Listed insurance companies "increase revenue but not profit", seeking to solve t

The insurance industry is entering a new growth cycle, focusing on resolving the risk of interest spread losses under the pressure on the investment side and the trend of longer-term liability products.

2023 marks the first year of implementation of the new financial instruments accounting standards. Recently released "report cards" for a total of ten listed insurance companies in A-shares and H-shares have shown a general decline in profits, with "increase in revenue but not in profit" being a common challenge faced by insurance companies at present.

According to the 2023 performance report data, the five major listed insurance companies in A-shares achieved a combined insurance business income of 2,693.215 billion yuan, a year-on-year increase of 5.21%; the combined net profit attributable to the parent company was 165.517 billion yuan, which decreased by 23.25% year-on-year due to multiple factors such as investment side and new accounting standards.

Looking at the net profit performance ranking of listed insurance companies, Ping An Insurance achieved a net profit of 85.665 billion yuan in 2023, taking the lead; followed by China Pacific Insurance with a net profit of 27.257 billion yuan; People's Insurance Company of China, China Life, and New China Life Insurance achieved net profits of 22.773 billion yuan, 21.11 billion yuan, and 8.712 billion yuan, respectively. Looking at the net profit performance of insurance companies listed in Hong Kong stocks, China Taiping achieved a net profit of 6.19 billion Hong Kong dollars in 2023, ZhongAn Insurance achieved a net profit of 4.078 billion yuan, and Sunshine Insurance achieved a net profit of 3.738 billion yuan.

It is worth noting that the combined net profit of listed insurance companies in A-shares in 2023 decreased by 23.25% year-on-year. Breaking down this decline to each insurance company: New China Life Insurance had the highest net profit decline, a significant decrease of 59.48% compared to 2022. New China Life Insurance stated that the 2022 data was under the old insurance contract standards and old financial instruments standards, which are not comparable to the 2023 data. Next was China Life, with a year-on-year decrease of 34.20%; the decline rates for China Pacific Insurance, Ping An Insurance, and People's Insurance Company of China were 27.08%, 22.83%, and 10.23%, respectively.

However, looking at the insurance companies listed in Hong Kong stocks, except for Sunshine Insurance's net profit decreasing by 16.83% year-on-year, ZhongAn Insurance turned a profit in 2023, improving from a net loss of 1.112 billion yuan in 2022 to a profit of 5.190 billion yuan; China Taiping's net profit growth was impressive, with a year-on-year increase of 44.10%.

From the perspective of the "increase in revenue" of listed insurance companies, the new business value of listed insurance companies in A-shares in 2023 achieved good growth. For example, China Pacific Life Insurance's new business value turned positive in the second half of 2022 and increased by 19.1% year-on-year in 2023. The growth rates of new business value for People's Insurance Life, New China Life Insurance, China Pacific Life Insurance, Ping An Life Insurance, and China Life were 69.6%, 65.1%, 19.1%, 36.2%, and 14%, respectively.

Pressure on the investment side is one of the core reasons why listed insurance companies do not "increase profits." Gong Xingfeng, Vice President and Chief Actuary of New China Life Insurance, said at the performance meeting, "The fluctuation of the capital market in 2023 has given the life insurance industry a vivid lesson on the risk of interest spread losses." In 2023, the investment performance of listed insurance companies was generally under pressure. Looking at the total investment return rate, China Life, Ping An Insurance, People's Insurance Company of China, China Pacific Insurance, and New China Life Insurance all had rates not exceeding 3.3%, with total investment return rates of 2.68%, 3%, 3.30%, 2.60%, and 1.80%, respectively. However, looking forward to 2024, many industry insiders are optimistic about the equity market outlook. Many insurance funds have already established positions in 2023 and gradually increased their holdings, expecting that the future market style rotation will be enhanced, with good structural opportunities.

