Recently, Zhongyi Property & Casualty Insurance Co., Ltd. (hereinafter "Zhongyi P&C") disclosed its Q4 2017 solvency report. In addition to the departure of Chairman Pan Guochao and the transfer of Chen Peng to Chairman, two successive general managers, You Yibing and Feng Tianyou, have also both left their posts.
It is understood that Pan Guochao has become General Manager of CNPC Captive Property Insurance Co., Ltd. (hereinafter "CNPC Captive"). In addition, in January 2017, Feng Tianyou, who had previously served as general manager of Yongcheng P&C Insurance and Chubb Insurance, was appointed interim person in charge of Zhongyi P&C. On September 30 of the same year, the CIRC approved the qualifications of Chen Peng as Chairman and Feng Tianyou as General Manager of Zhongyi P&C. Chen Peng previously came from the Finance and Assets Department of China National Petroleum Corporation, while Feng Tianyou came from a market-oriented company with no shareholder background. Feng Tianyou's departure means his formal tenure as General Manager of Zhongyi P&C lasted less than one quarter. A person familiar with the matter told a China Business Journal (blog, Weibo) reporter that Feng Tianyou has returned to his former employer Yongcheng P&C Insurance, information confirmed by Feng Tianyou himself.
Before 2017, Zhongyi P&C's senior management was relatively stable. Pan Guochao, who previously served as Chairman of Zhongyi P&C, held that post from October 2008 until 2017. You Yibing, from the foreign shareholder, served as the company's general manager from 2007 to 2017, also spending more than a decade at Zhongyi P&C.
Senior management changes
Regarding Pan Guochao leaving the chairmanship of Zhongyi P&C to serve only as General Manager of CNPC Captive, a person close to the CNPC system believes the move should be a corporate governance requirement: previously Pan Guochao held posts at both Zhongyi P&C and CNPC Captive, and there were certain business connections between the two, which was not conducive to the fairness of work.
"If he held posts at both sides, it might be difficult to allocate cessions fairly -- should the more favorable reinsurance cessions go to Zhongyi P&C or to other companies? The two companies are related, yet they are independently accounted for, and their shareholders are not exactly the same. CNPC Captive is 100% owned by CNPC, while Zhongyi P&C is a joint venture between CNPC and Italy's Generali Group," said Wang Xujin, Director of the Insurance Research Center at Beijing Technology and Business University.
"Previously, Zhongyi P&C's chairman was appointed by the Chinese shareholder and did not participate in operations and management, so the role was largely ineffective. After the change of chairman, the Chinese side may strengthen its control over Zhongyi and deepen its participation in management," said the person close to the CNPC system.
"Should profit be the goal, or scale? The foreign and Chinese shareholders have differences in philosophy. It is understandable that the foreign side, in a mature market, targets profit; but in a developing market like China, where companies are racing to carve out territory, the Chinese side targets scale, and the difference in goals creates conflicts," Wang Xujin said.
Chen Peng, the new chairman who succeeded Pan Guochao, previously served as deputy chief accountant and then chief accountant of China Petroleum Logging Co., Ltd., and as head of the Accounting Division of the Finance and Assets Department of China National Petroleum Corporation.
According to Zhongyi P&C's Q4 2017 report, Feng Tianyou left in the fourth quarter. His departure means his formal tenure as General Manager of Zhongyi P&C lasted less than one quarter. A person familiar with the matter told reporters that Feng Tianyou has returned to his former employer, Yongcheng P&C Insurance.
"I left because Yongcheng Insurance's former foreign shareholder, Canada's Fairfax Group, invited me to serve as its head of Greater China. I felt it was a good opportunity for career development," Feng Tianyou told reporters.
Regarding Feng Tianyou's departure, an industry veteran believes that as insurance market competition intensifies -- especially with the changes brought by the commercial auto insurance pricing reform -- small and mid-sized insurers have begun shifting to competition in non-auto lines, whereas Zhongyi P&C had stayed away from market competition for many years, operating at will in the embrace of its shareholders regardless of profit or loss. "Only in recent years has it begun performance assessments; meanwhile, with the listing of CNPC's financial arm, shareholders now have profit and growth requirements for its operations, since it is part of a listed company," the person said.
