Net profit of unlisted insurance companies increased by 35 billion: Boosted by the bull market or "paper improvement"?

As of now, 60 non-listed life insurance companies have disclosed their operating data for 2024.

According to the Enterprise Early Warning Platform, these companies recorded a total insurance business revenue of 1.11 trillion yuan, a year-on-year increase of 12.24%; net profit reached 24.7 billion yuan, reversing a loss of over 10 billion yuan in 2023, with a turnaround scale approaching 35 billion yuan.

Looking back at the 2024 market, the insurance business revenue of non-listed insurance companies grew overall by 12.24%, with the guaranteed return ratio adjusted downwards and the liability structure continuously improving; the warming of both the bond and stock markets provided considerable returns for the investment side.

Beyond performance, another significant reason for the change in profit is the switch in accounting standards.

At the request of the Ministry of Finance, non-listed insurance companies will implement new accounting standards starting in 2026. The adjustment of statistical criteria during the transition period directly affects the financial performance of life insurance companies:

Firstly, under the new insurance contract standards, the 750 curve is replaced by the spot yield, and many insurance companies use the OCI option to transfer the profit fluctuations caused by reserve provisions to net asset fluctuations.

Secondly, the new standards adjust the classification of financial assets from four categories to three; to ensure a smooth transition, some insurance companies, based on the old standards, adjust HTM (held-to-maturity assets) to AFS (available-for-sale financial assets) in line with the direction of the new standards.

This has led to three forms of statistical classification for financial assets among companies: "old standards unadjusted classification, old standards adjusted classification, new standards," resulting in significant differences in whether the same asset is included in current profit and loss, making performance non-retrospective and lacking comparability among peers.

Amidst these changes, the growth of insurance companies during the transition period raises questions about whether it stems from capability enhancement or financial statement beautification.

Fog and Dawn

Market skepticism regarding the profits of life insurance companies mainly focuses on data comparability.

From practical results, there are significant differences in the same period data compiled under the new and old standards.

For example, in the first three quarters of 2024, the net profit of China Merchants Life Insurance under the two standards differed by over 2 billion yuan, while the difference for PICC Life Insurance reached over 10 billion yuan.

The root of the difference lies in the new standards requiring financial reports to capture market fluctuations more timely, with adjustments involving asset classification, reserves, contract liabilities, etc., significantly impacting financial performance.

The first major change is the discount rate.

Under the old standards, the discount rate for life insurance was based on the 750 curve (750-day moving average of government bond yields); under the new standards, it is based on the spot yield.

As government bond yields decline and reserve requirements continue to rise, many companies face profit pressure.

Regarding the increase in reserves caused by interest rates, the new standards allow insurance companies to use the OCI option to spread the changes over various periods, transferring profit fluctuations to asset fluctuations.

The profit changes of China Post Life Insurance fully illustrate this process.

In 2023, China Post Life Insurance reported a loss of 12.014 billion yuan, with the accounting profit impact from discount rate fluctuations reaching as high as 11.21 billion yuan.

Amidst significant losses, the company switched to the new accounting standards ahead of schedule in 2024, and the smoothing effect of the OCI option was perfectly reflected in the financial report:

That year, China Post Life Insurance not only turned a profit but also ranked second among non-listed insurance companies with a "performance" of 9.188 billion yuan; during the same period, net assets shrank by over 40%, showing a rare reverse change in profit and assets under the old standards in previous years Xinfeng's analysis found that among the 9 life insurance companies showing profit growth and asset shrinkage in 2024, 6 had a significant difference between growth and shrinkage, all of which adopted the new accounting standards.

Another major change is the classification of financial assets.

The new standards enhance the objectivity of asset classification and the consistency of accounting treatment, adjusting financial assets from "four categories" to "three categories."

Under the new standards, a large amount of assets for insurance companies are recorded in profit and loss, directly reflected in their financial statements as FVTPL (financial assets measured at fair value with changes recognized in profit or loss for the period), leading to more pronounced performance fluctuations;

Additionally, during the transition phase, many insurance companies only implemented classification adjustments based on the old standards, that is, adjusting HTM to AFS in accordance with the spirit of the new standards.

Amidst these changes, life insurance companies exhibit three forms of financial asset statistics: "old standards unadjusted classification, old standards adjusted classification, new standards."

Due to varying transition times and degrees, non-listed insurance companies have become non-comparable with their peers and past periods; the seemingly impressive overall profit rebound cannot escape the suspicion of financial "beautification."

However, amidst the chaos, there are clear growth clues.

At the request of the Ministry of Finance, five listed insurance companies—Ping An, China Life, PICC, Taikang, and Xinhua—have switched to the new standards starting in 2023 and have retroactively adjusted their previous year's performance as required.

Xinfeng's statistics show that in 2024, the insurance business revenue growth rate of these five insurance companies is all above 2.7%;

Except for Ping An, which has not disclosed its performance, the other four insurance companies have all forecasted profit growth of over 55%, with growth rates far exceeding the previous year, and PICC and Xinhua are expected to break nearly 10 years of profit growth records.

The collective significant increase in comparable profits among leading insurance companies also reflects the overall development pattern of the insurance industry, with a glimmer of dawn gradually emerging behind the data fog.

Stronger or Stronger?

Despite the transitional period of accounting standards, profit fluctuations among insurance companies are frequent, but the strong performance on the liability side still belongs to the leading institutions.

According to corporate warning data, the top 15 non-life insurance companies in terms of insurance business revenue in 2024 have a high overlap of 93.33% with those in 2023;

Although the rankings of various institutions fluctuate, the overall stability of the "first tier" members remains, with the income of leading members being comparable to that of listed insurance companies.

