China’s 3 trillion yuan ($440 billion) insurance industry was largely insulated from the U.S. subprime crisis that battered AIG and other foreign firms, but the fallout poses the toughest challenge in a decade as profits tumble and demand for insurance products slumps.
China’s cautious regulators reined in the overseas adventures of aggressive insurers, limiting direct damage from the global financial meltdown largely to Ping An Insurance’s 15.7 billion yuan ($2.43 billion) loss on its investment in Dutch-Belgian financial group Fortis.
But as the financial turmoil spawns a global recession that has sent stock markets sliding and chilled China’s red-hot economy, insurers are facing shrinking investment returns and slowing or even negative growth in premiums.
For industry giants China Life Insurance Co., the world’s largest insurer by market capitalization, and Ping An, the second-largest, this means tumbling profits and share prices.
Smaller players, however, face graver dangers that have prompted even stricter government supervision. “The risks in the insurance industry have just begun emerging,” said Xiao Chaohu, analyst at Everbright Securities Co. “Small insurers may face liquidity problems if premium incomes keep falling while redemptions and claims rise.”
China’s insurance sector has more than 100 foreign and domestic players, although more than half of the market is controlled by China Life and Ping An. About one-10th of insurers cannot meet capital adequacy standards required by regulators, Xiao said.
INDIRECT IMPACT
The official Shanghai Securities News reported on Friday that China’s insurance regulators had stepped up their monitoring of life insurers’ liquidity conditions, concerned that falling asset prices and rising redemptions could hurt their cash flow.
“In the long term, China’s insurance industry will mainly suffer from the indirect impact of the financial crisis,” China Life President Wan Feng said in an e-mailed comment to Reuters.
“If the economy slides into a deep, prolonged recession and capital markets remain sluggish, insurers’ investment returns will fall sharply … and demand for insurance products will weaken,” Wan said.
China Life’s Hong Kong-listed shares are down nearly 50 percent since the start of the year, in line with the benchmark Hang Seng Index. Ping An, punished by investors for its overseas setbacks, has fallen by nearly two-thirds.
Ping An posted a $1.15 billion third-quarter loss due to its failed investment in Fortis, but analysts said it could well have found its survival under threat, if it had proceeded with a $17 billion fund-raising plan to finance overseas acquisitions. The plan was approved by shareholders in March but shelved by regulators.
Even without drama on the scale of AIG’s $150 billion-plus government bailout, China’s insurance sector is feeling the pain.
With the mainland’s benchmark Shanghai Composite Index down nearly 70 percent from its record peak in October 2007, most of the investment returns insurers earned in the stock market’s bull run of the previous two years have been wiped out.
China Life posted a 70 percent drop in third-quarter profit from a year earlier due largely to the stock market slump.
In the years ahead, insurers’ returns from the bond market also will be under threat from aggressive monetary easing as China moves to revive its slowing economy. Unlike other insurers across the world, much of the income earned by China’s insurance companies comes through investments in public securities.
“The negative impact from the stock market is almost over,” Yang Jianhai, analyst at Essence Securities, said in a report earlier this month. “However, insurers are just starting to feel the pain from falling interest rates.”
China’s central bank last week announced its fourth interest rate cut since mid-September, slashing one-year lending and deposit rates by a full 1.08 percentage point.
Yields of bonds, which typically account for 60 percent of Chinese insurers’ portfolios, have slumped. The 15-year government bond yield dropped as low as 3.2627 percent this month from a peak of 4.8562 percent in August.
Yang expects the industry’s investment returns to drop to as low as 3 percent in the coming years from above 5 percent in mid-2008, threatening margins.
The current investment environment resembles a crisis Chinese insurers faced in the late 1990s, when an interest rate-cut cycle combined with high-yielding insurance policies saddled them with huge losses and forced some to seek government bailouts.
Falling returns have also hit investment-linked products, which put a portion of customers’ insurance premiums into the capital markets and were sold aggressively during the stock market’s bull run.
Now insurers are besieged by customer complaints and rising redemptions, and growth in premiums has suffered.
China Pacific Insurance Group, the third-largest insurer, said its October premium income fell 7.62 percent from a year earlier, its first monthly decline this year.
($1=6.853 Yuan)
(Editing by Edmund Klamann & Kim Coghill)
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