China Property Insurance is in crisis, and the second echelon of property insura

The growth path of the established insurance company, China United Property Insurance Co., Ltd. (hereinafter referred to as "China United"), has not been smooth sailing.

With the release of the solvency report for the second quarter of 2024, the crisis for China United began to emerge. The report shows that the company's insurance business income was 41.016 billion yuan, a year-on-year increase of 3.93%; it achieved a net profit of 495 million yuan, a year-on-year decrease of 15.75%.

The dilemma of scale and profit is hard to reconcile.

It can be seen that China United continues the situation of last year, still facing the dilemma of "increasing revenue but not profit". Looking back at the development process of China United, it can be described as full of twists and turns. It was established in July 1986, originally known as the Xinjiang Production and Construction Corps Agricultural and Pastoral Insurance Company. After more than thirty years of trials and tribulations, it is unknown whether it can see the rainbow?

Looking back at 2006, China United suffered a loss of 797 million yuan, and by 2007, the loss soared to 6.4 billion yuan. The root of this series of financial crises lies in an aggressive expansion strategy—a combination of high commissions and low fees led to out-of-control costs, as well as a misjudgment of the compensation rate. In 2009, China United fell into a situation where its liabilities exceeded its assets, on the brink of bankruptcy.

A turning point occurred in 2010 when the Insurance Guarantee Fund took over and injected 6 billion yuan, along with a strategic investment of 7.81 billion yuan from China Orient, giving China United a chance for rebirth. With the strong support of shareholders and funds, the company achieved significant increases in operating income and net profit in 2014. In 2018, with the complete withdrawal of the Insurance Guarantee Fund, China United successfully returned to the right track and was reborn.

Since then, the premium scale of China United has shown a "steady growth" trend. Specifically, from 2018 to 2023, the premium scale increased from the initial 42.313 billion yuan to 65.283 billion yuan, an increase of 54.29%. During this period, the consolidated net profits were 1.123 billion yuan, 581 million yuan, 613 million yuan, 447 million yuan, 1.088 billion yuan, and 673 million yuan, respectively. It can be clearly observed that the growth of China United's premium income and net profit are not synchronized, and the trend of net profit changes is consistent with the fluctuation of the group's overall net profit, showing a large degree of volatility and falling into the situation of "increasing revenue but not profit".

In this regard, Wu Gaobin, Secretary-General of the Metaverse Committee of the World Digital Technology Institute, analyzed: "The phenomenon of product homogenization that is common in the property insurance industry, coupled with insufficient innovation, has led to a situation where insurance companies face a squeeze in profit margins. In addition, issues in cost management, especially the increase in claims costs and operational costs, further weaken the profitability of property insurance companies."

In fact, China United is facing a relatively high cost rate issue, which also compresses the profit space of the insurance company to a certain extent. In the first half of the year, the company's comprehensive cost rate reached 99.45%, approaching the break-even point of 100%. Among them, the comprehensive compensation rate as high as 77.45% is the key factor in driving up the comprehensive cost rate.It is noteworthy that in the past two years (2022–2023), China Property Insurance's combined cost ratio has been under continuous pressure, with eight quarters showing rates of 104.12%, 101.20%, 98.92%, 99.48%, 99.86%, 99.82%, 99.61%, and 100.28%, respectively. During this period, the combined claim ratio has consistently remained above 70%. The persistently high claim ratio not only compresses the company's profit margins but also increases financial risks.

Further investigation reveals that agricultural insurance is the key insurance type causing the claim ratio to remain high. It is reported that China Property Insurance is a leader in the domestic agricultural insurance sector, relying on its profound foundation in the field of agricultural insurance, with a market share that has consistently ranked third. The agricultural insurance business has grown into the company's second-largest insurance type. In 2023, with strong support from national policies, China Property Insurance seized the opportunity for the development of crop insurance, achieving rapid growth in agricultural insurance business. The annual agricultural insurance premium income soared from 12.078 billion yuan in 2021 to 16.601 billion yuan in 2023, and the income share also increased from 21.68% to 25.43%, becoming an important driver of China Property Insurance's revenue growth.

