25-10-2017

China 10-year bond yield began to rebound since September last year, and has risen to 3.81% recently, reaching three-year high. The rise in Treasury Yield is favorable to life insurance companies in different aspects. Frist of all, as life insurance companies generally allocate more than 80% of their investment in fixed-income, the rise in bond yield is favorable to their investment income. Although bond price will fall given a rise in bond yield, more than 60% of bonds held by HK-listed life insurers are classified as “held-to-maturity investments”, meaning that the change in fair value of bond price will not be recorded in the life insurers’ income statement. Plus the fact that as most of the products sold by life insurers are life insurance with dividends, approximately 70% of the loss due to decreasing bond price will be borne by policy holders; thus, the impact on life insurers’ income statement is limited. Second, the decline in the “750-day Treasury bond yields” has been gradually slowed down due to rising Treasury Yield. It is expected that the 750-day Treasury Yield will begin to rise from 2018, which will lower the reserves needed by life insurers, boosting their profitability. Coupled with the rise in bond yield will also make the assumptions used to calculate the embedded value of insurance companies more realistic. In terms of rising interest rates per se, pure life insurance players will be most benefited because of their long investment period and long duration of the investment portfolio. On the other hand, the business structure of the sector continued to be optimized. Listed insurance companies focus more on personal agency business, which has a higher profit margin than banks agency business, as well as recurring premium payment. The whole sector is expected to record improving profitability in the future, recommend for a long term investment.

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