risky, Lu said.

Smaller insurers that have pivoted to focus on the sales of long-term policies and allocating more assets to fixed income have seen benefits to their solvency ratios. For example, Qian Hai Life Insurance Co. Ltd., or Foresea Life, once an acquisitive insurer active in China's stock markets, saw a 30-percentage-point jump in its comprehensive solvency ratio in the 2017 fourth quarter from the prior year.

Other companies saw improvement following capital injections by shareholders, such as at Happy Life Insurance Co. Ltd., where an injection of shareholder cash in March 2017 added more than 70 points to the solvency ratio.

But if a company needs capital and finds it not forthcoming, it can land in a difficult position. Two insurers — Shin Kong-HNA Life Insurance Co. Ltd. and Sino French Life Insurance Co. Ltd. — recorded negative comprehensive ratios as of the end of 2017, as their admitted liabilities exceeded admitted assets. Both companies have stopped selling new insurance policies and said in their annual reports that they are looking for capital injections from shareholders.

Click here for a template that features dynamic graphical information of key financial metrics, distribution channels, investment ratios, solvency and market data. Click here for a webinar about analyzing financials at Asia-Pacific insurance insurers.