China insurers dodge bullet in crisis but risks loom

By Samuel Shen - Analysis

SHANGHAI (Reuters) - China's 3 trillion yuan ($440 billion) insurance industry was largely insulated from the U.S. subprime crisis that hit AIG (AIG.N) and other foreign firms, but the fallout poses the toughest challenge in a decade as profits tumble and demand for insurance products slumps.

China's cautious regulators reined in the overseas adventures of aggressive insurers, limiting direct damage from the global financial meltdown largely to Ping An Insurance's (2318.HK) (601318.SS) 15.7 billion yuan loss on its investment in Dutch-Belgian financial group Fortis (FOR.BR).

But as the financial turmoil evolves into a global recession that has chilled China's red-hot economy, investment returns are shrinking and premium growth is slowing or even turning negative.

For industry giants China Life Insurance Co (2628.HK) (601628.SS), the world's largest insurer by market capitalization, and Ping An, the second-largest, this means tumbling profits and share prices.

Smaller players, however, face graver dangers that have prompted even stricter government supervision.

"The risks in the insurance industry have just begun emerging," said Xiao Chaohu, analyst at Everbright Securities Co.

"Small insurers may face liquidity problems if premium incomes keep falling while redemptions and claims rise."

China's insurance sector has more than 100 foreign and domestic players, although more than half of the market is controlled by China Life and Ping An.

About one-10th of insurers cannot meet capital adequacy standards required by regulators, Xiao said.

INDIRECT IMPACT

The official Shanghai Securities News reported on Friday that China's insurance regulators had stepped up their monitoring of life insurers' liquidity conditions, concerned that falling asset prices and rising redemptions could hurt their cash flow.

"In the long term, China's insurance industry will mainly suffer from the indirect impact of the financial crisis," China Life President Wan Feng said in an e-mailed comment to Reuters.

"If the economy slides into a deep, prolonged recession and capital markets remain sluggish, insurers' investment returns will fall sharply ... and demand for insurance products will weaken," Wan said.

China Life's Hong Kong-listed shares are down nearly 50 percent since the start of the year, in line with the benchmark Hang Seng Index .HSI, although Ping An, punished by investors for its overseas setbacks, has fallen by nearly two-thirds.

Ping An posted a $1.15 billion third-quarter loss due to its failed investment in Fortis but could well have found its survival under threat, analysts said, if it had proceeded with a $17 billion fund-raising plan to finance overseas acquisitions.