Fat years over for mainland insurers

Shares of mainland insurance companies have enjoyed a blistering run-up over the past two years. Now there are signs the fat times may be at an end.

Few investments performed as strongly during the great Chinese bull market of 2006 and 2007 as the stocks of mainland insurers. Between 2006 and October last year, the Hong Kong-listed H shares of the mainland's largest life insurer, China Life, rose an astonishing 690 per cent.

Second-ranked life insurer Ping An did even better. Its shares climbed 750 per cent. Over the same period, the H-share index managed only a relatively paltry 277 per cent rise.

The performance of the insurers' mainland-listed A shares was equally impressive. China Life listed in Shanghai only in early January last year, but by late October had risen 298 per cent. Ping An shares made their mainland debut in late February. Over the next eight months, they had leapt 329 per cent.

It is easy enough to understand the attraction that life insurers' shares held for both domestic and international investors. China Life and Ping An have been regarded as a direct leveraged play on the development of the country's financial services industry.

With life insurance penetration rates in China just a fraction of those in developed markets and demand for savings products running high, mainland insurance companies have enjoyed stellar sales growth in recent years. Across the life insurance industry, premium income rose 25 per cent last year, easily outstripping overall economic growth.

On top of that, appetite for life insurers' shares was also sharpened by the surge in mainland stock markets. For international investors with restricted access to the A-share markets, the Hong Kong-listed stocks of big institutional investors such as China Life and Ping An represented a handy way to get exposure to the onshore equity market.

Their strategy proved brilliantly effective. Last year, Chinese insurance companies earned returns of 279 billion yuan on investments of 2.7 trillion yuan, even though they were only allowed to allocate 10 per cent of their assets to equity markets.

In the last few months, however, that happy position has reversed. Since October, Shanghai A-share prices have slumped 20 per cent, helping to hammer insurers' H shares. China Life stock has fallen 36 per cent and Ping An 40 per cent (see charts).

The rout could get worse. Last week, Wu Dingfu, head of the China Insurance Regulatory Commission, warned that if the broad market sell-off continued, massive redemptions could hit insurers with liquidity problems. 'It's too horrifying to think about,' he said.

Not for everyone; insurers are typically priced by their 'embedded value', a measure that attempts to assess the value of future premium income from policies an insurer has already sold. A price-to-embedded-value ratio of more than two is usually regarded as expensive. According to analysts at Credit Suisse, both China Life and Ping An are dangerously over-priced at more than four times embedded value for this year.

With competition set to intensify this year as banks move into the Chinese insurance business and investment income evaporating as mainland markets roll over, the H-share prices of both China Life and Ping An are looking precarious, even after their recent falls.