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Whether it is the company's core property and casualty insurance business or its young life insurance business, China Life Insurance is now facing a difficult situation.

Text/Daily Financial Report Mu Yan

2024 marks the 38th anniversary of the establishment of China Life Insurance.

However, China Life Insurance, which entered its "middle age", not only failed to have smooth sailing, but instead faced a mid-life crisis.

After long-term operation, its proud property and casualty insurance business has entered the second tier of the industry, and its premium income has reached fifth in the industry. However, in recent years, it has been repeatedly fined and its compliance operations have been criticized.

Not only the property and casualty insurance business, but also its life insurance business has frequently "flashed red lights". Although it has been established for 9 years and its scale has been expanding, the company's life insurance business has been losing money for a long time, and the income from the asset side has declined significantly. At that time, the chairman was replaced. The chairman Sun Yuchun, who had served for 8 years, took the initiative to resign due to age reasons. Although the proposed chairman Shao Xiaoyi is good at finance, he has little experience in insurance business, and the task of leading the company's transformation is arduous.

Whether it is the old property and casualty insurance business or the emerging life insurance business, China Property Insurance is facing difficulties.

Property and Casualty Insurance: High-quality development is insufficient, and quality control becomes a major problem

Starting from 2023, China Property Insurance ranked third on the list of fines, with a total fine of more than 20 million yuan in 2023. In 2024, the situation did not improve. According to statistics, in the first half of 2024, China Insurance's core subsidiary China Property Insurance received 48 fines from regulators, with a total fine of 11.403 million yuan, ranking third among property and casualty insurance companies.

Judging from the specific reasons for the fine, there are both major and minor problems. The major problem lies in internal control, especially the management of employees. From 2023 to the first half of 2024, the company's violations such as fictitious insurance intermediary business to embezzle fees and preparing false financial information were particularly serious. In addition, there were other problems such as false performance fees, false underwriting, and inadequate business execution.

The fundamental reason for the company's frequent internal control problems is the lack of quality in the high-quality development of China Property Insurance's business.

Judging from the premium scale alone, China Property Insurance did perform well. In 2013, China Property Insurance's insurance business income was 29.745 billion yuan, and it increased to 65.283 billion yuan in 2023, doubling in 10 years. However, the company's net profit fell instead of rising. In 2013, the company's net profit was 1.139 billion yuan, but in 2022 it was only 1.088 billion yuan, and in 2023 it continued to fall to 673 million yuan.

From the perspective of insurance structure, the company's property insurance is mainly motor vehicle insurance, but after the comprehensive reform of auto insurance in 2020, the company's motor vehicle insurance business revenue declined, and it was not until 2023 that premium income recovered to the 2020 high point (see the figure below). Due to the lack of strong channel and brand advantages, the company mainly relied on price advantages to seize the motor vehicle insurance market in the past. However, after the comprehensive reform of auto insurance, the overall price of auto insurance has fallen. The company's continued implementation of the high rebate strategy to seize customers will inevitably result in greater losses. After losing the price advantage brought by high rebates, some customers turned to well-known insurance companies with many offline outlets, and the company's auto insurance premium business was therefore affected to a certain extent.

▲Source: Company financial report

Although the company's auto insurance premiums have resumed steady growth through refined operational management after 2021, the overall contribution of auto insurance to the company's premiums has been on a continuous downward trend, with auto insurance accounting for 61.15% of revenue in 2018. As the comprehensive reform of auto insurance is being deepened and market competition is intensifying, the company's underwriting business faces great challenges.

▲Source: Company financial report

The company's current focus is on agricultural insurance. Thanks to the country's emphasis on food security and agricultural insurance protection, agricultural insurance has become the fastest growing property insurance product in recent years. The company's agricultural insurance premium income will increase from 10.612 billion yuan in 2022 to 16.601 billion yuan in 2023, with an average annual compound growth rate of 16%. From 2020 to 2023, the company's agricultural insurance comprehensive cost rate was 96.3%, 98.1%, 95% and 94.3% respectively, and the underwriting profit increased from 396 million to 953 million, with excellent performance.

▲Source: Company financial report

However, the excellent performance of agricultural insurance cannot make up for the risk of underwriting losses in the company's other businesses. Since 2020, among the top five commercial insurances of China Property Insurance, except for auto insurance and agricultural insurance, other insurance types have been in a loss-making state. From the first quarter of 2022 to the first quarter of 2024, the company's comprehensive cost rate was 104.12%, 101.20%, 98.92%, 99.48%, 99.86%, 99.82%, 99.61%, 100.28%, and 99.89%, respectively. The comprehensive cost rate has been under pressure for a long time, and the property insurance business itself has not contributed good results to the company.

▲Source: Company financial report

The company's property and casualty insurance business development quality is not only reflected in business and performance, but also in regulatory indicators and risk control. In 2021, the company's comprehensive solvency ratio and core solvency ratio were 208% and 183%, respectively. By the first quarter of 2024, the corresponding data dropped to 188% and 150%, respectively, both 50% lower than the industry average; the company's risk rating was also downgraded from "AA" to "BBB" in the first half of 2023, down two levels in half a year, and has remained at this level since then.

Under the conditions of weak macro-environment and overall downturn in the insurance industry, the company lacked sufficient competitiveness in the industry and its own performance was weak. In terms of weighing performance and fine costs, China Property Insurance had frequent violations. Ultimately, the company only focused on business growth over the years and lacked compliance and internal control awareness. Both its systems and services failed to keep up with the pace of business expansion.

Life insurance: Rough development is unsustainable

Compared with its property and casualty insurance business, although China Life Insurance has been more restrained in terms of violations, its performance is more worrying.