According to Yang Jun, Chairman of Century Insurance Asset Management, who previously wrote, the industry generally estimates that the comprehensive funding cost of small and medium-sized life insurance companies is around 5%, which is much higher than the current actual investment return rate level.In the past few years, the long-term investment return assumptions for most life insurance companies have been around 5%. Additionally, it is noteworthy in the annual reports that listed insurance companies such as China Life, PICC, Ping An, China Pacific, and New China Life have successively lowered their long-term investment return assumptions for life insurance to 4.5%, marking the second adjustment of this assumption in seven years.

Asset side pressure

Affected by multiple factors including the downward trend in interest rates, insurance companies generally faced pressure on the investment side in 2023, which is also one of the main reasons why listed insurance companies are currently struggling to "increase profits."

According to the annual reports, as of the end of 2023, the total assets of the five major listed insurance companies on the A-share market reached 22.78 trillion yuan, a year-on-year increase of 8.43%; the total investment income was 384.47 billion yuan, which declined compared to the same period last year.

Specifically, Ping An's total investment income was 123.899 billion yuan, a year-on-year increase of 32.80%, while the total investment income of the other insurance companies was in a negative growth state compared to last year. China Life, PICC, and China Pacific's total investment incomes were 141.968 billion yuan, 44.115 billion yuan, and 52.237 billion yuan, respectively, with year-on-year decreases of 24.38%, 19.70%, and 28.30%. It is worth noting that New China Life's total investment income decreased by as much as 50.25% year-on-year, with a total investment income of 22.251 billion yuan.

In response to this, Gong Xingfeng stated at the performance briefing that the fluctuations in the capital market in 2023 provided a vivid lesson on the risk of interest rate differential losses for the life insurance industry. The lesson lies in the leverage effect of interest rates; if they cannot cover the cost of liabilities, the losses incurred could be enormous. The management of New China Life indicated that in 2024, they will be committed to improving the company's performance and increasing investment income.

Looking at the net investment yield (which mainly includes bond interest income, stock dividend income, etc.), which is considered a "cushion" by insurance funds, none of them exceed 4.5%. Specifically, the net investment yields of China Life, Ping An, PICC, China Pacific, and New China Life are 3.77%, 4.20%, 4.50%, 4%, and 3.40%, respectively. From the perspective of total investment yield, the figures for China Life, Ping An, PICC, China Pacific, and New China Life do not exceed 3.3%, with total investment yields of 2.68%, 3%, 3.30%, 2.60%, and 1.80%, respectively.

From the data of the above two indicators, it can be seen that the volatile and interest rate declining market environment in 2023 indeed had a significant impact on insurance fund investments. Therefore, it is worth noting that after seven years, during the downward phase of the interest rate center, listed insurance companies have once again lowered their long-term investment return assumptions.

In the 2023 annual reports that have been published, Ping An, China Life, PICC, New China Life, China Pacific, and Sunshine Insurance have all reduced their long-term investment return assumptions from 5% to 4.5%. In the previous round of adjustments, some insurance companies had lowered their long-term investment return assumptions from 5.5% to 5%.

However, despite the twists and turns of the market environment in 2023, listed insurance companies are optimistic about the improvement of the investment environment in 2024. Deng Bin, Chief Investment Officer of Ping An, stated that the market will rise in 2024, and Ping An has increased its positions against the downward trend of the market in 2023.It is understood that since last year, insurance funds have begun to gradually increase their allocation to the equity market. According to some insurance company investors, the capital market has indeed warmed up. Generally, as right-side investors, insurance funds will increase their positions once they confirm that the market will continue to rebound, and some insurance funds have started to build positions and gradually increase their holdings since last year. A person in charge of an insurance company's investment department stated that they are optimistic about the equity market investment prospects in 2024, expecting that the market style rotation will be enhanced in the future, and there will be good structural opportunities.

