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Beijing Conjures a Perfect Storm for Insurers

Nisha Gopalan
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Beijing Conjures a Perfect Storm for Insurers

(Bloomberg Opinion) -- With just 114 million of China’s 1.4 billion population covered by life insurance, you’d think its domestic providers would be flying high. 

China Life Insurance Co.'s surprise profit warning late Tuesday indicates otherwise. The company estimates its 2018 earnings fell by 50 percent to 70 percent, largely because of flagging investment income from equity losses. Perhaps that’s no surprise given the Shanghai Composite Index was one of the world’s worst-performing benchmarks last year. The insurer’s stock fell as much as 4.5 percent Wednesday. 

Things are about to get even worse. Not only are government bond yields falling – the lifeblood of insurers’ investment income – but providers are also taking on the mantle of rescuing the country’s flailing stock market. In 2015, that was largely the remit of state brokerages. 

China has been stepping up pressure on insurers to beef up their investments in stocks and bonds, and has simplified the process of buying securities for them. On Tuesday, officials said firms could register to set up equity investment plans and private funds directly. Previously, companies had to wait for approval.

Such “national service” is aimed at helping the government’s aim to boost markets and stoke a wealth effect that raises consumption. Beijing is looking to domestic demand to pick up the slack as it tries to wean the world’s second-largest economy from its dependence on export- and investment-led growth. 

That isn’t to say China Life and its peers are a bad long-term bet. Part of the company’s fourth-quarter loss, implied in the earnings, could be due to some “kitchen-sinking” driven by a new management team and chairman, notes Daiwa Capital Markets’ Leon Qi.

Besides, China remains a growth story for the world’s insurers: Its expanding middle class is just waking up to the concept of buying insurance as protection rather than an investment tool, particularly when it comes to health. With almost 1.5 million agents, China Life is by far the country’s biggest provider. 

For its part, cash-rich China Life could reclaim some investor love by returning part of its war chest to investors: At 35 percent, its dividend payout ratio could be higher, given the insurer is among the top 20 most-profitable companies listed in Hong Kong. 

Until then, investors who've bought into the insurance story may want to take some cover.

To contact the author of this story: Nisha Gopalan at ngopalan3@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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