Falling by 99%, what happened to the Chinese life

On the evening of October 26th, the stock bar and the snowball fryer were up.

The reason is that Chinese Life Insurance Co., Ltd. (hereinafter referred to as "Chinese Life") released its financial report for the third quarter of 2023 that night.

According to the financial report data, the net profit of Chinese Life in the third quarter was only 53 million yuan, a year-on-year plunge of 99.1%.

For a time, rumors of the explosion of Chinese life were rampant. But, is it really thunder?

Chen Jiaming, an executive of an insurance company, told Yan Financial Reporter: "Chinese Life has neither solvency problems, nor major financial losses or other scandals, but the money earned less, which is a normal phenomenon of market fluctuations, and it is not a thunderstorm." ”

Despite this, as China's largest life insurance company with a market value of more than 900 billion yuan, Chinese Life's net profit in the third quarter fell by about 99% year-on-year, and the net profit was only more than 50 million, which is still staggering.

You know, in August this year, Fortune magazine released the list of "Fortune 500" companies in 2023, and Chinese Life ranked 54th, selected for 21 consecutive years. Previously, the World Brand Lab released the "China's 500 Most Valuable Brands" in 2023, and the brand value of Chinese Life was as high as RMB 485.567 billion, ranking first in China's insurance industry.

Chinese life, what is wrong? Where did its money go?

A 3-year high and a 10-year low

Chinese Life said in the third quarter report of 2023 that in the context of economic recovery, the company's insurance business has achieved steady growth, but net profit has declined due to the impact of the market environment.

The report shows that the scale and growth rate of premium income, new single premium, and first-year premium payment in the first three quarters of Chinese Life have reached a new high in the same period in the past three years. During the reporting period, Chinese Life achieved premium income of 578.799 billion yuan, a year-on-year increase of 4.5%. In terms of new premiums, the Company achieved a year-on-year increase of 14.8% to RMB196.656 billion, of which the first-year premium was RMB105.982 billion, representing a year-on-year increase of 16.0%.

Despite the growth in premium income, the company's net profit performed poorly. During the reporting period, the net profit attributable to shareholders of the parent company was 16.209 billion yuan, a year-on-year decrease of 47.8%.

Chinese Life's main financial data for the third quarter of 2023/Source: Chinese Life's third quarter report for 2023

Chinese Life said that the decline in net profit was mainly affected by the continued downturn in the equity market, resulting in a year-on-year decline in investment income.

The total assets of Chinese Life Insurance amounted to RMB5,759.367 billion, and the investment assets reached RMB5,519.950 billion. In the first three quarters of 2023, the company achieved a total investment income of 109.997 billion yuan, with a total investment return of 2.81%; The net investment income was 148.340 billion yuan, and the net investment return rate was 3.81%, which was the lowest investment return rate in 10 years.

Chinese Life 2013-2023 third quarter investment return / data source: Chinese Life official website

Under the influence of market uncertainty, Chinese Life's asset impairment losses surged in the third quarter.

According to the report, the company's asset impairment loss in the first three quarters was as high as 32.569 billion yuan, a year-on-year increase of 120.4%, of which the impairment loss in the third quarter increased by about 19.7 billion yuan.

According to a number of media reports, Liu Hui, vice president of Chinese Life, pointed out at the third quarter results conference that because the capital market is still low and volatile in 2023, the company's equity assets in a lower market position have suffered a certain equity spread loss, and the asset impairment loss has increased to 30 billion. Coupled with the decline in fixed income in a low interest rate environment, the company's equity investment decreased year-on-year, resulting in pressure on overall investment income this year.

Accounting standards adjusted

How to understand Liu Hui's "equity spread loss" and "fixed income decline"? Before we do that, we need to understand how insurance companies make money.

There are two main ways for insurance companies to make money, namely insurance business and investment activities.

In terms of insurance business, the insurance company deducts the insurance money and operating costs paid to the customer from the premiums collected by the customer, and the remaining part is its profit.

