Source: Huibaotianxia
From January 1, 2023, listed insurance companies began to fully apply the new accounting standards in their financial statements. At the same time, unlisted insurance companies also began to actively prepare for the future application. Even some unlisted insurance companies have already applied the new accounting standards in advance, in order to make full use of the characteristics of the new accounting standards and make their financial statements more beautiful.
So far, listed insurance companies have applied the new accounting standards for five quarters. Although the time is short and the data accumulation is not much, the industry still has a deeper understanding of the new accounting standards. On the whole, many listed insurance companies have significantly increased the fluctuation of their profits and net assets in the past five quarters, which is the result of insufficient matching of assets and liabilities after insurance companies applied the new accounting standards.
On the whole, the new accounting standards are reshaping the business philosophy of the insurance industry, making assets and liabilities more sensitive to changes in interest rates, which requires insurance companies to attach great importance to asset liability matching management, and then completely change the business philosophy.
Compared with the past, the development environment of the insurance industry has undergone tremendous changes. In the past, it was relatively loose, but now the interest rate has decreased, the accounting system has increased restrictions, and the demand has become more difficult... For insurance companies, the solution is still to find a way out from within, that is, to deal with the interest rate environment, reduce debt costs, enhance product flexibility, and not let rigid costs be too high. After the change of accounting system, the life insurance industry needs real asset liability management.
On May 18, "Huibao World" held the "2024 Life Insurance Q1 Strategy Closed door Seminar" in Beijing, where senior executives from life insurance companies' channels, actuarial, financial, investment and other business lines, as well as experts and senior executives from insurance asset management, brokers, funds and other companies gathered to share the current investment environment, the development status of the life insurance industry, etc, As well as in-depth discussion, the views on the new accounting standards are summarized as follows:
01
The new standards aggravate the fluctuation of net profits and net assets, which is rooted in the insufficient matching of assets and liabilities
The new standards have led to an increase in financial volatility. The previously commonly used available for sale items are no longer applicable, and all fluctuations can not be concealed. It is roughly speculated that improper allocation of equity will lead to large fluctuations in profits, and improper allocation of bonds will lead to large fluctuations in net assets.
Under the new standards, the net profits of some listed companies have shown significant fluctuations in the past five quarters, especially some companies have shown negative values in several quarters, which is rare in history. Because in the past, the financial management ability of insurance companies generally did not lead to the loss of listed companies in a single quarter, but under the new standards, this situation could not be controlled.
At the same time, the fluctuation of net assets is also great. The growth rate of some companies has reached 10%, while that of others has also declined considerably.
It can be felt that since the fourth quarter of last year, many companies have begun to strengthen exchanges to discuss how to stabilize profits or manage profits. This is mainly because insurance companies did not fully consider the matching management of assets and liabilities at the beginning, especially equity allocation. The first quarter and the second quarter of last year were periods of good volatility, and everyone enjoyed this volatility, but by the third quarter and the fourth quarter, negative volatility began to appear, and everyone began to feel troubled. It was not until the fourth quarter that some companies began to take this issue seriously.
This year, some insurance companies began to buy high dividend stocks and high interest stocks as part of their strategies. Some non listed companies have also started to prepare for the implementation of the new standards in the next 18 months and started to accumulate high dividend stocks.
02
The old code is like wearing a pair of flat shoes for the industry, while the new code is like wearing a pair of skates for the industry
Under the new accounting standards, financial management becomes more difficult for the management: the old standards are like wearing a pair of flat shoes, making us stand very stable, because assets and liabilities are relatively stable. The new standard is like wearing a pair of skates. Assets and liabilities are fluctuating. They must move in the same direction and range. A slight difference will make them feel uncomfortable. This is exactly the constraint brought by the new standards, which further triggered a series of restrictions on investment and asset allocation.
In the old standard, the reserve provision is based on the 750 day moving average treasury bond yield curve, which highly smoothes the market volatility. When the treasury bond yield fluctuates, only 1/750 of the volatility will be reflected on the balance sheet. However, the new standard adopts the spot interest rate, and the debt side shows strong volatility and debt.
