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China’s Life Insurers Face Cash Flow Pressure as Surrenders Jump

Cash flows at China’s life insurers will be squeezed this year by customers canceling contracts out of frustration with low returns and an increase in maturing policies, according to BoCom International Holdings Co. and Capital Securities Corp. (6005)

China Life Insurance Co.’s surrenders -- cash repayments policyholders receive when they choose to end the contracts before maturity -- more than doubled to 20.1 billion yuan ($3.3 billion) in the first quarter, the nation’s biggest insurer said last month. Redemptions jumped 62 percent at China Pacific Insurance (Group) Co. (2601) and 55 percent at New China Life Insurance Co. (2628) in the quarter, the insurers said.

Chinese banks are luring savers who have endured a 20 percent decline in the Shanghai Composite Index (SHCOMP) in the past two years with wealth-management products offering higher returns than deposits. Insurers may accelerate sales through banks of less profitable, short-term policies to keep cash coming in, according to BoCom International.

“Cash-flow pressures are tremendous this year,” said Li Wenbing, BoCom International’s Beijing-based analyst. “That’s especially so for China Life and Pacific Insurance,” which have the most policies maturing this year.

Insurers need adequate cash inflows to cover normal outlays including policyholders’ benefits, operating expenses, dividends to shareholders, and protect themselves from liquidity shocks such as early withdrawals by contract holders and defaults by debtors. Insufficient cash holdings may force insurers to liquidate parts of investment portfolios at undesirable prices and incur losses.

Maturing Policies

Policyholders’ search for more attractive returns is coinciding with a surge in maturing policies at insurers. That is partly a result of long-term contracts sold years ago and a peak in bank-counter sales of five-year policies, according to Capital Securities.

China Life has about 132 billion yuan of maturing policies this year, an increase of 93 percent from 2012, Li estimated. Claims in the first quarter jumped 41 percent from a year earlier to 43.9 billion yuan due to “intensive” payment for maturity benefits, equivalent to 40 percent of premiums earned over the period, the Beijing-based company said in a filing to the Hong Kong stock exchange April 25.

E-mails sent to China Life and New China Life’s Beijing- based press offices seeking comments were not returned. Phone calls to Pacific Insurance’s Shanghai-based media department went unanswered. New China Life is the third-biggest life insurance company, while Pacific Insurance is the fourth.

Regulatory Changes

Life-insurance premiums rose 4 percent to 996 billion yuan in 2012 after a 9 percent slump in 2011, according to the China Insurance Regulatory Commission. That compares with average growth of 30 percent a year in the previous three decades.

The CIRC, as the regulator is known, may scrap the 2.5 percent maximum rate on fixed-return policies in a trial starting as early as this month to help insurers make their products more attractive, a person with knowledge of the matter said last month. The changes may prompt premature redemptions to increase by less than 50 percent by value from the current level, the person said.

Banks’ wealth-management products, which invest in riskier assets, rose to 7.1 trillion yuan as of Dec. 31 and attracted “a very big part” of insurers’ bank-counter sales, Guotai Junan Securities Co. analysts led by Peng Yulong wrote in a March 27 report. Such insurance policies typically yield 3.5 percent to 4 percent, they wrote, compared with the 4.75 percent benchmark rate on the most comparable five-year bank deposits.

‘Poor’ Environment

“The environment for the industry remains poor and we’re not seeing any obvious improvement yet this year,” said Xie Jiyong, a Shanghai-based analyst at Capital Securities, referring to the jump in surrenders. “It could take as long as half a year for consumers to change their perceptions about insurance products.”

China Life’s new business value, which gauges profitability of new policies sold, may have dropped in the first quarter after a 3.1 percent increase last year, BoCom International’s Li said. Lower-margin policies sold through banks accounted for 73 percent of new business at the insurer last year and almost half at Pacific Insurance.

That compared with less than 20 percent at Ping An Insurance Group Co., the second-largest life insurer, whose surrenders rose 38 percent to 1.7 billion yuan in the first quarter, Li said.

‘Relatively Small’

Ping An faces “relatively small” pressure from maturity payments and surrenders this year, as most of its policies were sold by individual agents rather than banks and the contracts mostly have maturities longer than 10 years, the company said in an e-mailed statement.

Surrender value for the industry was 119.8 billion yuan last year, or 2.76 percent of premiums, below a 5 percent level identified by the agency potentially triggering liquidity risks, the regulator said. China Life’s annualized surrender ratio was 5.4 percent in the first quarter, compared to 2.7 percent last year, according to the Guotai Junan analysts.

“The surrender situation is severe,” Guosen Securities Co. analysts Shao Ziqin and Tong Chengdun wrote in an April 26 report. “The persistent shrinkage is aggravating pressures on the company’s cash flow and costs.”

--Zhang Dingmin. Editors: Tomoko Yamazaki, Andreea Papuc

To contact Bloomberg News staff for this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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