Across The Border
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Rising new business levels put insurers on solid ground

Undaunted by slew of profit warnings, analysts happy sector still has considerable room to grow as industry penetration rates remain low

PUBLISHED : Wednesday, 03 August, 2016, 5:52pm
UPDATED : Wednesday, 03 August, 2016, 10:39pm

Analysts remain upbeat that sufficient growth potential still exists in China’s insurance sector, despite a recent spate of hefty profit warnings by leading companies.

Practically sector-wide, firms reported they had been hit hard by falling investment returns and bond yields, as a result of fluctuating global and Chinese share prices over the past year.

The most dramatic alert came from China Life, China’s largest life insurer, which revealed a likely 65-70 per cent decline in net profit for the first half of 2016.

China Pacific Insurance said it expected first-half net profit to decline by 46 per cent year on year, while New China Life Insurance and Taiping Insurance both expected declines of more than 45 per cent.

Regardless of the red lights, however, Leon Qi, an analyst with Daiwa Capital Market said most “were positive surprises to us”, and that he is still rating the sector overall as “positive”.

“The market saw this coming, due to the substantial A-share correction in the first quarter … also the listed insurers we favour saw better bottom-line trends than the sector as a whole.

“Most have already achieved 40 per cent of their 2016 net profit estimate, based on a Bloomberg consensus,” he said.

China Insurance Regulatory Commission (CIRC) said last week that industry profits fell 54.05 per cent in the first half of the year to 105.6 billion yuan, but added that the sector saw a 37.29 per cent rise in premium income year on year.

The market saw this coming, due to the substantial A-share correction in the first quarter … also the listed insurers we favour saw better bottom-line trends than the sector as a whole
Leon Qi, an analyst with Daiwa Capital Market

The figures show property insurers saw profits fall 43.39 per cent to 33.7 billion yuan, life companies suffered a 65.6 per cent collapse to 54.2 billion yuan, while reinsurers saw theirs drop 58.8 per cent to 4.4 billion yuan.

“Based on that data, we believe New China Life Insurance’s estimated profit significantly exceeded the sector’s performance,” Qi wrote in a note on Monday.

“China Pacific and Taiping should have fared better, while China Life, unfortunately saw a worse-than-sector deterioration in its profit.

He also expects PICC P&C, and PICC Group to do well for the first half, regardless of their respective likely 35 per cent and 40 per cent declines in net profit, and is expecting Ping An’s first half bottom line to decline by 10 per cent.

Last year, strong equity investment returns were largely credited with boosting industry earnings as mainland firms benefited from the bull run on China’s A-share market, managing to lock in most of their gains before the market crashed in mid June.

This year, however, the benchmark Shanghai Composite Index has declined by more than 16 per cent, making A-shares the worst performing market globally.

At the same time, 750-day average yields for 10 years bond dropped by 11-12 basis points in the first half, compared to a 5 bps increase in same period last year.

Baron Nie, an analyst with Jefferies, said the key reasons behind China Life’s especially sharp drop were falls in the company’s “investment income and traditional business reserves”, and noted it remains “overweight” on the life insurance sector in general.

“It is not surprising to see significant declines in accounting profits for life insurers in the first half,” said Nie. “Earnings have been highly volatile under current accounting standards due to investment volatility and reserve estimates.

“As a result, net profit should be more accurately considered over a period of time, and volatility over a shorter time frame should be treated with care.”

In an earlier note, Nie had estimated that life company new business values had grown by 20 to 80 per cent in the first half year on year, adding he was expecting small declines in underwriting margins within property and accident insurance businesses.

Analysts, including Qi with Daiwa, still think the Chinese insurers have considerable room to grow their new business levels as the penetration rate of the industry in China remains much lower than in developed countries.

But they also caution it will remain a challenge for firms to maintain high investment returns.

In an aggressive move to shrug off profitability pressures brought about by falling interest rates, some unlisted insurance companies have been ploughing more investment into longer-term equities, creating the potential risk of a mismatch between assets and liabilities.

A high-profile recent example was Foresea Life, the little-known life insurer owned by conglomerate Baoneng Group. It has been instrumental in helping its parent built up a 25.4 per cent stake in leading property developer China Vanke, which has now led to an acrimonious takeover battle for the housebuilder.

Analysts say the riskier investment strategy is unlikely to be adopted by listed peers, after the CIRC recently voiced its strong objection to the influence Foresea was playing in the Vanke situation.

Xiang Junbo, chairman of the China Insurance Regulatory Commission, said in Beijing late last month that China would not allow conglomerates to use their insurance arms as financing platforms.

He said some insurance companies had been using low-cost financing tools to carry out “high-risk methods” to expand immediately, which was against the principles of the insurance business.

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