Author: Chief Financial Analyst Xu Chengyuan Financial Business Department Chen Qun
Background
International Financial Reporting Standards No. 9-Financial Instruments (IFRS9) was finalized in July 2014 and officially came into effect in 2018. According to regulations, overseas listed insurance companies will be implemented from January 1, 2021, but domestic listed insurance companies and non-listed insurance companies will have separate regulations.
IFRS9 reforms the asset side of insurance companies. The core change lies in the two aspects of reclassification of financial assets and impairment
IFRS9, one of the core changes is to change the classification and measurement of financial assets from the four-part method to the three-part method. The four types of financial assets under the original four-part method include: one is financial assets measured at the fair value of and its changes are included in the current profit and loss (referred to as "FVPL"), which are divided into trading financial assets and designated accounting part; the second is available-for-sale financial assets (referred to as "AFS"), which includes the part measured at fair value and measured at cost; the third is loan and receivable investment; the fourth is holding to maturity investment (referred to as "HTM"). The last two financial assets are mainly financial assets measured at amortized cost . Under IFRS9, three types of financial assets include: one is financial assets measured at amortized cost (referred to as "AC"); two is financial assets measured at fair value and their changes are included in the current profit and loss, namely FVPL; three is financial assets measured at fair value and their changes are included in other comprehensive income (referred to as "FVOCI",), which includes equity instruments designated as FVOCI and debt-type instruments formulated as FVOCI.
At present, judging from the annual reports of listed insurance companies in the first half of 2018, their stock investments are classified in AFS. In the first half of the year, the stock investment scales in China Life Insurance, China Pacific Insurance and Xinhua Insurance AFS were 124.2 billion yuan, 46.7 billion yuan and 35.6 billion yuan respectively. AFS stock investment accounted for 71.8%, 83.0% and 95.7% of its total stock investment scale, respectively. Ping An of China has switched to IFRS9 since 2018. The share of stocks in FVPL has increased significantly, accounting for 49.5% of the total stock investment scale, far lower than other listed insurance companies. The high proportion of stocks in insurance companies' AFS is because AFS can play a role in regulating profits to a certain extent under the four-part method. Insurance companies can dispose of floating profit assets to increase profits when the performance growth rate is too high, and floating loss assets can adjust the growth rate. However, in IFRS9, it was irrevocable after being designated as an equity tool for FVOCI, which increases the prudence of companies to recognize stock investments as FVOCI assets. Another core change in
IFRS9 is the impairment of financial assets , which has been changed from the original "loss model" to the "expected loss model", and impairment accounting is carried out based on expected credit losses. According to the expected credit loss model, if the credit risk increases significantly from the initial recognition, the expected credit loss for 12 months will be confirmed; if the credit risk increases significantly from the initial recognition, but there is no objective evidence of impairment, the expected credit for the entire expiration period should be confirmed. Overall, the intensity of financial asset impairment has increased compared with previous accounting standards.
Therefore, Oriental Jincheng believes that after the implementation of IFRS9, there are two main impacts on asset allocation in insurance funds: First, most stock investments under AFS in the past will be reclassified to FVPL, and changes in fair value of are directly included in the current profit and loss, which will lead to a significant increase in the impact of its stock investment on performance fluctuations; Second, financial assets are impaired by the expected credit loss model, and the amount of impairment of their financial assets will be increased.
Affected by IFRS9, insurance asset management is expected to adjust in stocks, non-standards and bond investments
Given that insurance companies pursue higher yields while emphasizing duration matching and cash flow stability, it is expected that under IFRS9, on the one hand, FVPL assets will focus more on weakening performance fluctuations through quantitative hedging and other methods; on the other hand, in FVOCI assets, due to the characteristics of changes in their fair value not included in the current profit and loss, dividends are included in the profit and loss, in terms of stock investment, insurance companies will be more than high dividend yield stock assets and hold them in large amounts for a long time.
In terms of non-standard assets, the assets were originally mainly classified into two types of assets: loans, receivables and AFS, and less than 2% of non-standard assets were classified into FVPL.In IFRS9, loans, receivables and AFS were cancelled, and the proportion of non-standard investments in insurance companies included in FVPL increased through strict contract cash flow tests. Since non-standard investment has greater credit risk compared to other debt products, according to IFRS9 regulations, impairment will be required for overdue losses and credit losses will be confirmed in advance, and non-standard investments will be of less attractive to insurance companies.
In terms of bond allocation, due to the use of the expected credit loss model and increasing the amount of impairment of financial assets, insurance companies are expected to prefer bonds with high credit ratings and reduce the proportion of bond investments with certain credit risks.
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Edited: Lee Gin