In terms of investment activities, insurance companies will invest the premiums collected in the stock market, bond market, real estate and other channels, through which interest, dividends or capital appreciation can be obtained. This also means that the profitability of insurance companies can be affected by both market volatility and insurance payout risk.

Chen Jiaming told Yan Financial Reporter: "The sharp drop in the net profit of Chinese Life is just to encounter the double killing of stocks and bonds, and this year's stock market is really bad, plus Chinese Life has also bought a lot of local bonds, corporate bonds, etc., and the decline in yields is normal." ”

According to the 2023 semi-annual report of Chinese Life, as of the end of the reporting period, 72.38% of the company's investment assets were used for investment in financial assets with fixed maturity dates, including fixed deposits, bonds, debt financial products, etc., and 18.02% were used for stocks, funds and other equity investments. Investment in associates and joint ventures accounted for 4.76%.

Chinese Life Investment Assets/Source: Chinese Life 2023 Interim Report

"Equity spread loss" refers to a loss incurred by a company that previously purchased shares at a higher price than the current market price, and "decline in fixed income", which refers to a decline in the yield on fixed income assets due to a low interest rate environment.

In other words, during the reporting period, the company did not make any money in the stock market or in other fixed income products such as bonds.

However, in terms of stock investment, there have also been sharp declines in the stock market in previous years, so why did profits collapse this year?

An important reason that cannot be ignored is that Chinese Life has changed this year's accounting standards.

As a listed insurance company in China, Chinese Life has adopted the new accounting standards for insurance contracts and new financial instruments standards as required from 1 January 2023, namely IFRS17 (Accounting Standard for Business Enterprises No. 25 Insurance Contracts) and IFRS9 (International Financial Reporting Standard 9 Financial Instruments).

The new Code of Insurance Contracts changes the principle of revenue recognition for insurance companies. The income from insurance services is no longer directly equal to the premium payable in the current period, but is recognized on a period-by-period basis throughout the insurance period, and the investment component is excluded.

Comparison of premium income under the new current standard/Source: Accounting Standard for Business Enterprises No. 25 - Insurance Contracts, Caitong Securities Research Institute

According to the new financial instruments standard, the method of provision for impairment of financial assets has also been changed from the "incurred loss method" to the "expected credit loss method", and the impairment of equity assets must be included in the income statement thereafter. Coinciding with the poor stock market performance in the third quarter of this year, the net value of stock investment fell sharply, and the net profit also decreased.

The relevant person in charge of Chinese Life previously responded that the change in accounting standards may affect the presentation of net profit in the financial report of insurance companies, but will not change the long-term business essence of insurance companies. They mainly affect the distribution of earnings over different periods of time and do not change the core business and long-term financial health of the insurer.

In addition, many financial analysts said that the real estate bonds related to Sino-Ocean Group have become the oil bottle for the net profit growth.

Chinese Life is the largest shareholder of Sino-Ocean Group, with a shareholding ratio of 29.59%. Sino-Ocean Group's main business covers real estate development, financial investment and overseas business. According to public information, the two companies have close cooperation in various fields such as financial products, insurance business, real estate investment, property services and pensions.

At the end of 2021, Chinese Life signed a financial framework agreement with Sino-Ocean Group with an amount of RMB 15 billion, through which within three years, Chinese Life can subscribe to financial products issued by Sino-Ocean Group according to its investment needs.

June 15, 2022, Shanghai, Sino-Ocean Commercial Building/Source: Visual China

However, since 2023, Sino-Ocean Group has faced financial losses, debt distress and default pressure.

On October 13, Sino-Ocean Group issued a major loss announcement, the company's net assets at the end of 2022 were 47.276 billion yuan, and the company's unaudited consolidated statement net loss in the first half of 2023 was 12.562 billion yuan, accounting for 26.57% of the net assets at the end of the previous year.