In 2024, Taikang Life, China Post Insurance, and Xintai Life continue to hold the top three positions in terms of liability performance among non-listed insurance companies, achieving insurance business revenues of 228.324 billion yuan, 134.94 billion yuan, and 52.994 billion yuan, respectively.

Under the strong impact of non-listed insurance companies, the landscape of the life insurance industry is also adjusting:

Currently, the "top" non-listed Taikang's insurance business revenue has surpassed that of Xinhua and PICC Life Insurance, ranking fourth in the industry, with only a 10 billion yuan gap from the third-ranked Taikang Life;

Taikang's liability growth rate reaches 12.37%, exceeding Taikang Life's by 9.93 percentage points, with the gap between the two continuing to narrow.

The second-ranked China Post's revenue scale has also surpassed that of PICC Life Insurance, with a year-on-year growth rate as high as 22.82%, closely chasing Xinhua Insurance.

After excluding the interference of OCI options on profits and assets, Xinfeng Statistics found that 28 life insurance companies achieved simultaneous growth in insurance business income, net profit, and net assets in 2024.

Among them, some small and medium-sized life insurance companies contributed impressive numbers that were short-lived:

Xinhua Pension, National Pension, and Fosun Ping An's insurance business income doubled, with National Pension maintaining a high growth trend, year-on-year growth of 329.67%;

12 companies, including HSBC Life, turned losses into profits, with China British Life and China Netherlands Life among 7 companies experiencing profit growth rates exceeding 100%;

Dehua Angu Life, Anxin Life, and China Merchants Renhe Life saw their net profits double, with 2 companies achieving growth rates over 150%.

Even though the objective law suggests that the likelihood of maintaining high growth rates for an extended period is minimal, the overall profit recovery and individual outstanding performances also indirectly confirm that many companies are gradually emerging from the "deep water zone" of transformation.

Pressure Still Exists

The significant improvement in investment returns is a key factor driving the recovery of insurance companies' profit performance.

For example, listed insurance companies like Xinhua and PICC have stated in their performance forecast announcements that the high profit growth is due to "actively seizing opportunities in the capital market, with total investment income significantly increasing year-on-year."

In the case of unlisted insurance companies, 18 companies reported investment returns exceeding 5%, and 5 companies exceeded 6%: 20 companies had a comprehensive investment return rate exceeding 10%.

Xiaokang Life topped the list with an investment return rate of 8.86%, whereas the company's average investment return rate over the past three years was only 3.50%.

Overall, the surge in investment returns is attributed to the recovery of the bond and stock markets in 2024.

During the "924 market," the Shanghai Composite Index continued to rise sharply; in the bond market, the yield on 10-year government bonds fell by 88 basis points throughout the year, significantly increasing the face value of various bonds held by insurance companies.

The change in statistical criteria during the accounting standards transition period has amplified the impact of investment income on the comprehensive investment return rate.

Wang Qing, the chief actuary of Dehua Angu, pointed out that more companies are reclassifying HTM bonds to AFS bonds during the transition period, causing past and current bond floating profits to collectively enter the current year's comprehensive income, driving the continuous rise in comprehensive return rates.

However, at this moment, two "clouds" still loom over the profit surge of insurance companies.

First, the "asset shortage" dilemma remains the main theme of the investment side, especially under the backdrop of overdrawn space for interest rate bonds in 2024, it is still uncertain whether insurance companies can find suitable investment targets in the future;

Second, increased equity market investments will inevitably lead to higher capital occupation, thereby affecting solvency performance.

For example, Changcheng Life, which was active in the capital market in 2024, saw its comprehensive and core solvency adequacy ratios decline by 4.53 and 8.57 percentage points, respectively, from the beginning of the year by the end of the second quarter.

The capital occupation caused by increased equity investments is the main reason for the decline in solvency.

In the solvency report for the second quarter of 2024, Changcheng Life stated, "The minimum capital for market risk increased by 366 million yuan compared to the previous quarter, an increase of 4.36%."

It also mentioned, "The minimum capital for overseas equity price risk and exchange rate risk both increased by over 100%, mainly due to optimism about the performance of the Hong Kong stock market under the expectation of interest rate cuts, leading to active investment behavior." Fortunately, under pressure, the latest investment by Great Wall Life Insurance has been secured.

By the end of 2024, the Beijing Financial Supervision Bureau has approved Great Wall Life Insurance to increase its registered capital by 620 million yuan; since its establishment in 2005, Great Wall Life Insurance has completed 10 capital increases, with registered capital rising from the initial 300 million yuan to 6.839 billion yuan.

However, against the backdrop of difficulties faced by real enterprises and central enterprises "withdrawing funds," the overall external capital replenishment channels for small and medium-sized insurance companies remain unimpeded.

Experts suggest that the equity management regulations for insurance companies should be adjusted, and the entry standards for investors should be appropriately relaxed; the capital replenishment channels for small and medium-sized insurance companies should be broadened, and the thresholds for bond issuance should be appropriately lowered.

There are also calls to further "loosen" policies in the context of guiding medium- and long-term funds into the market.

Zhou Jin, a partner in financial management consulting at PwC China, suggested that adjustments should be made to solvency rules.

"For example, lowering the capital occupation coefficient for long-term allocated equity assets," Zhou Jin stated, "or adopting risk coefficients linked to holding periods or assessment periods to guide insurance funds to increase equity allocation and extend holding periods."