LEX Proof at last that Chinese shares can be as toxic as securitised products – albeit on a smaller scale. China Life, the country’s top insurer, reported a 60 per cent plunge in year-on-year net profits in the first quarter after booking an $800m loss on the fair value of its investment portfolio.
China Life – and rival Ping An, which reports later this month – were always likely to take the biggest hit from falling share prices. Many Chinese companies have been playing the stock market but insurers have the biggest equity portfolios. Equities comprise 23 per cent of China Life’s investment portfolio.
That was a fortunate position to be in last year when the Shanghai market virtually doubled. Not so in the first quarter when the index fell by a third. Thus the yield on China Life’s investment assets fell from 11 per cent in 2007 to a puny 1.1 per cent in the first quarter. Gauging the true damage will have to wait until China Life publishes its accounts under international standards, as Chinese standards allow for some cushioning.
So is it time for investors to run for cover? Despite the drubbing insurers have received, they continue to trade at a price/earnings premium to the banks. The basic investment rationale, of a fast-growing but barely tapped market, remains intact. Personal insurance premiums grew by 22 per cent in 2007 and total penetration is low. Insurers are rapidly expanding their distribution channels in order to exploit the vast potential.
Yet the market is becoming tougher too. More products, such as mutual funds, are clamouring for investors’ attention. Similarly, more distributors – not least the banks – are pushing investment products. And rising inflation puts more stress on enhancing real returns. With this much uncertainty on the horizon, China’s insurers are anything but safe and boring.
