1、Insurance 10 March 2010 Life Insurers China Special Report Chinese Life Insurers Growth Story Remains Intact Sumary Fitch Ratings expects the Hong Konglisted Chinese life insurers to maintain robust credit profiles in 20102011, supported by an improvement in both structural and cyclical factors. Wh
2、ile the sectors topline growth in 2009 was relatively modest compared with 20072008, new business profit margins remained strong. The markets increased emphasis on quality over volume will continue to be a key theme in 20102011, in the agencys view. To summarise, Fitch believes the folowing factors
3、will have the most impact on the sectors credit profile over this period. Credit Positives/Oportunities Quality over volume: After years of chasing market share, the Chinese insurers have refocused themselves on product fundamentals. Fitch believes the companies will deliver solid growth in value of
4、 new business (VNB) figures in 20102011, albeit at a slower rate than in 2009. Asset diversification: Fitch expects the investment channels available to the Chinese insurers to continue to broaden in 20102011. This will improve the sectors assetliability management in areas such as duration matching
5、 and risk diversification. That said, smaller companies with unproven internal research and risk management capabilities will likely face greater financial and operational risks in a more liberalised environment. Interest rate increases: As far as cyclical factors are concerned, Fitch believes poten
6、tial interest rate increases and a steeper yield curve will be positive to the insurers balance sheets in 20102011. Improvements in earnings will most likely materialise in the latter part of 2010. Increased regulatory focus on solvency: The China Insurance and Regulatory Commission (CIRC) has been
7、more proactive in monitoring the sectors solvency since the beginning of the financial crisis. Fitch believes this will provide an oportunity for the stronger players to differentiate themselves and an incentive for the weaker players to shore up their balance sheets. Credit Negatives/Threats Compet
8、itive pressures on pricing and product design: Fitch expects to see moderate margin pressure on spreadbased products, reflecting competition in the bank channel. This will partially ofset the benefits of higher interest rates. Investment risk apetite: Folowing the strong recovery in equity prices in
9、 2009, Fitch believes it will be challenging for the Chinese insurers to produce similar levels of capital gains from the stock market in 20102011. Fitch also remains cautious about potential M increased regulatory oversight on product and commission structures; and stricter supervision on solvency.
10、 The regulators will also more closely regulate distribution agreements by limiting bancassurance contract negotiations to the head ofice level. (Previously, individual bank and insurance company branches could enter into distribution agrements.) In addition to increased regulatory oversight, Fitch
11、expects to see increased shareholding ties between the banking and insurance sectors. (A recent example was the acquisition of a 51% stake in China LifeCMG Life Assurance Co Ltd by the Bank of Communications in September 2009.) Fitch believes that, as the shift in the insurers product portfolio cont
12、inues, closer integration between the two sectors could potentially beter align their economic interests and create an incentive for the bank distributors to market longerterm products. However, it will take time for new partnerships to develop the necessary marketing and risk management expertise.
13、Meanwhile, the markets product focus in 20102011 will continue to favour insurers with wellestablished and productive agency forces. 42.5 53.1 45.6 58.2 40.9 4.6 47.2 39.3 31.8 37.2 27.4 47.9 46.3 45.2 18.2 15.1 17.2 14.4 1.2 9.1 7.6 0 20 40 60 80 10 H106 H206 H107 H207 H108 H208 H109 Tied agency Ba
14、ncasurance Group China Life PRC GAP distribution mix (%) Source: Company data 79.8 82.2 81.0 81.2 7.5 7.0 73.0 9.6 8.5 9.2 9.1 12.6 16.7 2.0 10.6 9.3 9.8 9.7 9.9 6.3 5.0 0 20 40 60 80 10 H106 H206 H107 H207 H108 H208 H109 Tied agency Bancasurance Group Ping An Life PRC GAP distribution mix (%) Sourc
15、e: Company data 48.1 46.0 39.1 45.8 34.6 40.9 51.4 42.7 17.3 13.1 9.5 1.5 0 20 40 60 80 10 206 207 208 H109 Tied agency Bancasurance Group China Pacific Life PRC GAP distribution mix (%) Source: Company data 10.8 17.6 27.5 36.1 20.5 24.0 27.1 75.5 70.2 62.0 58.1 74.4 70.2 68.4 13.7 12.2 10.5 5.8 5.1
16、 5.8 4.5 0 20 40 60 80 10 H106 H206 H107 H207 H108 H208 H109 Tied agency Bancasurance Group Tai Ping Life PRC GAP distribution mix (%) Source: Company dataInsurance Chinese Life Insurers Growth Story Remains Intact March 2010 5 36.2 16.2 8.3 8.2 8.2 2.5 1.0 19.4 0 15 30 45 China Life Ping An Life Ch
17、ina Pacific Life Taikang Life New China Life Tai Ping Life AIA Others Total Premium Market Share (PRC GAAP) As at end2009 (%) Source: CIRC Aset Diversification Fitch expects that the investment channels available to Chinese life insurers will continue to broaden in 20102011. Fitch believes insurers
