Despite a tricky sales and investment environment, China's four biggest insurers posted double-digit year-over-year rises in first-half net profit, and analysts expect further solid results in the second half as life insurance businesses are turned around and expenses fall in the auto insurance market.
Ping An Insurance (Group) Co. of China Ltd., China Life Insurance Co. Ltd., China Pacific Insurance (Group) Co. Ltd. and People's Insurance Co. (Group) of China Ltd. posted aggregate net profit of 92.82 billion yuan, up 30.7% from 70.99 billion yuan in the first half of 2017. The rise came in spite of several hurdles since the beginning of 2018 — first-quarter life insurance sales were hit hard by regulatory curbs on short-term wealth management-type products, while intensified competition in auto insurance after deregulation reforms pushed up costs, and investment yields fell amid financial market volatility.
But the regulatory crackdown in life insurance is likely to prove beneficial in the long run, as product offerings pivot toward high-margin protection business, which promises higher underwriting profits. The amortization of residual margin — the future profits of in-force policies — also helps reduce earnings volatility for Chinese insurers.
"Definitely there is short-term pressure on the premium growth [in life insurance] but given the change in product mix, you see that the proportion of renewal premium is increasing," said Sally Yim, associate managing director at Moody's in Hong Kong. "That means the cash flow of life insurers will be more predictable going forward."
Gross written premium growth among the listed Chinese insurers' life insurance units began to rebound in the second quarter, driven by improved new business sales and steady growth in renewal premium. The improving sales and shifting product mix also pushed up new business value — the present value of new business's future profits — quarter over quarter.
At Ping An, new business value in the life and health units rose 9.9% year over year in the second quarter after a 7.5% decline in the first quarter, while China Pacific said new business value at China Pacific Life Insurance Co. Ltd. was up 35.2% in the second quarter after a 32.5% decline in the first quarter. China Life and PICC Life Insurance Co. Ltd. both expect to see new business value return to growth by the end of the year.
"We continue to see a pretty healthy trend in terms of the profitability despite slow improvement in growth," Yim said.
High expenses in the auto insurance market
Meanwhile, Chinese insurers' property and casualty units were hit by higher expense ratios and tax payments in the first half.
For example, gross written premium for Ping An Property & Casualty Insurance Co. of China Ltd. rose 14.9% to 118.91 billion yuan in the first half, but commission expenses on insurance operations jumped 61.6% to 25.74 billion yuan and its income tax payment more than doubled to 4.11 billion yuan. That translated to a 14.1% fall in first-half net profit, to 5.92 billion yuan.
PICC Property & Casualty Co. Ltd. and China Pacific Property Insurance Co. Ltd. saw their income tax payment rise 51% and 105%, respectively.
Felix Luo, a Hong Kong-based analyst at China Merchants Securities (HK) Co. Ltd., said pricing reforms in China's auto insurance market have lowered insurers' claim payments, but insurers are spending more on commissions to attract customers, in turn driving up expenses. Because tax deductions on such costs are capped at 15% of a P&C insurer's net earned premium, the result is a sharp rise in income tax payments.
Michelle Ma, an analyst at Huatai Securities in Hong Kong, noted that in recent months, both the insurance regulator and an industry body made efforts to bring down heated competition on commissions in the P&C segment. She said the benefits of these efforts could become visible through lower expense ratios and tax payments by the fourth quarter.
As of Sept. 17, US$1 was equivalent to 6.86 Chinese yuan.