Mainland insurance companies due for a health check
It has been a good couple of months for the stocks of Chinese insurance companies listed in Hong Kong.
Not only have they been buoyed by the rising tide of international investment in China which has lifted the H-share index by 22 per cent since the beginning of November. The two big life insurance firms, China Life Insurance and Ping An Insurance (Group), have also benefited from a new assessment of Chinese mortality rates showing greater longevity, which allows them to set aside less cash as reserves and to be more flexible on pricing.
As a result, shares in both companies have risen by more than 30 per cent since the end of October to touch record highs this week. General insurance firms have risen too. Shares in PICC Property and Casualty are up by 43 per cent over the same period.
Selling insurance in China should be a lucrative business in the long run. With its low penetration rate, fast expanding middle class - who typically save about 40 per cent of their income - and inadequate state welfare provision, China's demand for insurance-related financial products is only going to increase.
But sales growth has slowed from the heady rates of a few years ago, and competition is intensifying as the market place gets more and more crowded.
Last year, according to the China Insurance Regulatory Commission, life insurance premiums collected in the mainland rose by about 14 per cent. The figure is flattered, however, by a single 20 billion yuan deal signed in January by Italian insurer Generali to provide life cover for 390,000 employees of its joint-venture partner, China National Petroleum Corp. Stripping that out leaves a growth rate of just 7 per cent last year, well down from the 39 per cent growth the sector enjoyed three years ago.
Meanwhile, as the Generali deal shows, the presence of foreign insurance companies has ballooned, especially since the latest market-opening measures came into force at the end of 2004.
There are now 22 foreign-backed joint ventures selling life insurance in competition with Ping An and China Life, and although their scale remains small, they are fast grabbing business. Last year the premium income of foreign joint ventures leapt by almost 80 per cent, boosting their market share to 9 per cent from about 2 per cent in 2004.
Life for the Chinese insurers is further complicated by the difficulties they face generating healthy returns on their investments. Although insurance companies have recently been allowed more leeway to invest in corporate bonds, A shares and foreign assets, the majority of their investible funds remain parked in bank deposits and government bonds, which are now yielding less than 3 per cent annually.
Equity investment remains exceptional. According to Morgan Stanley, China Life has only 5 per cent of its assets invested in equities, either through mutual funds or through direct purchases on the domestic A-share market, while Ping An has just 4 per cent. As a result, neither company has benefited much from the recovery in A-share prices after last year's market restructuring initiative.
Greater freedom to invest abroad is not helping either. Foreign investment income is liable to tax and is threatened by the prospect of yuan appreciation. According to Morgan Stanley's calculation, foreign assets would have to generate a gross return of 8.5 per cent, before they appear more attractive than tax-exempt government bonds. Naturally enough, the insurance companies' asset managers are playing it safe.
This all means that the shares of Chinese insurers are looking richly priced after their recent run-up.
At more than 20 times estimated forward earnings, China Life, Ping An and PICC are all trading at a hefty premium to the H-share index, which is now priced at about 12 times forward earnings. It may be time for a retrenchment.