This leads to a double mismatch of insurance companies:
First, debt is sensitive to interest rate, that is, debt is strong. This requires that assets must also show debt nature, not debt but assets, which will lead to mismatch. Strictly speaking, traditional accounts should not be matched with stocks, only with bonds to avoid mismatch. However, due to the high cost of debt, it is impossible to achieve a reasonable return only by allocating debt, so it is necessary to allocate shares. This makes insurance companies have to carry out large asset mismatches.
The second is the selection of accounts. The debt side was stable in the past, but now it is highly volatile. The new standard provides a tool to bypass the debt volatility caused by interest rates and directly enter OCI (other comprehensive income). If the income on the liability side enters OCI, the income on the asset side should also enter OCI, and both parties meet in the same account and offset each other. This brings about a problem: how to select accounting subjects? Whether bonds or stocks on the asset side are selected, OCI should be selected. Under the new standards, stocks are either trading or FVOCI, and bonds are divided into three categories: amortization, OCI, and TPL. The asset selection account of the traditional insurance account should be placed in OCI, because the source of fluctuations is coming from here.
03
The high financial volatility of listed insurance companies since 2023 is mainly due to the low proportion of OCI when the old and new standards are switched
The new accounting standards have new requirements for OCI's rights and interests:
1. Only dividends can be included in profits;
2. The stock will be sold in the future, and the spread profit and loss will not be transferred back to the income statement, which is completely different from the past available for sale account. The available for sale account allows the profit and loss of price difference to be transferred back to the income statement after sale, and becomes a reservoir in which profits and losses can be hidden.
3. The new accounting standards also restrict the free transaction of OCI's rights and interests, which must be "not for the purpose of transaction". This requires the company to explain clearly to the auditor when selling, otherwise it may be considered that the division of accounting items is wrong.
These restrictions make high interest shares the only equity suitable for OCI. On January 1, 2023, when switching accounting standards, listed insurance companies found that there were not many stocks that really met the high interest rate, intended to hold for a long time, and did not intend to sell in the near future. Therefore, most of these stocks were put into FVOCI (changes in fair value are included in other comprehensive income). As the name implies, changes in the fair value of these stocks directly affect the income statement: when stocks rise, profits rise; When stocks fall, profits fall, which directly leads to a significant increase in the volatility of financial statements.
Should all fluctuations be ironed? All stocks will be allocated as OCI high interest stocks, so that the price difference fluctuation of stocks will not affect profits, and only dividends will be included in the income statement. However, some companies are confident in their investment ability and may still allocate some TPL (financial assets measured at fair value and whose changes are included in current profits and losses) offensive stocks to increase profits. It depends on the investment style and objectives of each company. At present, the allocation of industry listed companies in OCI accounts may not be enough, which is the source of the first fluctuation. The profit fluctuation mainly comes from the wrong selection of stock accounts.
The second source of volatility is net assets. At present, the debt side is sensitive to interest rates. When the interest rate drops, the debt will increase, and FVOCI fixed income bonds will also increase. If these two increases are the same, the net assets will not move. If not, the net assets will be affected. Now it is basically a negative impact, with more reserves and less debt growth. In short, the duration of debt is not enough. Ultra long term treasury bonds are still valuable to us. At least they can lengthen the duration of assets and reduce the fluctuation of net assets.
04
It is expected that the equity allocation proportion of traditional insurance accounts may decrease in the future, while the equity allocation proportion of dividend insurance accounts will increase
Dividend insurance is different from traditional insurance. Its standard directly stipulates that liabilities are equal to the fair value of underlying assets In fact, this is the concept of AUM in asset management business. Customers see the net value of underlying assets, and risks are also passed to customers. This provides insurance companies with great flexibility in investment. They can allocate more stocks instead of being so tied down. The choice of stock subjects is also flexible. They can choose both OCI and TPL. The investment is flexible. However, this flexibility is not unlimited, because there are still rigid costs on the liability side, which are now 2.5%, and some companies even reached 3% before. Therefore, it is necessary to ensure that the fluctuations on the asset side will not affect the rigid costs.
