Analysis of Ping An Insurance (Group) Company Accounts

 

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2019 Accounts

On 20 February 2020, Ping An Insurance (Group) Company (PAIC)  published its 2019 consolidated accounts. The accounts were audited by PricewaterhouseCoopers Certified Public Accountants firm in Hong Kong (HKPWC) and given an unqualified opinion on 20 Feb 2020.

2020 Accounts

PAIC published its reviewed but unaudited 2020 1H accounts on 14 September 2020.

Risk of insufficient audit objectivity and independence 

Free speech and free thinking including critical thinking about accounting issues have been compromised  significantly by Chinese Communist Party (CCP) 's fascist behaviours in Hong Kong since Hong Kong returned to Communist China from the United Kingdom in 1997. PAIC, which was  registered in Shenzhen, was controlled by CCP. CCP is an organized crime organization. It's naïve to count on HKPWC to maintain sufficient objectivity and independence and exercise sufficient professional judgement and scepticism to perform audit on PAIC's Accounts. Though HKPWC is a member of PricewaterhouseCoopers Global and subject to its internal audit quality control system, who can insure peers from other PricewaterhouseCoopers Global members are free from influence of CCP.

Risk of self-interest threat compromising objectivity and due care exercised by internal auditor, Chief Actuary and CFO

As reported in "SHAREHOLDINGS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Change in the Number of Shares Held in the Company", its internal auditor and CFO held 268,191 shares and 321,378 shares in PAIC respectively, which may induce them to be engaged in accounting fraud despite shareholding was published. It's hard for them to defend objectivity and independence when applying professional judgement to present and scrutinize financial numbers and related transactions. Consolidation scope, actuary assumptions, impairment testing of goodwill and non-current assets, and evaluation of expected credit losses on financial assets and fair values relied on professional judgement in many circumstances. Undisclosed related transactions and undisclosed related parties have often been used for manipulating financial performance of A-share listed companies. Coverup is a communist virus that killed people via great starvation between 1959 and 1961 and CCP virus in 2020 and cheated money from Chinese as well as from foreign investors.

Significant judgment is required in determining the actuarial assumptions, e.g. discount rates/investment return, mortality, morbidity, lapse rates, policy dividend, and expenses, used in the valuation of insurance contract liabilities for the long-term life insurance contracts. In 2019, it reported claims and policyholders' benefits RMB578.31bn rising by 31.56%, which was 53.14% of total expenses. 

The measurement of the expected credit losses for financial assets measured at amortized cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour.

Abnormal increase in investment income

(in RMB million)	2019	2018	Change	Rate
Column No.	1	2	3=1-2	4=3÷2
Gross income	1,273,091.00	1,082,146.00	190,945.00	17.65%
Net earned premiums	748,779.00	677,703.00	71,076.00	10.49%
Investment income	101,747.00	31,974.00	69,773.00	218.22%

Unrealized gains/(losses)

44,091.00

-28,284.00

72,375.00

255.89%

Extract from Unrealized gains/(losses)

Financial assets at fair value through profit or loss	44,127	-27,948	72,075.00	257.89%
Bonds	340	1,677	-      1,337.00	79.73%
Funds	14,597	-12,150	26,747.00	220.14%
Stocks	20,989	-28,688	49,677.00	173.16%
Wealth management investments and other investments	8,201	11,213	-      3,012.00	26.86%

Its gross income increased 17.65% partly because investment income rose by 218.22% or RMB69.77bn. According to disclosure of investment income, its increase mostly came from increase in unrealized gains/(losses) by RMB72.38bn, among which unrealized gains or losses for funds and stocks accounted as Financial assets at fair value through profit or loss (FAFVTPL) contributed most respectively RMB26.75bn and RMB49.68bn, or 220.14% and 173.16%.

THE FAIR VALUE HIERARCHY for FAFVTPL for year both 2019 and 2018 informs that more than 72% of  such category of financial assets are measured using Level 2 and Level 3 hierarchies inputs. 

          THE FAIR VALUE HIERARCHY for FAFVTPL

As at 31 December 2018
(in RMB million)	Row No.	Level 1	Level 2	Level 3	Total	Sum of level 2 and level 3	Ratio
Column No.		1	2	3	4=1+2+3	5=2+3	6=5÷4
Bonds	1	18,343	151,024	–	169,367.00	151,024.00	89.17%
Funds	2	131,861	59,259	6,231.00	197,351.00	65,490.00	33.18%
Stocks	3	79,294	10,346	–	89,640.00	10,346.00	11.54%
Wealth management investments and other investments	4	4	270,321	98,256.00	368,581.00	368,577.00	100.00%
Total	5=1+2+3+4	229,502	490,950	104,487.00	824,939	595,437	72.18%
As at 31 December 2019
Bonds	6	15,484.00	210,748.00	59.00	226,291.00	210,807.00	93.16%
Funds	7	130,725.00	78,965.00	4,375.00	214,065.00	83,340.00	38.93%
Stocks	8	111,289.00	4,313.00		115,602.00	4,313.00	3.73%
Wealth management investments and other investments	9		263,009.00	142,106.00	405,115.00	405,115.00	100.00%
Total	10=6+7+8+9	257,498.00	557,035.00	146,540.00	961,073.00	703,575.00	73.21%

Level 2 and Level 3 are more likely to be subject to manipulation than Level 1.