18、with significant cash and deposits will be keen to seek yield enhancement from new asset classes, while diversifying their credit positions. In terms of credit risk, Fitch notes that insurers are now permitted to invest in nonbank guaranted corporate bonds, subject to domestic credit ratings restric
19、tions. This will likely benefit larger players with more advanced credit research capabilities and allow companies to differentiate their fixed income strategies beyond interestrate plays. Term deposits 27% Equities 14% Bonds 52% Cash 7% China Life Investment mix (H109) Source: Company data Others 2
20、% Term deposits 17% Funds 8% Bonds 62% Equities 5% Cash 6% Ping An Life Investment mix (H109) Source: Company data Others 8% Term deposits 28% Cash 6% Bonds 50% Funds 3% Equities 5% China Pacific Life Investment mix (H109) Source: Company data Cash and term deposits 24% Equities 5% Bonds 61% Others
21、1% Funds 9% Tai Ping Life Investment mix (H109) Source: Company data Another rule change in the pipeline is the relaxation of property investment restrictions. As of now, Chinese insurers are not permitted to invest in properties other than those they operate for their own use. Fitch believes that,
22、initially, the limit on property investments will be lifted to 5%10% of total assets. Chinese insurers have generally been keen to see the restrictions on real estate investment Fitch believes China Lifes vast distribution network is a key competitive advantage Fitch expects the relaxation of invest
23、ment restrictions to have a favourable impact on insurers with more advanced risk management capabilitiesInsurance Chinese Life Insurers Growth Story Remains Intact March 2010 6 lifted to take advantage of yield enhancement, asset class diversification and duration lengthening. (As a way to indirect
24、ly participate in the market, China Life also acquired a 16.6% stake in SinoOcean Land Holdings Ltd in December 2009.) However, given the property markets illiquidity, Fitch remains cautious about substantial property investments by insurers, especialy those with weaker capital and those that alread
25、y have sizable holdings for ofice premises. Potential Interest Rate Increases Fitchs sovereign team expects Chinas policy interest rates to begin trending higher in H210 and 2011. Rising bond yields and a steeper yield curve will be important cyclical factors for the Chinese life insurers over this
26、period, in the agencys view. Although the value of existing bond holdings held as availableforsale in the accounts will decline when interest rates increase, the insurers economic capital should increase. This is especially true given the large duration mismatch between assets (shorter) and liabilit
27、ies (longer) in the Chinese life sector. Fitch believes the current macroeconomic outlok favours insurers with sizable cash positions and those with stronger premium inflow expectations. Ahead of yield increases, insurers have generally moved into shortduration assets. Fitchs view is that interest r
28、ate hikes will begin to have an impact on the sectors profitandloss statement (P the calculation of policy reserves; and tests for significant insurance risks. Chinese life insurers will begin to adopt the new accounting standards for their 2009 accounts. While the proposed changes have caused conce
29、rn among investors and many details on the rules implementation remain unclear at the time of this report Fitch expects only a moderate impact on the way the agency analyses the insurers credit profiles. The most likely net impact is that profits (and shareholders equity) will increase in the onshor
30、e (Ashare/PRC GAAP) accounts, while staying largely the same in the ofshore (Hshare/HKFRS) accounts. More important, Fitch expects no impact on the insurers published EV and VNB figures (where these are produced on a statutory basis), aside from moderate changes in income taxes arising from changes
31、to taxable income. Equally, there will be no impact on regulatory solvency, the calculation of which is based on more conservative statutory reserves. For more details on the new accounting rules, please refer to Apendix B. Fitchs Expectations Barring any material M competitive pressures on pricing
32、and product design; and companies ability to develop internal risk management capabilities in an increasingly liberalised investment environment. The accounting changes introduced by the CIRC in December 2009 have been one of investors major concerns. To prepare for these changes, the listed insurer
33、s are expected to postpone their 2009 results announcements to April 2010. The regulator has urged the companies to be conservative when applying these new rules, which are, more often than not, less prescriptive and require greater management judgment. While these changes might potentially make pee
