China’s insurers issue profit warnings amid low interest rate environment

PUBLISHED : Sunday, 31 July, 2016, 8:20pm
UPDATED : Sunday, 31 July, 2016, 10:30pm

Several major mainland Chinese insurers issued profit warnings, projecting their first half earnings would slump by more than 40 per cent from a year earlier due to poor investment returns.

China Life Insurance, the nation’s largest insurer, said on Friday its net profit for the first six months of the year may plunge from between 65 per cent to 70 per cent from 31.49 billion yuan posted over the same period in 2015, blaming dismal investment income.

Joining China Life in alerting investors to declining fortunes on Friday were China Reinsurance Group, China’s biggest provider of insurance to insurers, state-owned China Taiping Insurance, as well as China Pacific Insurance headquartered in Shanghai.

“The estimated decrease in the results for the first half of 2016 is mainly attributable to the decrease in investment income and the impact of the update of discount rate assumption of reserves of traditional insurance contracts,” Heng Victor Ja Wei, company secretary with China Life, was quoted as saying in a filing to the Hong Kong stock exchange.

The profit alerts came after the subdued returns of the country’s major insurers’ were further squeezed by lower interest rates in China and volatility in Chinese stocks during a tumultuous period in the mainland financial markets.

Lower [interest] rates mean that the insurers... will see a significant drop in investment yields
Sally Yim, Moody’s senior credit officer

Hong Kong-based China Taiping forecast its net profit for the first half of the year would tumbleby up to 50 per cent from the HK$5.86 billion logged a year ago, attributing the slump to “the relatively higher released gain” from the company’s equity investments during the same period in 2015.

Global credit rating agency Moody’s Investors Services in March revised its outlook for the Chinese life insurance industry to negative from stable, underscoring the key threat of lower interest rates as a result of the central bank’s push to revive economic growth.

“Lower rates mean that the insurers... will see a significant drop in investment yields. We expect the profitability and capitalisation of life insurers to weaken against the backdrop of weaker macroeconomic conditions and falling interest rates,” Moody’s senior credit officer Sally Yim wrote in a note.

China Pacific also warned investors of a possible 45 per cent year-on-year slide in net profits for the first half of 2016, compared with the 11.30 billion yuan in half year earnings it registered in 2015, dragged down by a “significant decrease in investment income”.

On the same day, China Re, a state-owned reinsurer which listed in Hong Kong last October, said it expected to see a 60 per cent fall in half year net profits from the 6.58 billion yuan seen in the same period in 2015, citing essentially the same reason.

“In 2016, bond yields are falling and the equity markets are going south, leading to shrinking investment returns in capital markets and deteriorating profitability of financial firms including the insurers,”said Shao Shuai, a Capital Securities analyst.