Since its business start in 2015, China Life Insurance's business scale has maintained rapid growth: when it was first established, China Life Insurance's business income was only 8 million yuan. By 2022, the company's life insurance premium income had exceeded 6.5 billion yuan. Among them, 2019-2022 was the period of explosive growth in the company's premiums, during which the company's average annual premium growth rate was close to 50%.

However, the rapidly developing life insurance business did not contribute to the company's profits. Except for 2016, China Life Insurance has been unable to escape the curse of losses since its establishment, which is closely related to the company's rough development model.

For a long time, China Life Insurance has been relying on the bancassurance channel to drive its performance growth. The proportion of the company's bancassurance channel has always remained above 50%, and the products sold are mainly annuity products such as Hengtiancai and Fumanying. The proportion of premiums from individual insurance channels is less than 5%.

▲Source: China Credit Trust

Although high-interest products in the bancassurance channel can boost the growth of the company's premium scale in the short term, the disadvantages of this model are also obvious in the long run: since bancassurance channel customers purchase insurance products mainly for financial management, the profitability of products sold through bancassurance channels is usually worse than that of other channels such as individual insurance. According to statistics from thirteen actuaries, the ROE of companies that mainly use bancassurance channels is significantly lower than that of companies that mainly use non-bancassurance channels. Once the investment performance is under pressure, the company will easily fall into losses.

Moreover, the reliance on a single channel and product also makes the company's life insurance business extremely vulnerable to policy fluctuations. In 2023, affected by the "integration of insurance and banking" policy, the company's bancassurance channel business is difficult to carry out, and the channel's premium income has dropped from 3.834 billion yuan in 2022 to 3.058 billion yuan. Although the premium income of intermediary and individual insurance channels has increased during this period, it is difficult to make up for the gap in the bancassurance channel in a short period of time, resulting in an overall decline in the company's premium income in 2023.

▲Source: Company financial report

In addition to being impacted by policies, the company will also face cash flow pressure in the future. The China Fortune Manying Annuity Insurance, which China Life launched as its main product from 2019 to 2021, will gradually enter its survival period after this year, when the cash value of the product will reach its maximum. The company may face pressure from surrender payments in the future.

Calculation of cash value of Zhonghua Fumanying

▲Source: Company official website, Fat Tiger Baobao official account

This kind of surrender payment pressure has already begun to appear in 2023. According to the information disclosed by the company, the cumulative surrender amount of Fumanying in 2023 reached 214 million yuan, and the cumulative surrender rate was 4.9%, making it the company's product with the highest surrender amount in 2023. According to the five-year period, the surrender pressure is expected to continue at least until 2026, which will test the company's liquidity management and capital operation.

Due to the expansion of losses, at the end of the first quarter of 2024, China Life Insurance's core and comprehensive solvency adequacy ratios dropped to 71.47% and 125.26% respectively. Despite measures such as issuing capital supplement bonds and increasing capital and expanding shares, the company's solvency will still barely meet the minimum regulatory requirements.

The future: transformation is full of challenges

Both the company's core property and casualty insurance business and its young life insurance business are now facing a difficult situation.

The repeated fines and changes in leadership are just superficial phenomena. Behind this is that China Life Insurance has long focused on scale and growth rate, while ignoring the development quality. In the past, the company relied on scale to drive business. Although the business cost was high, due to the good performance of the investment side, it was able to bring certain returns to the company overall.

However, the performance of the investment side has been under pressure in the past two years, further squeezing the company's profitability: Like most insurance companies, the company's fixed-income products account for a high proportion of investment, and the fixed-income investment of property and casualty insurance and life insurance companies accounts for more than 70%. However, the downward speed of treasury bond yields has accelerated in recent years, which has had a significant impact on the interest rates of the company's fixed-income products: from the beginning of 2022 to the end of 2023, the yield on 10-year treasury bonds fell from 2.8% to 2.56%, and the company's investment income also fell from 1.8 billion yuan to 940 million yuan, almost halving.

Entering 2024, the situation has not improved: at the beginning of this year, the yield on 10-year treasury bonds was still 2.55%, but by July it had fallen to around 2.2%, and there are even signs of a wider decline. Looking forward, with the country supporting the development of the real economy, interest rates are expected to fall. If the company continues to adopt the previous rough expansion model, it will inevitably face greater risks.

In this context, Sun Yuchun's departure is probably not just due to age considerations, but also indicates that the company intends to make adjustments in its development direction and management strategy.

Shao Xiaoyi, the newly nominated chairman of China Life Insurance, has been engaged in financial work in the past. In February this year, she was approved to serve as the deputy general manager and financial director of China United Insurance Group. Just a few months later, she was promoted to the chairman of China Life. Shao Xiaoyi is the only director of China Life who has a background in Oriental Asset Management. Sun Yuchun failed to effectively promote the company's healthy and sustainable development during his tenure. Oriental Asset Management chose its own people to "take the lead" at this time, which may also be intended to strengthen the management and control of its subsidiaries.

Although Shao Xiaoyi has extensive experience in financial management at several well-known financial institutions in the past, as a director of an insurance company, in addition to being proficient in finance, he also needs an in-depth understanding of investment, risk management, insurance business and other aspects. Shao Xiaoyi has relatively little experience in these areas, which is also a test for whether he can successfully lead the company's transformation in the future.

In terms of property insurance business, the company currently needs to focus on strengthening its internal control management capabilities. Under the background of stricter supervision and declining investment returns, it is difficult for the company to achieve scale expansion by relying on the high rates and rebates in the past. In the absence of strong brand and channel advantages, if it receives frequent fines, it will only further reduce customers' trust in the company, which will be more detrimental to the development of its business.

Meicai.com Statement: This article is based on public information. The information or opinions expressed do not constitute investment advice to anyone and are for reference only. The picture material comes from the Internet. Please delete if it infringes.

2024

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