"For a company with so many demands, plus the impact of the establishment of the captive company on its business, one can imagine how much pressure Feng Tianyou was under. His departure is not surprising," the person added.
"Leaving after such a short time, Feng Tianyou probably had not yet been able to play his role well or put his ideas into practice; it may also be related to differences in philosophy," another industry insider said.
Operating difficulties: weakening support, turning from profit to loss
Zhongyi P&C was established in 2007, founded by China National Petroleum Corporation and Italy's Assicurazioni Generali, with registered capital of RMB 1.3 billion. It was China's first Sino-foreign joint venture property insurance company. Subsequently, 51% of Zhongyi P&C's equity was transferred to CNPC Capital, which was formed through the asset restructuring of Jinan Diesel Engine Co., Ltd.; CNPC Capital was officially listed on the Shenzhen Stock Exchange on February 10, 2017. CNPC Capital's insurance subsidiaries currently include: Generali China Life, Zhongyi P&C, CNPC Captive Property Insurance, Kunlun Insurance Brokerage and Jingsheng Insurance Adjuster.
At the beginning of Zhongyi P&C's establishment, CNPC gave it very strong support. In 2010, insurance business income from CNPC and its subsidiaries accounted for 82.9% of Zhongyi P&C's total business; the proportion was 75.2% in 2011, 69.4% in 2012 and 65.5% in 2013.
At the end of 2013, CNPC Captive Property Insurance was established, and CNPC's support for it was even stronger, leaving Zhongyi P&C in an increasingly awkward position. However, even after the establishment of CNPC Captive, Zhongyi P&C's business remained dependent on the CNPC system: in 2014, insurance business income from CNPC accounted for 60.9% of Zhongyi P&C's business, and 50.8% in 2015.
According to Zhongyi P&C's related-party transaction report, from Q1 to Q4 2017, Zhongyi P&C generated RMB 186 million of insurance business income with CNPC and its subsidiaries, accounting for 31% of the company's insurance business income for the year.
The data shows its dependence on CNPC business is declining, yet losses have appeared. According to Zhongyi P&C's Q4 2017 solvency report, the company's net profit was a loss of RMB 55 million. Zhongyi P&C's 2016 audit report shows a net loss of RMB 29 million in 2016, versus a profit of RMB 2 million in 2015.
Meanwhile, CNPC Captive has been profitable year after year. "Because of the existence of the captive insurance company as a professional self-insurance vehicle, the premium payments that would otherwise have been a net cash outflow for the group are retained within the system and transformed into part of the group's consolidated profit. Of the components of insurance premiums, the management fees and underwriting profit originally collected by commercial insurers are retained by the captive insurer, leveraging the preferential policies of its own financial license, and flow into the capital pool," CNPC Captive stated in a release published on the China Petroleum News Center.
"The structure of Zhongyi P&C alongside the captive insurer is somewhat strange. Where else in the market does one company own both a commercial insurer and a captive insurer, with greatly overlapping business directions?" an industry insider said.
"If both the captive and the commercial insurer write shareholder business, there is bound to be competition to some extent. The very nature of a captive's licensing means it can only write shareholder business," said Zhu Junsheng, Deputy Director of the Insurance Research Office at the Development Research Center of the State Council. "However, captives and commercial insurers are not purely in competition either; not all risks are suitable for a captive, and even with a captive, claims handling and risk pricing are not necessarily done by the captive itself."
Hao Yansu, professor of insurance at the Central University of Finance and Economics, said: "A joint venture like Zhongyi P&C is merely a decoration for a large central state-owned enterprise like CNPC, with minimal impact on its main business. The group pays no attention to the business overlap among these insignificant affiliated small enterprises. The development of similar small enterprises in non-core businesses of large central SOEs, such as Zhongyi P&C, should rely mainly on the market rather than on the parent company."
Source: China Business Journal 2018-02-10