Shares of the mainland's two biggest insurers fell yesterday after last week's rally as China Life Insurance posted worse than expected first-quarter earnings, hurt by losses from its investments in the tumbling stock market.
Analysts expect the company's smaller rival, Ping An Insurance (Group), to post an even weaker quarterly profit as it is more exposed to the mainland stock market.
China Life shares lost 4.12 per cent to 32.80 yuan yesterday in Shanghai, and 1.63 per cent to HK$33.25 in Hong Kong. Ping An shed 3.46 per cent to 64.70 yuan in Shanghai and 1.53 per cent to HK$70.70 in Hong Kong.
China Life announced on Sunday a 61 per cent fall in first-quarter profit to 3.47 billion yuan, dragged by a 5.5 billion yuan loss on the fair value of its investment portfolio following a 34 per cent decline in the Shanghai Composite Index during the period.
'The company was previously thought to have locked in some of the unrealised mark-to-market gains,' said Dominic Chan, an analyst from CLSA. 'But its first-quarter earnings are much below market expectation.'
At the end of last year, China Life had about 30 billion yuan of unrealised mark-to-market gain from investments it made during the bull run in the market early last year. Companies could only book unrealised gains as profits after the assets were sold.
JP Morgan estimates that unrealised investment gains represented 75 per cent of total earnings for China Life this year, sufficient to boost the company's headline profits.
'For China Life, lots of the unrealised gains remained unsold in the first quarter,' said Samuel Chen from JP Morgan.
Equity made up about 23 per cent of China Life's investment portfolio last year, compared with 24.7 per cent for Ping An.
Analysts said Ping An would book a larger investment loss in the first quarter than China Life if it did not dispose of part of its investments to unlock the unrealised gains.
JP Morgan estimates that for every 10 per cent drop in the A-share market, earnings would be cut by 5.3 per cent for China Life and 7.9 per cent for Ping An.
Both China Life and Ping An said they would reduce their equity positions this year when corporate earnings were expected to fall.
PICC Property and Casualty, the country's biggest non-life insurer, said it had trimmed its stock holdings from 21 per cent to 12 per cent in the first quarter.
Total investment income for China Life and Ping An soared 135.5 per cent and 68 per cent last year, respectively, when the A-share market almost doubled.
China Life shares fell to close at 32.80 yuan yesterday, a drop of: 4.12%