China's Insurers Fall After Regulator Plans Removal of Interest-Rate Caps
China Life Insurance Co. and China Pacific Insurance (Group) Co. tumbled in Shanghai trading after the regulator said it plans to remove a cap on the guaranteed rate of return for some life insurance contracts, scrapping a decade-old ceiling that helped contain price competition.
China Life, the nation’s biggest insurer, fell 6.7 percent, the most since Nov. 28, 2008, to 23.00 yuan as of 2:04 p.m. local time. China Pacific declined 6.6 percent. Ping An Insurance (Group) Co. shares are suspended pending an announcement on a restructuring of its bank unit.
The China Insurance Regulatory Commission said July 9 it plans to allow insurers to decide the “preset interest rate” paid to holders of traditional life insurance policies. Price competition will likely intensify and squeeze profit margins, while the increased attractiveness of such contracts may slow down sales of other types of products, said Olive Xia, a Shanghai-based analyst at Core Pacific Yamaichi.
“The short-term negative impact on life insurers is fairly obvious,” Xia said in a phone interview today. “The market will need some correction in evaluations to digest the impact.”
Companies were asked to submit their feedback to the proposal by July 20, according to the statement. The regulator cut the ceiling on preset interest rates for all life insurance policies to 2.5 percent in June 1999, after insurers racked up losses as price competition drove returns paid to policyholders above investment yields. The higher the preset rate is, the cheaper the insurance policies are for customers.
‘Controllable’ Impact
Traditional life insurance refers to contracts with premiums and policyholder benefits already set when they are written, the regulator said. Such contracts, which focus on risk coverage and compare to participating policies and investment- related products, account for less than 20 percent of China’s insurance market by premiums, according to Xia.
“The overall impact on the industry is controllable,” Guosen Securities Co. analysts Shao Ziqin and Tong Chengdun said in a report yesterday. “Given the environment of low market rates, the likelihood of vicious competition and a repeat of the high interest rate contracts is small.”
Least Affected
Ping An, China’s second-biggest insurer, will be least affected by any increase in the guaranteed rate of return given the company’s lowest proportion, at 9.7 percent, of traditional policies out of the total individual life premiums, the Guosen Securities analysts said. That compares to China Life’s 45 percent and Pacific Insurance’s 50 percent.
The profit margin of life insurance companies will be squeezed by 8 percent, Shenyin & Wanguo Securities Co. analyst Robert Hu wrote in a report today. He cut the target price for Pacific Insurance to HK$27.00 from HK$30.00 and downgraded the stock to “underperform” from “neutral.” China Life’s “neutral” rating was maintained.
The benchmark Shanghai Composite Index advanced 0.6 percent, while Hong Kong’s Hang Seng Index gained 0.7 percent.
--Chua Kong Ho, Zhang Dingmin. Editors: Malcolm Scott, Chitra Somayaji
To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net
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