According to Sino-Ocean Group's 2023 interim results announcement, in the first half of this year, Sino-Ocean Group's net profit attributable to shareholders of listed companies was -18.369 billion yuan, with a year-on-year increase of 1,589%.

According to the data disclosed in the interim report, the company's debt due within one year is about 44.616 billion yuan, accounting for 49% of the total loans, and the debt due within 1 to 2 years and 2 to 5 years is about 19.834 billion yuan and 18.863 billion yuan, accounting for 21%.

Sino-Ocean Group's loan maturity date/Source: Sino-Ocean Group's 2023 interim report

However, as of the reporting period, Sino-Ocean Group's total cash assets totaled 7.650 billion yuan, which is only a drop in the bucket for the loans to be repaid within one year.

Chinese Shou had to clean up the mess for it.

On June 25, 2023, the two major shareholders of Sino-Ocean Group, Chinese Life and Dajia Life, established a joint working group to gain a more comprehensive understanding of Sino-Ocean Group's operations. Subsequently, Sino-Ocean Group made major changes to the board of directors to cope with the current difficulties.

According to Chinese Life's semi-annual report, based on the income statement and owner's equity change statement for the first half of 2023 provided by Sino-Ocean Group, Chinese Life has made equity method adjustments to its investment in Sino-Ocean Group, and the equity method adjustment amount from January to June 2023 is -2.194 billion yuan. As of June 30, 2023, the book value of Chinese Life's long-term equity investment in Sino-Ocean Group has fallen to 0.

This means that Chinese Life believes that the value of its investment in Sino-Ocean Group has decreased by 2.194 billion yuan and no longer expects any financial return from this investment. The investment in Sino-Ocean Group alone has caused heavy losses to Chinese life.

Liu Hui emphasized that the fluctuation of the company's investment income in the third quarter does not represent the company's real investment management ability, and hopes that the market can rationally look at the value and inherent volatility of equity asset investment.

Investment, Risk & Regulation

Insurance companies that have been dragged down by the investment side and greatly affected their net profits are not only Chinese Life.

On October 27, Xinhua Insurance, China Pacific Insurance, and Ping An of China successively released their performance reports for the third quarter of 2023.

According to the data of Xinhua Insurance's report for the third quarter of 2023, in the third quarter, Xinhua Insurance's net profit loss attributable to the parent company was 436 million yuan, down 120.7% from 2.102 billion yuan in the same period last year.

In the first three quarters, the premium growth rate of Xinhua Insurance reached 3.79%, and the original insurance premium income was 142.911 billion yuan, however, the investment income decreased by 11.432 billion yuan compared with the previous year, and the income was only 211 million yuan, a year-on-year decrease of 98.19%.

Xinhua Insurance's main accounting data for the third quarter of 2023/Source: Xinhua Insurance's report for the third quarter of 2023

In the third quarter of 2023, CPIC's net profit attributable to shareholders of the company was 4.817 billion yuan, down 54.3% year-on-year. The operating income was 80.387 billion yuan, a year-on-year decrease of 9.3%. CPIC said the decline in net profit was mainly due to volatility in the capital market.

As of the end of the third quarter, CPIC's investment assets were 2.17 trillion yuan, an increase of 11.1% from the end of the previous year. The investment income in the first three quarters was 6.039 billion yuan, down 89.78% from the same period last year.

CPIC's main accounting data for the third quarter of 2023/Source: CPIC Q3 2023 report

According to Ping An's report for the third quarter of 2023, although the total operating income increased by 5.20% to 704.938 billion yuan in the first three quarters of 2023, the net profit attributable to the parent company decreased by 5.61% year-on-year to 87.575 billion yuan. In terms of single-quarter data, the net profit attributable to the parent company in the third quarter was 17.734 billion yuan, a year-on-year decrease of 19.6%.

Ping An's main accounting data for the third quarter of 2023 / Source: Ping An's report for the third quarter of 2023

"When an insurance company reaches a certain scale, its foreign investment income must be dominant." Gao Jiaming told the salt financial reporter.

