The logo of PICC, one of the biggest insurance companies in China, and which lender Credit Suisse believes have strong margins that are sustainable. Photo: Reuters
Rising stock market prices are boosting mainland insurers’ investment income and they also stand to benefit from higher sales agent productivity.
But at the same time they are facing higher risks on their bond investments and policies’ guaranteed returns.
“We believe that the risk profile of Chinese insurers has increased over the past few years, especially since 2010, and will continue to do so,” Credit Suisse analyst Arjan van Veen said in a report.
“Despite a reduction in equity market exposure, we have seen a significant increase in asset risks, with a material rise in corporate bonds and more recently debt schemes, trust investments and wealth management products, as insurers chase higher yields while investment asset class restrictions are lifted.”
Van Veen said insurers were facing higher liability risks because they had offered higher guarantees and higher-return products in life insurance policies sold to customers after Beijing gradually relaxed its regulations and gave insurers more freedom to set policies’ guaranteed returns.
“We expect total deregulation of the maximum guarantee rate within the next year or two [given a State Council directive to deregulate],” he said. “Whilst the insurers reacted to the traditional product maximum guarantee increase [from 2.5 per cent to 3.5 per cent], we have of late seen higher guarantees become mainstream. We expect this to continue on full liberalisation.”
Van Veen examined the key risk profiles of listed mainland insurers and said PICC P&C and China Pacific had the lowest risk profiles, followed by China Life.
He said many mainland insurers were enjoying higher returns from their A-share investments due to the market rallies in Shanghai and Shenzhen.
Meanwhile, improved agency productivity, rather than an increase in the number of agents, would be the driving force behind business growth for mainland insurers.
“We view the number of agents in China as reasonably close to saturation point in the more developed urban areas; therefore, we see future growth being more driven by productivity and margin enhancement,” he said.
“Average productivity levels in China remain just a fraction of those in more developed Asian markets. As such, we see significant room for improvement as average wages rise and agency workforces slowly become more professional.”
Among all insurers, China Taiping had seen the strongest growth in agency productivity, followed by New China Life and China Pacific, while China Life’s was still relatively low.
Van Veen said large insurers such as PICC, Ping An and China Pacific had strong margins that would be sustainable due to significant advantages of scale.
He has increased the target price for PICC P&C to HK$21.5, from HK$21, and upgraded China Pacific’s target price to HK$55, from HK$51.
“As such, we believe that downside earnings protection exists [at around a 15 per cent return on equity], as the smaller insurers would be unprofitable at around these levels,” he said in the report.
“Longer term, we believe key features of the deregulation proposals are positive for the industry with the regulator taking a pragmatic approach to implementation.”
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