It is expected that the equity allocation proportion of traditional insurance accounts may decrease in the future, while the equity allocation proportion of dividend insurance accounts will increase. The equity allocation proportion in the dividend insurance account of a leading foreign insurance company reached 27%, which is very high, while the equity allocation proportion in the traditional insurance account is only 7%, which is relatively conservative. This is because the traditional insurance account has rigid costs, so it is conservative, while the cost of the dividend insurance account is elastic, so it can be slightly more radical.
As for the division of accounting items under the old standards, most of the equity was divided into available for sale items. After the implementation of the new standards, most of the equity is classified into the FVTPL (measured at fair value and the changes are included in the current profit and loss) account. In fact, this proportion is unbalanced. In this case, the choice of OCI subjects should be increased. However, the report and annual report show that the equity of OCI seems to have declined a bit. Some companies have expanded their overall asset size, but the equity of OCI has not increased or even decreased.
From the perspective of listed companies, at least the allocation of high-yield stocks still needs to be increased, but now the price of high-yield stocks has become higher, and they cannot be sold quickly after buying, which may bring about time problems, so stock selection has become more important. The timing of this work last year was more appropriate, and this year may be more difficult.
Fixed income assets are accounted for at amortized cost under the old standards. Since the liability side remains unchanged and the asset side remains unchanged as far as possible under the old standard, amortized cost is selected. However, under the new standards, the volatility of the liability side is increasing, so nearly two-thirds of the fixed income assets are placed in the OCI account. Some traditional insurance companies are still allocating FVTPL bonds, but in fact this should not be done. All bonds of traditional insurance should be placed in the OCI account, otherwise the subjects corresponding to fluctuations will be inconsistent.
05
The industry's understanding of the new guidelines is generally in error, focusing too much on fluctuations, but its core is to promote life insurance companies to change their own perceptions
There are widespread and profound misunderstandings about the new standards in the industry at present. The new standards do put forward very high requirements for asset liability management of life insurance, or promote it to an unprecedented important position, but the good intentions are often ignored. Once falling into a cognitive misunderstanding, the more attention paid to the new standards, the easier it is for the industry to deviate.
In 2023, people hope that the insurance industry will participate in the rescue of the market. They believe that the new standards limit the investment of insurance companies to some extent, especially in the operation of stocks. Therefore, the dilemma of "having to allocate, but not more" will arise in the equity investment of insurance companies. This shows the industry's misunderstanding of the new accounting standards.
The issue of OCI (other comprehensive income) option is another cognitive error against the new guidelines. The OCI option is ultimately an "option", which can be used or not. It is widely believed in the industry that all returns should be included in OCI in order to "reduce investment volatility". From the data, the new standards have indeed increased the volatility, but insurance companies are not investment companies. They can not only focus on asset management, but also need to carry out liability management, Both the fluctuation of net profit and the fluctuation of net assets are the result of the two-way effect of the fluctuation of assets and liabilities.
People pay too much attention to the problem of investment fluctuations, and they think that all stocks should be included in OCI, but the assessment of the Ministry of Finance is based on the old standards, which leads people to believe that they cannot invest in stocks. However, in the current situation of declining market interest rates, shrinkage of non-standard assets, extension of debt maturity, and risk of interest margin loss, insurance companies must invest in stocks.
The current market is very fragmented. The preferences and aspirations of various shareholders of state-owned enterprises, private enterprises and foreign-funded enterprises are completely different. Large insurance companies and small insurance companies are also very different. In this case, what is the business goal of enterprises? Is it for fluctuation or profit? We seem to be too focused on volatility.
The fluctuation of assets is rigid and explicit, but why does the debtor have to suppress the fluctuation and close it in a black box? This is not the original intention of the new guidelines, The new standard requires insurance companies to confirm and measure in groups, but does not require them to be treated as dull. If the assets allocated by liabilities lose money and are closed in a black box by means of measures, who can blame it?
The criticism of the new standards has fallen into a misunderstanding, and even become a shield. It is not recommended to always put forward requirements and suggestions to the regulatory authorities, because many people have problems understanding from the beginning. The industry's understanding of the new standards still needs to be carefully studied on the basis of certain data and experience accumulation.
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