According to the data of the "China Insurance Industry Development Report 2021" jointly released by economist Ren Zeping and others, from 2013 to 2020, the balance of insurance funds in mainland China increased from 7.7 trillion yuan to 21.68 trillion yuan, with an annualized growth rate of 16%, and has become the second largest institutional investor after public funds.

The substantial increase in the balance of insurance funds undoubtedly shows the important position and influence of the insurance industry in the capital market.

However, as the scale of funds continues to expand, investment risks and regulatory issues are gradually emerging.

On October 7, Zhonghui Life Insurance Co., Ltd. was approved to acquire the insurance business and related assets and liabilities of Tianan Life Insurance Co., Ltd. So far, since the CBIRC officially took over in July 2020, the handling plans of the four insurance companies under Tomorrow Holdings Limited have been basically clarified.

Tomorrow Holdings Co., Ltd. is involved in a number of industries, including finance, real estate, etc., and in 2017, Xiao Jianhua, the actual controller of the company, was arrested. Xiao Jianhua illegally occupied or controlled a large number of financial licenses through countless shell companies, and occupied a large amount of funds from financial institutions for a long time, resulting in the failure of major shareholders to return the overdue funds, and finally fell into a repayment crisis.

In 2020, the State Administration of Financial Supervision and Administration decided to take over these institutions because Huaxia Life Insurance, Yi'an Property Insurance, Tianan Property Insurance and Tianan Life Insurance, which are subsidiaries of Tomorrow Holdings, triggered the conditions for takeover under China's insurance law.

At present, Ruizhong Life Insurance, which was jointly founded by the Insurance Protection Fund and other investors, will legally take over China Life Insurance; Yi'an Property Insurance is now wholly owned by BYD, a new energy vehicle company, and the reorganization plan has been fully implemented. Tianan Property & Casualty's asset portfolio was taken over by Shanghai-based state-owned Shenergy Group, which has been approved to establish Shenergy Property & Casualty Insurance Co., Ltd.

2008-2022 Insurance Security Fund Size / Source: Caixin based on public information

As of the first quarter of 2023, six insurers are in the process of risk disposal, and eight insurers are considered quasi-problematic insurers and have suspended the disclosure of solvency reports, according to Caixin Weekly. In addition, there are 13 insurance companies with a C rating and 3 with a D rating, including China Life Insurance, Evergrande Life Insurance, Tianan Life Insurance, etc.

Many of these 30 insurance companies have assets in the hundreds of billions of yuan, which means that if these companies fail to solve their solvency problems, it may have a greater impact on policyholders, investors and the market.

The government has been actively promoting the standardized development of the insurance industry.

In 2020, in order to further standardize the operation of liability insurance and protect the legitimate rights and interests of parties involved in liability insurance activities, the China Banking and Insurance Regulatory Commission formulated the Measures for the Supervision of Liability Insurance Business.

This method clarifies the definition of liability insurance, the obligations of insurance companies and the scope of insurance services, so as to promote the sustainable and healthy development of liability insurance business.

In 2021, the State Administration of Financial Supervision and Administration adopted the Measures for the Supervision and Administration of Insurance Group Companies, which aims to strengthen the supervision and management of insurance group companies, effectively prevent the operational risks of insurance groups, and promote the healthy development of the financial and insurance industry.

In 2022, the State Administration of Financial Supervision and Administration carried out a nationwide special inspection on related party transactions in the use of insurance funds. This is the first special inspection of related party transactions in the use of insurance funds since the establishment of the China Banking and Insurance Regulatory Commission, and the first large-scale special inspection action after the reform of the responsibilities of insurance institutions.

In Chen Jiaming's view, "whether it is the industry access threshold, solvency management, business supervision, or the use of insurance funds, etc., it will only become more and more stringent and standardized, and the entire industry will continue to develop for the better."

(At the request of the interviewee, Chen Jiaming is a pseudonym)