Anyone that looks regularly at the annual reports of Chinese companies will be used to seeing spectacular numbers, but the data coming out of the insurance industry this year will have raised an eyebrow or two among even the most battle-hardened observers.
Ping An Insurance made a net profit of Rmb13.8 billion ($2 billion) in 2009, representing year-on-year growth equal to 879.1%. Two of the other largest companies in the sector also did extremely well: China Pacific Insurance, made Rmb7.3 billion, a 186.3% jump on the year before; while China Life made Rmb32 billion, up 71.8%. Even for the world’s fastest growing insurance market (in terms of premium growth) this is an improvement that demands some explanation.
Ping An touted its overall increase in market share – from 14% to 16.5% – to partly explain its profit surge. And underlying the growth is a genuine increase in profitability, in contrast to the tough times of 2008. With the equity market undergoing a healthy recovery throughout 2009, insurance companies increased their exposure to equities to get the most out of the rebound. China Life, for example, boosted its equity assets to 15.3% in 2009, a sharp increase of 7.3%.
So, to some extent, the good news coming out of the insurance industry reflects the recovery in the Chinese stock market.
As the market is no longer on the clear upward trajectory it was on last year, the immediate prospects for the insurers are more opaque: “The challenge now for Ping An is to adjust its investments at a time when interest rates are likely to rise, and focus more on keeping bonds rather than stocks, which will likely be volatile and may hit its bottom line,” Sheng Nan, an analyst at UOB Kay Hian, told Reuters.
Look below the topline numbers, however, and you will see that a significant chunk of 2009 growth was down to a new accountancy standard. In early 2009, the regulator tacked back towards international reserve evaluation standards, ending a period in which more funds were required to be put aside to cover future payout commitments. There were also rule changes in how the insurers should account for income and acquisition costs.
All the major insurers had forewarned investors that the rule changes were likely to mean a profit bonanza for the year. And the predictions were accurate. Under the earlier standards, Ping An’s net profit would have been Rmb8.9 billion, for instance. But under the new system it was boosted by Rmb5 billion, to Rmb13.9 billion.
Still, in the days following the profits announcements, the investor community seemed unsure that such stellar performance could be maintained. Stock prices for Ping An, China Life and China Pacific all fell.
In part this reflects the less-than-buoyant health of the Chinese stock market recently. But it also marks concerns about the rule changes themselves. “The information from the current financial statements under the new accounting standard is far lower than the market expectation,” Li Cong, of Huatai United Securities, told Caijing magazine.
One gripe is that the regulator has not published detailed rules on how insurance companies should implement the new standards. As Caijing puts it: “Financial data without any unified operating rules is not comparable.”
This lack of transparency in the new accounting approach affects even the most important data. One analyst complained that since insurance companies have not disclosed their total reserve margin, it is hard to assess the profits of the different companies. This can only call into question the industry’s apparent success in 2009. The element of mystery in the firms’ annual reports means that predicting performance in 2010 will be that much harder too.
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