Huang Ben Yao, Vice President and interim head of China People's Insurance Asset Management, believes that in 2024, external pressures will ease marginally, the domestic economy will continue to recover, and the fixed-income market will generally show a trend of interest rate fluctuations downward, steepening term spreads, and converging credit risks. The opportunities in the equity market will outweigh the risks, and structural investment opportunities will emerge at the "five major articles" level. Insurance funds can actively adjust the asset allocation structure and improve the asset-liability matching level.

At the end of December 2023, the China Insurance Asset Management Association released the 2024 "Insurance Asset Management Industry Investment Confidence Index" survey. According to feedback from 189 insurance institutions in China (with a coverage rate of insurance funds reaching 98%), there is strong confidence in equity investment for 2024, and the equity investment situation for the year 2024 and the first quarter of 2024 is expected to be optimistic.

However, an industry insider warned that life insurance reserves are very sensitive to government bond yields. A decline in government bond interest rates will increase the liability costs of reserves, leading to a decrease in profits and subsequently causing a decline in solvency.

Solving the "interest spread loss" issue, in 2023, the insurance industry achieved a premium income of 5.12 trillion yuan, a year-on-year increase of 9.14% at a comparable rate, an increase of 4.56 percentage points compared to 2022. This is also the second consecutive year of growth achieved by the insurance industry since its in-depth transformation.

Looking at the insurance business income of listed insurance companies, in 2023, Ping An Life, China Life, Taikang Life, New China Life, and People's Insurance Life, these five life insurance companies achieved a total premium income of 1.61 trillion yuan for the year, a year-on-year increase of 4.9%.

Specifically, the insurance business income of China Life, Ping An Life, Taikang Life, New China Life, and People's Insurance Life were 641.5 billion yuan, 466.54 billion yuan, 233.141 billion yuan, 165.903 billion yuan, and 100.634 billion yuan, respectively, with year-on-year growth rates of 4.30%, 6.20%, 4.90%, 1.70%, and 8.60%.

Looking at the new business value growth rate, which reflects the growth indicators of life insurance companies, Taikang Life's new business value turned positive first in the second half of 2022, and other A-share listed insurance companies also achieved significant growth in 2023. Specifically, the new business value of People's Insurance Life and New China Life increased by 69.6% and 65.1% year-on-year, respectively, while Taikang Life and Ping An Life's new business value were 19.1% and 36.2%, respectively, and China Life's new business value grew by 14% year-on-year.

The factors affecting the new business value include annualized new premiums and the new business value rate, which are closely related to product and channel strategies. Some industry insiders believe that the growth in new business value of listed insurance companies is mainly due to the increase in new policy premiums and the improvement in business structure. From the perspective of new policy premium growth, the growth rates of new policy premiums for China Life, Ping An Life, Taikang Life, New China Life, and People's Insurance Life were 14.1%, 44.6%, 3.7%, 2.9%, and 10.5%, respectively.At the same time, the persistency rate of long-term individual life insurance policies is also a key indicator of stable new business value. In 2023, China Life's 26-month policy persistency rate was 79.10%, an increase of 4.9 percentage points year-on-year; Ping An Life, Taikang Life, and New China Life's 25-month policy persistency rates were 85.8%, 84.0%, and 78.4%, respectively, with year-on-year increases of 6.8 percentage points, 10.6 percentage points, and 1.2 percentage points, respectively.

Under the backdrop of longer-term policies and a rebound in premium momentum, the concern of interest rate differential losses becomes prominent. "The risk of interest rate differential losses is not a matter for New China Life alone, but a common issue and problem faced by the entire industry," said Yang Yucheng, Chairman of New China Life, at the performance briefing. Interest rate differential losses are becoming a predicament that the life insurance industry needs to face and resolve together. According to insiders, the current interest rate differential loss issue in the life insurance industry is quite severe, especially for some small and medium-sized life insurance companies, and this issue urgently needs to be addressed.

