Ping An on Wednesday became the first Chinese insurer to report interim results under new international accounting standards, revealing a greater degree of fluctuation in its numbers and a drop in its stock holdings.

Financial institutions globally have been required to follow International Financial Reporting Standards 9 (IFRS 9) since the start of this year but insurers can choose to adopt them no later than 2021 and Ping An remains the only Chinese institution to have braved them to date.

Under the new rules more changes in fair value are recognised, depending on the types of investment asset held. In the case of Ping An, the proportion of its assets categorised and measured at so-called fair value through profit or loss (FVPL) rose to 19.5% as of June-end from 1.9% six months earlier, Ren Huichuan, president of Ping An Insurance Group, said at a press conference.
 
“This (IFRS 9) has indeed increased the volatility of our investment income," Ren said, before outlining Ping An's commitment to "continue to source quality and long-term equity investments to diversity risk and lower the impact of market volatility on us.”
 
Ping An’s allocation to stocks stood at 9.5% of total investment assets at the end of the first-half period, 1.6 percentage points lower than at the end of 2017, representing the biggest change among all asset classes.
Timothy Chan

In future, China's second-largest lifer will pay more attention to stocks with higher dividends, Timothy Chan, Ping An's chief investment officer, said at the same event.

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, an insurance analyst who declined to be named told AsianInvestor.

IFRS IMPACT

Under the previous IAS 39 rules, when the value of a security holding dropped insurers could hide the unrealised investment loss in the other comprehensive income (OCI) statement and not show it on the profit and loss account (income statement). And when the asset went up in value, insurers could reflect the gain in the income statement once the profit was realised, the analyst said.

But insurers can no longer do this under IFRS 9. Whenever a security has entered the OCI, realised profit can no longer be shown in the income statement but in the balance sheet, he said.

So insurers have instead to report a larger amount of its assets at fair value on the profit or loss account, which then increases the volatility of investment income and overall earnings. If an insurer books all the assets in the OCI, it cannot record any gain in fair value in the income statement, he said. 

Under IFRS 9, in the first half of 2018, Ping An Group achieved an operating profit attributable to shareholders of the parent company of Rmb59.3 billion ($8.7 billion), up 23.3% year on year. The amount under the old accounting standards would have been Rmb62.41 billion, a 43.7% improvement.

Some of unrealised losses were assigned to the OCI under the previous standard, inflating the net profit. Not so under the new system, the insurance analyst said.

IFRS 9 demands more of an insurer’s investment management capabilities and internal risk controls. But for the bigger names with more resources the cost of adapting the new standards should be lower than for their smaller peers, Guosen Securities said in a report in January.

ASSET ALLOCATION

Ping An’s insurance funds had total investment assets of Rmb2.58 trillion as of June 2018, 5.43% more than the Rmb2.45 trillion posted at the end of last year.

Bond investments at 44.3% of the total accounted for the largest proportion, while non-standard debt assets, which include debt investment plans and wealth management products, made up 14.1% of its investment portfolio.

The annualised net investment yield for the first half of the year was 4.2%, which is lower than the 5% for the same period last year.

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