34、r comparisons more dificult as assumptions vary across companies, Fitch believes the new framework will not materially change its view of the sectors credit fundamentals.Insurance Chinese Life Insurers Growth Story Remains Intact March 2010 1 Apendix A Insurer Financial Strength (IFS) Ratings Compan
35、y IFS rating Outlok China Life A+ Stable Tai Ping Life BB+ Positive Source: FitchInsurance Chinese Life Insurers Growth Story Remains Intact March 2010 12 Apendix B:Acounting Changes Explained Unbundling of Mixed Insurance ContractsMainly Afecting AShare Acounts Perhaps the most apparent change unde
36、r the new reporting regime is the way in which insurance premiums are accounted for. Currently, in the Ashare accounts, 100% of the premiums writen flow through the P&L as a revenue item. In future, insurance contracts with “mixed” risk and investment elements will be unbundled, with the latter bein
37、g accounted for as a deposit (liability) item on the balance sheet. The impact of this change varies across the sector, depending on the insurers product mix. Companies with a large bok of universal life policies, for instance, will report substantially lower Ashare premiums, while companies with si
38、zable participating product oferings will see a more moderate efect in their P&L. Many market observers believe that this change in accounting standards could be a catalyst for change in product strategy, as the industry has traditionally viewed premium market share as an important performance indic
39、ator. Defered Acquisition Costs (DAC)Mainly Afecting HShare Acounts This change relates mainly to Hshare accounts, as DAC is not permitted under PRC GAAP. China Life Insurance Co Ltds (China Life) Hshare accounts currently folow US GAAP, which allows for a deferral of initial acquisition costs. DAC
40、is essentially a way for insurers to smoth their accounting profits over the duration of their boks according to the matching principle. Under the new accounting framework, insurers will no longer be allowed to use DAC to defer the costs associated with new sales (eg, agents commissions). However, c
41、ompanies can still manage their new business strain implicitly through a “residual margin”, which is a mechanism through which future profits are embedded in the policy reserves held. The estimation of this margin is based on pricing assumptions, over which company management has considerable contro
42、l. It remains difficult to determine the impact of this accounting change at the time of the report as management has yet to be able to provide guidance on the quantum of the residual margins to be used versus the amount of DAC currently in the GAAP accounts. Interest Rate AsumptionsAfecting Both AS
43、hare and HShare Acounts Under the new accounting system, insurers will report significantly diferent levels of policy reserves in their Ashare accounts due to changes in the interest rate assumptions used. This will lead to a considerable difference in the timing of accounting profit release from th
44、e business inforce. AShare Acounts Prior to the implementation of the new rules, Ashare accounts were produced on a statutory basis. In China Lifes case, the amount of policy reserves it holds in its A share accounts are based on a discount rate of 2.4%. It is important to note that China Lifes back
45、 bok that carries higher guaranteed rates was separated from the listing vehicle at the time of its initial public ofering. The guarantee rates for the policies in China Lifes current portfolio are at or below 2.5%. The new accounting framework, which will be applied retrospectively to the whole bok
46、 of business, will allow for greater flexibility in setting reserving interest rates. China Life has advised, for instance, that for its nonparticipating, or traditional, policies, it will use the riskfree (government bond) yield plus a spread. For the companys participating business, it will use it
47、s expected investment return. The net impact is that, companies will likely carry lower policy reserves in their A share accounts going forward, leading to higher shareholders equity at end2009 and lower profits emerging in later years. Net impact of contract unbundling: Ashare reported premiums to
48、fall Impact varies depending on: product mix Net impact of the elimination of DAC: unclear at the time of writing Impact varies depending on: the amount of implicit cost deferral through the residual margin Net impact of interest rate assumption changes on Ashare accounts: potentially lower policy r
49、eservesInsurance Chinese Life Insurers Growth Story Remains Intact March 2010 13 HShare Acounts Under the existing regime, companies use their best estimates when seting policy reserves for their Hshare accounts. Once the interest rates are determined, they are locked in for the duration of the contracts. As with the treatment of acquisition cost deferral, companies have yet to be able to quantify the impact of the accounting change on policy reserves in Hs
