By Craig Stephen
HONG KONG (MarketWatch) ? Investors never like a profit warning, and even less so when it?s from a bellwether like China Life Insurance Co., the world?s largest insurer by market capitalization.
Profits could be down as much as 50% when results come out on March 27th, the insurer announced last week.
The sharp sell-off in its shares suggests many funds were caught wrong footed, although investors with a long memory were surely forewarned.
Anyone who kept a copy of the prospectus when China Life /quotes/zigman/336639/quotes/nls/lfc LFC -1.04% /quotes/zigman/29330 HK:2628 -1.67% /quotes/zigman/29330 HK:2628 -1.67% listed just over eight years ago will find it had one of the largest risk disclaimers ever tacked onto a listing document.
Asia Week Ahead: Japan, India rates in focus
The central banks of Japan and India are scheduled to make decisions on interest rates and asset-purchase programs next week. China will also be in the spotlight as the country's parliament wraps up meetings. MarketWatch's Rex Crum reports.
Much of this was because pre-IPO China Life was in a right mess, having written millions of negative spread policies that guaranteed years of losses after being caught out by declining interest rates. For the listing to proceed these toxic policies were removed from China Life and ring-fenced.
This allowed it to debut as the world?s biggest IPO of the year in 2003, after a joint listing in New York and Hong Kong. Investors were happy to overlook the state-owned insurer?s blundering past, betting it would reform alongside the mainland?s financial industry.
After all, the growth story sounded compelling, buying into a state-backed giant with 50% of the market, in potentially the biggest growth market in the world for life insurance and savings products.
And if you look at China Life?s turnover of 318 billion yuan ($50.4 billion) and 33 billion yuan net profit in 2010, it has lived up to expectations of generating some massive numbers.
But with profits now set to halve, has China Life reverted to its accident-prone habits of old?
The company blamed a decline in investment yield and increase in impairment losses for its profit warning last week. Granted the poor investment returns from A-shares last year will have hurt, but this was widely known.
What looks to have tripped up the insurer is its failure to wean itself off a reliance on selling single-premium savings products and sell more life insurance policies. Further, once again it has been left exposed by a reversal in the mainland interest rate cycle.
A long-standing criticism of the behemoth is its inability to develop a sales force that can sell traditional life products. Instead, China Life has relied on the easy growth in single-premium saving products, often sold through banks. According to company data in the first half of 2011 single-premium was 38% of China Life?s product mix, whereas by comparison for Ping An Insurance Group Co. /quotes/zigman/372285 PNGAY -0.31% ? /quotes/zigman/8216 HK:2318 +0.64% ?that figure was 17%.
Typically single-premium products (which are similar to time deposits) are easier to sell than life or long-term saving products. But they are also lower margin and do not bring a long-term recurring income stream. They are also more prone to being terminated early.
China life showed a 50% jump in the number of customers surrendering policies in its third-quarter report. Further, it is easy to see how pressure is building on redemptions after China?s recent cycle of rate increases.
China?s fifth rate hike last July pushed annual bank deposit rates to 3.5%, which also meant the payout on a five-year term bank deposit reached 5.5%.
Insurers will have a hard time matching this with their single premium savings products. Regulations restrict them from guaranteeing more than 2.5% a year (so at to avoid a repeat of negative spread products) although they can try and make it up in discretionary bonus dividends.
Adding to China Life?s troubles is a new aggressiveness by mainland banks towards attracting funds after seeing their deposit bases shrink.
It is easy to imagine how mainland banks could make life uncomfortable for China Life if they encouraged customers to redeem funds sitting in low yielding insurance saving products.
China Life is also reliant on bank channel distribution where it sells 50% of its products. Ping An Insurance, by comparison, sells 86% of its business through its agents, according to Nomura data.
How much of a hit China Life takes from early policy surrenders will depend on the surrender charge and its negotiating power with the banks. This is one area to watch closely when results do finally come out.
Meanwhile, the profit warning from China Life is likely to intensify the debate on China?s industrial policy of supporting its state industry flagships with kid glove regulation.
In recent years authorities have increasingly restricted the presence of foreign firms entering its insurance market. But this also has a downside as the absence of robust competition removes a key driver of change and innovation. You could argue China Life never changed its old habits because it never really had to.
Ultimately, investors will need to be convinced this state dinosaur can learn how to sell life insurance as well as just savings products.
/quotes/zigman/336639/quotes/nls/lfc
Volume: 318,698
March 9, 2012 5:01p
/quotes/zigman/29330 Volume: 20.05M
March 12, 2012 11:05a
/quotes/zigman/29330 Volume: 20.05M
March 12, 2012 11:05a
/quotes/zigman/372285 Volume: 5,376
March 9, 2012 4:57p
/quotes/zigman/8216 Volume: 2.30M
March 12, 2012 11:05a
Source: http://www.marketwatch.com/news/story.asp?guid=%7B98A063EC-6BE1-11E1-864A-002128049AD6%7D&siteid=rss
survivor south pacific survivor south pacific house of wax patrick willis team america snow day snow day
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.