China Life plans to revamp its stock portfolio to focus more on investments in high-yield stocks after its equity volatility caused its net earnings to plunge in 2018.

In a regulatory filing on January 29, China’s largest insurer said that net profit attributable to equity holders for 2018 will drop by 50% to 70% compared to its 2017 total, based on preliminary estimates.

Zhao Lijun, vice president at China Life, attributed the loss to pronounced volatility in China’s stock market last year, which caused large fluctuations in its investment returns. Stocks and funds account for 10% of the insurer’s Rmb2.8 trillion ($417.21 billion) portfolio as of mid-2018, he said.

He said that the drop also comes down from China Life being listed in New York, Hong Kong and Shanghai, and thus subject to the reporting standards of these markets. One impact is that it is required to report fair value changes of over 20% to equities that it holds in its profit and loss account – even if it isn’t selling them.

Local Chinese reporting standards do not require such stringent asset valuation changes. As a result, the earnings statements of local insurer peers may be less affected by last year’s volatility, Zhao explained.

Going forward, China Life intends to invest more in high-yield stocks so as to counter the cyclical fluctuations in profits, Zhao told media and analysts in the company's "open day" event held in Beijing on Friday (February 22 – AsianInvestor joined it through a conference call). He didn't indicate how much the insurer intended to raise its exposure to these stocks. 

China Life is not the only insurer to target larger investments in high-yield stocks. Ping An, the country’s second-largest insurer, said in August last year that it will pay more attention to stocks with higher dividends.

Ping An has faced similar earnings volatility as China Life, due to its equity investments and the fact it is the only insurer in the country to have implemented IFRS 9, part of the International Financial Reporting Standards that oversee investment reporting on an insurer's financial statement. The company revealed it had faced greater fluctuations of its financial numbers in its latest interim report and cut its stock holdings by 1.6 percentage points to 9.5% in the first half of 2018.

Under IFRS 9, financial institutions prefer value stocks with higher dividends as the price of these stocks tends to be more stable. Dividend income can also help to mitigate the impact of fluctuations in fair value, according to an insurance analyst who declined to be named. China Life follows IFRS but has delayed implementing the IFRS 9 requirements. It will have to do so by 2021. 

REFORM TO COME

China Life's top management underwent a shakeup late last year. In November the 64-year old Yang Mingsheng resigned as chairman due to old age and was replaced by Wang Bin, the former chairman of China Taiping Insurance. Then in December China Life’s former president Lin Dairen resigned for the same reason and was succeeded by Su Hengxuan. Other senior management changes also took place in China Life's pension and property insurance units in 2018.

China Life’s new management team has pledged to reform the company and strengthen capabilities in asset allocations. Su told media last week that the company is conducting comprehensive strategic planning and will introduce a series of reforms. 

These reforms include enhancing its coordination of asset allocations, optimising its management of external mandates and constructing a market-oriented mechanism for staff employment, he said.

For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.

This story has been updated to reflect that China Life has delayed implementing IFRS 9 standards.