Can China’s insurers shrug off Covid-19?

March 31 2020 by Nick Ferguson

Some Chinese insurers are saying that the Covid-19 outbreak will not seriously affect their business in 2020, even as they present their earnings over webcast while wearing face masks.

Conglomerate China Taiping’s chairman Luo Xi said last week that he expected a “double victory” of controlling the effects of the virus and hitting 2020 business targets, which looks like a tall order after the company’s record earnings and strong growth in 2019 — profits were up 31% to HK$9 billion (US$1.16 billion).

“The epidemic is further raising national insurance awareness and accelerating the shift to insurance demand.” Luo Xi, China Taiping

Repeating that performance will be particularly challenging given that much of the company’s growth was driven by investment income, which was up by 42.3% over 2018. But far from worrying about the outlook, Xi told investors that the outbreak could ultimately be good for the insurance industry in China.

“The epidemic is further raising national insurance awareness and accelerating the shift to insurance demand,” he said. “We believe that the mainland insurance market will continue to grow steadily as China’s economy recovers, and the life insurance industry in particular is expected to see significant growth.”

Long term
China Life sounded a similarly upbeat tone as it announced profit growth of more than 400%, which represented a rebound after significant investment losses in 2018.

“Looking ahead, we firmly believe that the Chinese economy will maintain its long-term sound development and its high-quality growth fundamentals remain unchanged, and that the domestic insurance industry is still at an important stage full of strategic opportunities,” it said in its earnings statement.

That may be true, but the outlook for investments in 2020 is bleak to say the least, with Morgan Stanley forecasting that the global economy will shrink by half a percent for the full year.

“Whilst the short-term impact from the virus is notable, it does not derail the structural shifts underway in the region.” Dale Nicholls, Fidelity China

China’s apparent success in containing the outbreak prompted hopes that its economy would escape serious harm, but the severity of the outbreak in Europe and the US has threatened such optimism. Shanghai’s benchmark share index is down 10% from where it started the year.

But the government has so far been aggressive in supporting businesses through interest-rate cuts, new spending commitments worth trillions of renminbi, tax cuts, easy loans and expectations of more generous stimulus down the road — and so far it has not downgraded GDP growth forecasts.

Even so, not all Chinese insurers have been promising business as usual. China Pacific, for example, warned of business risks from the coronavirus pandemic and a slowing Chinese economy.

Such concerns may be valid. China Taiping’s 2019 results show the value of its new mainland life insurance business falling more than 20% in Hong Kong dollar terms, while life premiums for the first two months of 2020 are down 10%.

Contained?
However, if China’s containment of the disease holds up, Xi’s prediction about a post-pandemic boom in insurance sales may come true.

“Whilst the short-term impact from the virus is notable, it does not derail the structural shifts underway in the region,” said Dale Nicholls, who manages Fidelity China Special Situations, in a note. “I remain cautious as it is difficult to predict the extent and time this will last for, however if we see continued signs of the virus being contained then this impact could be short-lived as sentiment and demand would improve quickly.”

Nicholls has increased his allocation to Chinese insurers — China Life and China Pacific are among the US$1.1 billion fund’s biggest holdings — on an assumption that the sector will emerge stronger after the pandemic.

Whether such optimism is justified in the short run, it is much easier to accept that such dynamics will play out in the longer term as Chinese consumers become increasingly willing to accept the value of insurance protection.

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