The so-called interest rate differential loss refers to the loss caused by the investment return rate of insurance funds being lower than the average guaranteed interest rate of effective insurance contracts. With the continuous downward trend of domestic interest rates and the "asset drought," the potential interest rate differential loss risk in life insurance is relatively prominent. Yang Jun once stated that for some small and medium-sized life insurance companies with higher risks, they indeed may face a phased crisis. Interest rate differential loss is the "culprit" that sends these small and medium-sized life insurance companies into the ICU.

To address the risk of interest rate differential losses, the industry consensus is that both the investment and liability ends need to work together. There is already a consensus within the industry on the solutions for the investment end, such as extending the duration, diversifying asset allocation, increasing overseas allocation efforts, and enhancing the proportion of alternative investments; on the liability side, it is necessary to reduce the comprehensive cost by lowering the guaranteed interest rates for new markets, settlement rates, and dividend rates.

Looking at the solutions in foreign markets, in the 1970s, American insurance companies issued a large number of policies with high guaranteed interest rates. In the 1980s, as interest rates fell, the issue of interest rate differential losses began to stand out. The United States addressed the problem of interest rate differential losses by reducing traditional life insurance rates, vigorously developing investment-type annuity products, meeting market demand to strengthen health insurance and other protective products, and at the same time, on the investment end, increasing diversified allocation of non-standard, alternative, and overseas assets.

When discussing the response to the risk of interest rate differential losses, Gong Xingfeng stated that the core is asset-liability management. First, it is necessary to view life insurance business from a higher level and a perspective that penetrates the cycle, and to strengthen the concept of long-termism. The operation of life insurance is long-term, and long-term funds can traverse the cycle, but this does not mean that every insurance company managing funds can follow the cycle; second, improve the ability to compete differently. Differentiation is reflected in the uniqueness of the company's asset and liability ends, and it is necessary to see both the strengths and weaknesses, and to improve core competitiveness.

Third, truly improve the linkage of asset-liability management. It is necessary to break down the barriers between the asset and liability ends and strengthen the overall leadership of asset-liability management in the company's organizational structure; fourth, continuous innovation is needed. He stated that New China Life's own products are highly sensitive to interest rates, and the next step will be to increase the innovation and sales efforts of "interest-sensitive" products such as universal and dividend products, thereby better suppressing the potential exposure to interest rate differential loss risks in the long term.

Xiao Jianyou, President of PICC Life Insurance, stated that with the downward trend of interest rates, fluctuations in the capital market, and a decline in investment returns, if the insurance company's investment returns cannot cover the liability costs, a conflict of interest rate differentials will occur. The company will take certain measures to respond, on the one hand, it is necessary to continue to reduce the cost of liabilities, compress the business with high operating liability costs, actively promote the sale of new products with relatively low guaranteed interest rates, and increase the sales efforts of protective insurance types. Considering the situation of investment returns, reasonably adjust the dividend levels and the settlement rates of universal insurance. On the other hand, on the investment end, it is necessary to strengthen the forward-looking analysis of interest rate trends, adopt a dynamic and flexible asset allocation strategy, and enhance the certainty of investment returns. Give full play to the combination of strategic and tactical asset allocation, further optimize the overall structure of allocation. Strengthen the management of institutional linkage, actively manage the duration gap, extend the duration of assets, and prevent the risk of mismatch between asset and liability durations.

Gu Xiaotao, Co-CEO of Ping An, also recently stated that in the downward interest rate cycle, the risk of interest rate differential losses will continue to exist. To this end, he emphasized the need to "grasp with both hands, and both hands must be strong" on both the investment and liability ends. On the one hand, it is more effective to match the duration of assets and liabilities, and the returns on the investment end must be sustained and stable; on the other hand, Ping An's liability costs will gradually adjust the product structure and pricing model according to changes in customers, the market, and interest rates, reduce liability costs, and ensure that it can continue to pass through the low-interest-rate environment in a stable and robust manner.