HONG KONG (Reuters Breakingviews) - Life should be good again for China’s insurance giants. Low interest rates and tougher capital rules made 2016 hard for mainland life insurers. Now, the tide is turning as bond yields rise. For major players, a crackdown on high-yielding investment products should also help them regain market share.
Ping An, which vies with China Life for the title of the largest player by market value, on Wednesday reported a 15 percent increase in annual net profit last year, to 62.4 billion yuan ($9.1 billion).
On the face of it, that is decent - but far from the good years when annual earnings rose more than twice as fast. China Life, which is more narrowly focused on insurance than the diversified Ping An, is faring considerably worse and has already flagged an annual net profit drop of as much as 50 percent.
After years of rapid growth, monetary easing has hurt the sector on multiple fronts. First, low interest rates reduced returns from bond holdings, which make up the bulk of investment assets. That in turn made it more difficult to honour the terms of products promising high yields. So companies moved into stocks and other riskier assets, only to see equity markets falter.
Graphic: low-yield pain: tmsnrt.rs/2mv0ZMV
A rule change made life even harder. From January 2016, insurers have been required to discount liabilities based on market rates, so low yields forced them to ramp up reserves last year. But now, interest rates are finally rising as China’s central bank tightens policy in tandem with the U.S. Federal Reserve.
The big listed insurers also stand to benefit from curbs on so-called universal insurance schemes, which are effectively high-yield investment products combined with a benefit should the policyholder die. While that is a big downer for smaller firms that had aggressively pushed those policies to take market share, the major players can now win back business.
China, after all, is a big, underpenetrated market, and one with a limited social safety net. Even for the largest actors, there is plenty of room for growth.
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