Chinese insurers could see better prospects after first-half squeeze

PUBLISHED : Monday, 18 August, 2014, 1:56pm
UPDATED : Monday, 18 August, 2014, 1:56pm

Stagnant premium business is expected to have hindered the first-half performance of China's leading insurers, but they may see better prospects following the State Council’s pledges to accelerate the sector’s development.

The lack of a new growth engine in premium business had stemmed insurers’ earnings growth in the first half, Phillip Securities analyst Chen Xingyu said.

China Life Insurance and PICC Property & Casualty, the largest players in the life and non-life insurance segments respectively, faced the biggest pressure in profitability in premium business in their pursuit of volume to maintain their leading positions, he said.

Citi Research has forecast China Life’s first-half earnings will drop 12 per cent to 14.3 billion yuan (HK$18 billion), while Shenyin Wanguo Securities expects the insurer’s earnings to grow 0.72 per cent to 16.32 billion yuan.

China Life said its accumulated premium income for the first six months was 196.9 billion yuan, down 2.8 per cent from the same period last year.

Ping An Insurance, the second-largest insurer, is set to release its first-half results on Tuesday. Profit growth is expected to be 26 per cent, according to the average of three brokerages’ estimates.

Although China’s property and casualty insurers saw decent premium growth in the first half, shrinking underlying profit caused by increased competition and higher claims costs due to inflation continued to hinder profitability, UBS analysts said.

The brokerage forecast negative earnings growth for PICC, and for its combined ratio to be one to 1.5 percentage points better than the industry average of 97 to 98 per cent. A combined ratio of less than 100 per cent indicates an insurer is receiving more in premiums than it is paying out in claims.

Chen said Chinese insurers were likely to break through their premium business bottlenecks following the State Council’s pledge of support.

Insurers will have more room or buffer to expand into new insurance segments if bolstered by better investment income
Chen Xingyu, Phillip Securities analyst

The cabinet outlined measures on Wednesday designed to support the industry, setting a target to have insurance premiums account for 5 per cent of the country’s gross domestic product by 2020. It also vowed to support a variety of market segments including pension, health, rural and catastrophe insurance.

Haitong Securities analyst Ding Wentao said annual premium growth could reach 17 per cent in the coming six to seven years, improving from the single-digit average of the past three years.

Ding said the State Council’s announcement was meant to provide an outline and principles for the industry, while detailed rules on particular segments were expected to be released soon. Pension insurance would be one focus that would allow Chinese insurers to expand their scope, he added.

Chen said reforms of the investment channels available to insurers would also be needed to boost returns. “Insurers will have more room or buffer to expand into new insurance segments if bolstered by better investment income,” he said.