However, China Property Insurance's combined cost ratio has been under tremendous pressure as a result. Looking at the performance of various insurance types, since 2020, all major insurance types of China Property Insurance, except for auto insurance and agricultural insurance, have been facing the dilemma of losses. As an important source of profit for the company, the position of agricultural insurance has become particularly significant. Entering 2024, especially since June, frequent flood disasters in Guangdong, Guangxi, Fujian, Anhui, Hunan, and other places have posed significant challenges to agricultural insurance. According to data statistics from the National Committee for Disaster Reduction and the Ministry of Emergency Management, in just the first half of this year, natural disasters have caused 31,721,000 hectares of crops to be affected, with direct economic losses amounting to 93.16 billion yuan. Behind these figures, it reflects the significant increase in the claim pressure faced by agricultural insurance.

Compliance Red Light

Halfway through 2024, the regulatory intensity of the insurance industry continues to strengthen. Frequent penalty notices and hundreds of millions of yuan in total fines not only demonstrate the determination of the regulatory authorities but also reveal some internal issues within the industry. Under the "dual penalty system," in addition to the insurance companies that violate regulations being severely punished, 31 individuals have been banned from entering the insurance industry, with 16 people even being subjected to a lifetime ban.

According to incomplete statistics, in the first half of the year, China Property Insurance accumulated 48 penalty notices, with a total fine of 11.403 million yuan, making the penalty amount prominent and ranking third among property insurance companies. From the inaccuracy in the accounting of agricultural insurance to the fabrication of insurance intermediary business, to the falsification of claims documents, and the improper use of insurance terms and rates, China Property Insurance has frequently tripped over compliance issues. Specifically, the Jiangsu branch was fined 10,000 yuan for conducting insurance business across provinces; the Xinjiang branch was fined 10,000 yuan for designating a temporary person in charge without reporting as required and serving beyond the term; the Jilin branch was fined 210,000 yuan for not strictly implementing the independent accounting of agricultural insurance. On August 2, the Guangshui branch of China Property Insurance was fined 120,000 yuan for falsely listing financial expenses, and the then deputy manager Dong Qianguo was warned and fined 10,000 yuan; the Suixian County branch in Suizhou was fined 120,000 yuan for the irregularity, incompleteness, and inaccuracy of agricultural property insurance underwriting and claims files, and the then agricultural insurance department manager Yin Renchao was warned and fined 10,000 yuan.

Another noteworthy point is that, according to the document (2024) Ji 0983 Execution No. 3188, on July 23, 2024, China Property Insurance was listed as an executor by the People's Court of Huanghua City, Cangzhou City, Hebei Province, with an execution amount of only 247 yuan.

Rating Downgrade

Amidst multiple challenges, the international rating agency Fitch (hereinafter referred to as "Fitch") also began to "take action." On August 1, Fitch downgraded China Property Insurance's rating from "A-" to "BBB+." Fitch explained that the main reason for the downgrade was the relative deterioration of the credit status of the actual controller, Oriental Assets, and that China Property Insurance's rating no longer considers the upgrade due to the ownership of Oriental Assets.

Public information shows that in 2022, China Property Insurance transferred four non-performing asset portfolios to its parent company, China Oriental, involving Yingda Trust - Yongli No. 19, CITIC Trust · Wuhan Central Business District Loan, Western Trust · Kunpeng No. 3, and the trust beneficiary's rights of HNA pledge repurchase debt. The total principal amount of these assets is 1.18 billion yuan, plus interest of 43.8081 million yuan and other fees such as default penalties of 390 million yuan, totaling about 1.613 billion yuan, including 5.5346 million yuan of product-level fees. Although this transaction temporarily eased the pressure on the asset quality of China Property Insurance, it also exposed some deficiencies in the company's risk management.However, analysis from the international rating agency Fitch indicates that the credit profile of China Orient has weakened, with its capital buffer capacity expected to remain at a limited level in the short term, which will constrain its expansion capabilities in policy-oriented businesses. Particularly against the backdrop of adjustments in China's real estate market and a slowdown in macroeconomic growth, both the asset quality and profitability of China Orient will continue to face challenges. Therefore, it is anticipated that China Orient is unlikely to provide further financial support to China Insurance in the future, implying that the credit rating of China Insurance will no longer receive additional enhancement due to the ownership by China Orient.

For the management of China Insurance, the investment strategy remains a critical issue that urgently needs to be addressed.

According to Fitch's report, in the first half of 2024, China Insurance added non-performing investments, primarily involving trust plans closely related to the real estate industry. Due to the increased risks of counterparties and the divergent performance of the real estate market, the potential impairment losses from these non-performing assets will continue to affect the financial stability of China Insurance.

With the "major reshuffling" of the executive layer in 2024, the new management team faces a significant test. Whether they can chart a clear and feasible development path for China Insurance will be key to determining the company's ability to "emerge from the shadows."