Sunshine chases investment income amid tepid demand for its insurance

The insurer plans to set up a subsidiary that will run a 20 billion yuan fund investing in stocks and fixed-income instruments

Key Takeaways:

• Sunshine’s asset management unit will set up a wholly owned subsidiary that will run an investment fund using 20 billion yuan from the company’s life insurance business
• The move will allow the insurer to gain from movements in financial markets without directly exposing it to short-term volatility or bringing additional capital charges

By Warren Yang

Sunshine Insurance Group Co. Ltd. (6963.HK) is building a shelter in financial markets to prop up its fortunes as a cloudy economy rains on its core insurance business in China.

Last Friday, the insurer said its asset management unit will set up a wholly owned subsidiary that will run a 20 billion yuan ($2.8 billion) fund using money from Sunshine’s life insurance business. The 10-year fund will buy stocks of Chinese companies listed in Hong Kong, Shanghai and Shenzhen, as well as fixed-income instruments. The new subsidiary will earn management and other fees from and distribute returns to Sunshine Life.

The move gives Sunshine a new channel for indirect exposure to financial markets, in addition to direct investments in stocks and bonds it already makes. Although this setup may just look like a scheme to exchange money among Sunshine’s own entities, it can offer some practical benefits for the company. For one, by creating an investment vehicle this way, Sunshine won’t have to take capital charges on its own balance sheet for risky assets like stocks held by the fund. This is critical as regulators are imposing increasingly stringent capital requirements on insurers.

The move also eliminates the need for Sunshine to incorporate changes in the values of the fund’s investments directly into its own net profit, which can lead to painful paper-based losses during a down market. It “is conducive to reducing the impact of fluctuations in the market value of equity assets on the net profit of the company, and improving the ability of the company to invest in the capital market,” Sunshine said in its disclosure.

Insurers invest premiums they collect from their policyholders to generate returns as one of their major revenue sources. Such income is particularly crucial for Sunshine right now as margins on its insurance underwriting aren’t that great. The company’s insurance revenue increased a little less than 7% last year to 64 billion yuan. But associated expenses erased more than 90% of that sum. And that’s before accounting for other costs like fees the company paid to reinsurers. By comparison, its investment income, including paper gains and losses on assets, jumped more than 145% to 13 billion yuan.

Now, as China’s frail economy makes consumers and businesses cautious about spending on non-essential items, it’s becoming even more difficult for insurers like Sunshine to grow profits from their core insurance business. This makes investment income all the more important, even though such a revenue source is inevitably volatile.

To boost returns, the company would want to buy more high-risk assets. But that creates a dilemma, since doing that would raise its capital requirements and could also result in losses. By using an off-balance sheet fund, Sunshine can avoid increased capital requirements and short-term paper losses created by volatility in financial markets, though any disposal of investments at a loss would ultimately hit the company.

Insurers also have to worry about matching the durations of their investments and liabilities with their customers’ requirements for funds. In an extreme case, for example, if an insurer has more money locked in long-term investments than what it needs to service its policyholders, it wouldn’t be able to honor its obligations.

Tricky investment strategies

All that means devising investment strategies for insurers can be quite tricky. Sunshine’s investment portfolio is heavily focused on fixed income assets, which are typically safer than stocks. Such instruments accounted for more than 70% of its investment assets at the end of last year. A large proportion of them were government bonds, considered one of the safest assets, and most of the corporate bonds it invests in also have high credit ratings, suggesting the company is relatively conservative in its risk-taking.

By establishing a separate entity solely dedicated to operating an investment fund, Sunshine can have more leeway to dabble in risky assets that it might otherwise avoid. The 20 billion yuan the company plans to commit to the fund is not a huge amount for Sunshine. But it’s not peanuts either, considering the company had 12 billion yuan in cash and cash equivalents at the end of 2024. Sunshine will provide capital for the fund in installments.

Unless the new subsidiary makes a loss, it can contribute to Sunshine’s bottom line by returning any profits it makes to the company. But this plan also hints at limited opportunities for insurers to expand their real-world businesses. At the end of the day, the earmarked 20 billion yuan is large enough to fund a sizable acquisition or other initiatives that could lead to meaningful growth for Sunshine’s insurance and other businesses.

Sunshine actually made an acquisition recently, but that effort may have left many scratching their heads. Last November, it agreed to buy about 40% of JC International Finance & Leasing Co. Ltd., which leases equipment and other assets to small businesses in areas like manufacturing and energy conservation, for about 1.3 billion yuan.

From a business diversification perspective, that deal made sense. But the target company was barely profitable, and it’s not clear if Sunshine’s can change that for the better. So, whether the investment is really worthwhile is questionable, and the move also suggests that attractive acquisition targets are rare these days.

Sunshine shares have lost more than 40% of their value since the company’s IPO in 2022. They currently trade at a trailing price-to-earnings (P/E) ratio of 6.5 and a price-to-sales (P/S) ratio of 0.47. The P/S is in line with the 0.5 for online insurer ZhongAn (6060.HK), which, however, commands a much loftier P/E ratio of 28. Among related companies, insurance distributor Yuanbao (YB.US), which went public this month in New York, trades at a lofty P/E ratio of 67 and P/S of 8.9. That could reflect investor preference for companies like Yuanbao that provide services for actual policy underwriters like Sunshine and ZhongAn.

Sunshine shares have fallen further since its investment fund announcement, indicating investors weren’t impressed with the plan. For the company to shine among insurance companies in the current gloomy Chinese economy, it will need to spark better growth. Its latest move may provide some fuel for that, but it looks more like an admission that its core insurance business isn’t going anywhere fast.

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