[Weekly Preview] Inside Chinese Insurers’ Impressive Earnings (AI Translation)

【周刊提前读】险企业绩亮眼 真实经营能力为何不容乐观？

In 2024, the insurance industry continued its strong performance from the first half of the year, supported by capital markets and measures to cut costs and improve efficiency. The fourth-quarter solvency reports for 145 non-listed insurance companies indicated significant profit increases for the industry. However, some companies experienced a reduction in net assets, highlighting the effects of new accounting standards.[para. 1]

Life insurance companies displayed notable profit growth, with non-listed firms earning a net profit of 24.7 billion yuan and about 70% of companies reporting profits. Taikang Life led in profits with 14.61 billion yuan, while China Post Life Insurance showed a significant recovery from a previous loss. [para. 1][para. 5] In the property insurance sector, non-listed firms achieved 7.721 billion yuan in net profits, reflecting a 60.35% increase.[para. 5]

The improvement in net profits is primarily attributed to enhanced investment returns and a reclassification of asset bonds, which boosted the overall yield. Comprehensive investment returns for life, property, and reinsurance companies increased significantly from the previous year.[para. 5] However, despite the increase in net profits, net asset growth remains challenged due to the new accounting standards implemented starting in 2023, known as IFRS 17 and IFRS 9, which alter the accounting of unrealized gains from investments.[para. 5]

The new accounting standards resulted in a disconnect between net profits and net assets, especially affecting bank-affiliated insurance firms. Approximately a quarter of life insurance companies, including several bank-affiliated ones, reported a decline in net assets despite substantial profit increases.[para. 5][para. 9] This discrepancy is due to new requirements that separate unrealized gains and losses, affecting reported equity figures.[para. 9]

The industry's solvency adequacy ratio is anticipated to improve in 2024, although significant pressure persists. The transition period for the "C-ROSS" project, which assesses this ratio, has been extended as part of efforts to bolster the industry's financial health. [para. 3][para. 17] Many insurance companies continued issuing bonds to supplement capital, with issuances totaling 117.5 billion yuan, marking a record high. In particular, five companies issued substantial capital supplementary bonds to boost capital reserves.[para. 17]

Capital replenishment remains a critical issue, with bond issuances and capital increases helping to address solvency challenges. Nevertheless, the sector faces ongoing pressures related to regulatory conditions and economic factors affecting financial performance.[para. 23] In response, some insurance companies have shifted evaluation metrics from net profits to focus on net assets and value preservation. [para. 10][para. 23]

The extension of transition periods for regulatory requirements like Solvency Regulation Rules (II) indicates an adjustment to the challenging macroeconomic environment for insurers. The regulatory authorities have relaxed some rules to aid the sector in navigating pressures from market conditions and policy changes.[para. 23] The insurance industry is in a relatively sluggish phase, different from previous rapid growth periods, requiring pragmatic regulatory adjustments to support stability.[para. 27]

Overall, while significant gains in profits were recorded, the insurance sector grapples with accounting standard changes, balancing profitability with maintaining and growing net asset value, and adapting to evolving regulatory frameworks. The gradual improvement in solvency ratios and capital supplementation through bonds shows a move towards strengthening financial resilience despite underlying challenges.