China’s top insurers face difficult 2016 as stock-market volatility challenges investment environment

China Taiping and China Life may have tough time replicating 2015 results

PUBLISHED : Wednesday, 30 March, 2016, 2:35pm
UPDATED : Wednesday, 30 March, 2016, 2:37pm

China’s two leading insurers by assets, China Taiping and China Life can expect a difficult 2016 because the volatility in China stocks will reduce their investment income, analysts said.

That’s regardless of a sound 2015 that brought “buy” ratings from investment banks.

Analysts said they were cautious about investment returns due to the high volatility of China’s stock markets that saw the benchmark Shanghai Composite Index close at 3,296.66 points on January 4 and then plunge to 2,657.19 on January 28. It traded at 2,976.20 as of 1.56 p.m. in Hong Kong.

China state-owned life insurer China Taiping Insurance reported its 2015 result and said the value of new business (VNB) rose 39.1 per cent year on year to HK$ 6.02 billion, driven by margin improvement in the second half year of 2015. Net profit rose an annual 56.9 per cent to HK$ 6.34 billion. That was below consensus despite the first-half investment boost.

Total investment return of China Taiping was at 7.97 per cent last year, the highest in eight years due to increased alternative investments, Jennifer Law, the director and Asia ex-Japan insurance equity research at Bank of China International Research said in a report

“The insurer has seen strong investment income growth of 59.5 per cent year-on-year in 2015 thanks to HK$8.58 billion in realised gains from investment in equity securities,” she said in a report.

In the first six months of 2015, the Shanghai Composite Index added 32.23 per cent, peaking on June at 5,106 points.

BOCI maintained its ‘hold’ rating for China Taiping but said it is cautious because of the challenging investment environment this year.

“We note that the company has continued to move towards shorter-term regular premium products both at the agency channel and the bancassurance channel,” Law said. “As such, we remain skeptical on the sustainability of its VNB margin expansion.”

The company’s life insurance team grew 73.3 per cent year-on-year to 231,766 people in 2015 and Law said it may be problematic for the company to maintain low staff turnover and VNB growth.

China Merchant Securities (HK) kept its ‘buy’ rate of China Taiping, citing an attractive valuation. Still, analyst Jerry Li said the company’s overall business qualities need to be further improved.

Beijing-based insurer China Life said its net income climbed 7.7 per cent to 34.7 billion yuan in 2015 from 32.2 billion yuan a year earlier. The rise was mainly due to higher investment returns from the rally in Chinese stocks in the first half of last year.

China International Capital Corporation reiterated a ‘hold’ rating for China Life and slightly raised an H-share target price to HK$ 22 and an A-share target price to 25 yuan.

CICC analyst Bolun Tang said there are potential risks of China Life.

“Aggressive sales of long-term annuity products with a 4 per cent guarantee rate and investors cutting assumptions for investment returns to write off disclosed embedded value are both downside risks for China Life,” Tang said in a report.

BOC International analyst Wei Tao said premiums and VNB growth of China Life are expected to be guaranteed by a strengthening sales force.

Wei said in a report that a promise by China Life to improve long-term asset allocation and diversify products will help to achieve stable growth.

Dominic Chan, head of Asia-Pacific insurance research at BNP Paribas raised his target price for China Life to HK$ 39.63 and gave a ‘buy’ rating for the firm, citing currently low interest rates that may help trigger a better product mix.