More Capital Necessary for Chinese Insurers to Grow
By Marius | Published July 28, 2011
Chinese insurance companies will need to raise more than CNY110 billion(US$17 billion) of fresh external funding to support their industry’s further growth and development over the next three years, according to credit analysts from Standard & Poor’s Ratings Services. Although the credit outlook for China’s life and property insurers will remain stable to positive, the ratings agency expects the industry to slow down.
The Chinese insurance industry has experienced rapid growth within the past decade and still has much to look forward to due to favorable economic conditions and an under-penetrated market. Total written premiums in China’s insurance market reached RMB1,452.8 billion (US$221.4 billion) in 2010, a year-on-year increase of over 30.4 percent. According to the latest China Insurance Regulatory Commission (CIRC) figures, the total premium income reported by Chinese insurance companies’ surpassed CNY 805.66 billion (US$123.95 billion) in the first half of the year, a 13 percent rise on last year’s figures. The largest increase in income in the first six months of 2011 came from the property insurance sector whose premiums surged 16.9 percent from a year previous to CNY 235.96 billion (US$36.49 billion). Meanwhile, the total value of life insurance premium income stands at CNY 569.7 billion (US$ 88.1 billion).
Earlier this year, Standard & Poor’s (S&P) updated its forecast on the Chinese non-life insurance sector to positive from stable and maintained the stable outlook for the Chinese life insurance sector. However, while S&P expect the operating performances of China’s predominant insurers to remain favorable over the next one or two years, these companies will soon face moderate industry risk due to problems involving their relatively low capitalization, unrefined risk management practices and limited asset and liabilities management options. Weaker economic growth and unforeseen catastrophe losses could also pose substantial industry risk in the coming years. “This is particularly true for non-life insurers, given their relatively low capitalization,” S&P insurance analyst Connie Wong told the media at a news briefing on Wednesday.
“Though the credit profiles of the Chinese life insurers are expected to be stable and non-life insurers positive, rating upgrades are unlikely over the next one or two years.” Wong added.
Based on the latest 2010 financial figures released by the CIRC, at least eight non-life insurers, including the leader The People’s Insurance Company of China Ltd (PICC), had an indicative ratio (shareholders’ funds versus total company assets) under 30 percent, which is low in comparison to international standards. According to S&P, Chinese property and casualty insurers will need a capital injection of about CNY82 billion (US$12.72 billion) over the next three years to support a more respectable 40 percent ratio, while achieving an assumed 15 percent growth in premiums over the same period. The ratings agency also expects the underwriting performance of the non-life sector to continue improving on account of further regulatory changes and greater diligence on the part of company shareholders in recent years.
S&P disclosed that at least seven companies in China’s life insurance market had an indicative ratio under 4 percent, and that these insurers would need to raise about CNY32 billion (US$4.96 billion) in fresh capital investment to both improve upon this and meet similar premium growth targets to the non-life sector in the next three years. According the S&P analysts none of the key Chinese companies in the life sector, including China Life, China Pacific Life and Taikang Life Insurance Co Ltd, would require additional funding in the short-medium term nor would most international joint-venture operations present in the country.
While the Chinese insurance industry is technically open to foreign players, they have faced restrictions and a more active regulatory authority than in most other countries. Foreign insurance companies have tended to exist in China through investing and operating as joint venture partners with local Chinese insurance and financial conglomerates. Though the market share for foreign insurers’ has remained below 10 percent in China’s insurance sector, gradual increase is expected. S&P notes the example of CITIC-Prudential Life Insurance Co Ltd, Beijing’s largest international joint-venture business in terms of premium income, which last year saw its market share for new policies sold through insurance brokerages, an important marketing and distribution channel for most life insurers, increase by over 20 percent.
A recently published article by S&P, titled ‘Have Rapid Growth And Regulatory Changes Improved The Credit Profiles Of Chinese Insurers?,’ points out that the performance of Chinese insurers could be slowed down marginally in the short term in conjunction with the country’s economic expansion developments, which would force companies to refocus on more profitable product lines. The report further states that while the recent rise in interest rates will improve investment returns for the country’s insurers, it could ultimately slow down future premium growth if banking and pure investment products become more attractive to consumers than insurance.
Earlier this month, CIRC Chairman, Wu Dingfu confirmed sales of some general insurance products in China had already suffered as a result of the central bank’s decision to raise interest rates. The Chairman told Chinese media outlets that despite the growth potential of the country insurance industry, there remained many challenges to the insurance market in the midst of inflationary pressure, macroeconomic policy changes and weak global capital markets. Insurance companies will need to adapt to changes in the Chinese economy, adjust their business models and increase both equity investments and bank deposits, all while making sure to maintain a healthy solvency ratio.
Despite these noted concerns on the horizon, the Chinese insurance market will continue to be seen lucrative investment opportunity for many large multinational insurance companies as well as investors from the financial-services sector. Around US$25 billion in share offerings in Hong Kong and Shanghai could be coming to the market over the next 12 months from Chinese insurance companies alone. PICC has announced plans to raise between US$5 billion and US$6 billion in a dual listing this year. New China Life Insurance, China’s third-largest life insurance firm with RMB93 billion (US$14.38 billion) in premium income for 2010, has also recently applied to the Hong Kong stock exchange for a dual listing. The insurer is aiming for HK$31.2 billion (US$4 billion) in fresh funds by the end of the year. Taikang Life Insurance, the nations’s fifth-largest insurer by premiums, has also targeted between US$3 billion and US$4 billion from a Hong Kong listing in the next couple of years, all according to industry reports.
New China Life
New China Life Insurance Co.,Ltd (NCI?has headquarters in Beijing and was established in 1996 It is a large national insurance company, with products including traditional protection products, bonus products as well as the products that have a strong financial management function. With sustained, healthy and harmonious development of the company, the brand value of NCI is a valuable asset.
People’s Insurance Company of China (PICC) is a state-owned holding company in the PRC, founded in 1949, that sponsors its subsidiaries: PICC Asset Management Company Limited and PICC Property and Casualty Company Limited (PICC P&C) among others. PICC P&C was established in 2002 and is now China’s largest non-life insurer. The insurer remains the designated agent within the People’s Republic of China for most major international insurance companies. In 2005, PICC announced a life-insurance joint venture with Sumitomo Life Insurance Co called PICC Life Insurance Co., which is now the sixth largest life insurer in the country.
Standard & Poor’s
Standard & Poor’s (commonly referred to as S&P) is a business branch of publishing house McGraw-Hill. Operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial vehicles such as stocks, municipal bonds, corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard & Poor’s is known for its indexes, in particular the S&P 500 index.
Taikang Life Insurance was founded in Beijing in 1996 and offers life, annuity and health insurance through 120 offices throughout China