Most fair values at RMB557.04bn of FAFVTPL are arrived at using Level 2 inputs method in 2019.

As informed by IFRS 13 Fair Value Measurement, Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly and Level 2 inputs include quoted prices for similar assets in active markets, identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset, for example: interest rates and yield curves observable at commonly quoted intervals, implied volatilities; and credit spreads and market‑corroborated inputs. The same also applied to liabilities carried at fair value within IFRS 13 application scope. It's a public secret that the grading and valuation industries mostly with CCP units or cells, of which work is possibly used for Level 2 and Level 3 fair value measurement, are lack of objectivity and independence which compromises due care as well as integrity in PRC. Some foreign grading agencies in PRC may also be ineligible to trust because CCP has BGY scheme, not to mention rating service fees paid by those graded and no rule of law and no free speech in PRC. Qualified rating and valuation agencies usually do some work on financial statements of investee before issuing ratings and valuation reports but financial statements of investee in PRC as well as those of Ping An are subject to manipulation. 

Some fair values of RMB146.54bn are calculated using Level 3 inputs

As established in IFRS 13, Level 3 inputs are unobservable inputs for the asset or liability.   

Unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. An entity shall develop unobservable inputs using the best information available in the circumstances, which might include the entity’s own data. Using Level 3 inputs relied on management's judgement and therefore more prone to manipulation.

Consolidation scope misjudgement risk  embedded in investments in associates

There're some examples listed below subject to consolidation scope misjudgement risk .

Investee name	Proportion of ordinary shares held
Veolia Water (Yellow River) Investment Co., Ltd	48.76%
Veolia Water (Liuzhou) Investment Co., Ltd	44.78%
Lufax Holding Ltd	40.61%
Ping An Healthcare and Technology Co., Ltd	41.27%
Ping An Medical and Healthcare Management Co., Ltd	38.54%
OneConnect Financial Technology Co., Ltd	36.61%
Shenzhen China Merchants-Ping An Asset Management Co., Ltd	38.81%

An investor determines consolidation scope based on control.  Control exists when investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Though the shareholding ratios in those investees are below 50%, there's absolutely no control just based on shareholding not exceeding 50%. IFRS 10 listed some examples of rights that, either individually or in combination, can give an investor power over investee besides voting power. Circumstances imposed by CCP complicates judgement on whether those rights, either individually or in combination, can give an investor power over investee.

Rights	Circumstances that complicates judgment of power
Rights to appoint, reassign or remove members of an investee’s key management personnel who have the ability to direct the relevant activities	CCP sets units which have substantial rights over key personnel appointment both in Ping An and in its investees.
Rights to appoint or remove another entity that directs the relevant activities	CCP’s absolute control over society
Rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor	CCP sets units in investee, whose members have such rights.
Other rights (such as decision‑making rights specified in a management contract) that give the holder the ability to direct the relevant activities.	CCP often communicates orally, falsifies or deletes or burns documents in the same way it conducted in PRC Consulate to Houston before it got shut down.

Equity accounting manipulation risk

In another article , Lufax Holding Ltd, which was carried in equity method as 40.61% shareholdings ratio associate, was doubted to have manipulated financial performance for the years 2019, 2018 and 2017. Income of equity method investee as well as impairment loss on the investment directly affect investor's unrealized gains or losses. Measurement of impairment loss on investment in associates is also subject to manipulation risk. PAIC reported investments in associates and jointly controlled entities of  around RMB204.14bn as at 31 December 2019 and RMB5.15bn increase in share of profits and losses of associates and jointly controlled entities.

Risk of expected credit loss misstatement

In 2019, PAIC reported in its income statement net impairment losses of RMB65.27bn on financial assets and in balance sheet, loans and advances to customers and financial assets at amortized cost of RMB2.24tn and RMB2.28tn respectively, which were two largest numbers. Net impairment losses on loans and advances to customers were RMB53.29bn, which were the main part of net impairment losses on financial assets but impairment losses on financial assets at amortized cost were only RMB5.11bn or accumulated 0.73% of gross amount.

Extract from Note “13. NET IMPAIRMENT LOSSES ON FINANCIAL ASSETS” of year 2019

(in RMB million)	Net impairment losses	Provision balance	Gross (Including interest receivable)	Ratio of provision
Column No.	1	2	3	4=2÷3
Loans and advances to customers	53,288.00	69,560.00	2,309,956.00	3.01%
Financial assets at amortized cost	5,113.00	16,719.00	2,297,944.00	0.73%

More interestingly, despite increase in gross amount of financial assets at amortized cost by 10.03% and growing macroeconomic depression in PRC, net impairment losses on financial assets at amortized cost contracted 2.5%.

Extract of Financial assets at amortized cost

(in RMB million)	2019	2018	Increase by
Column No.	1	2	3= (1-2) ÷ 2
Gross amount	2,297,944.00	2,088,456.00	10.03%
Net impairment losses	5,113.00	5,244.00	-2.50%

More importantly, subsequent measurement of both loans and advances to customers and financial assets which were carried at amortized cost involved ECL measurement that is subject to manipulation risk.

Misstatement risk development for the half year ended 30 June 2020

Interim Condensed Consolidated Financial Information was given an unmodified review opinion on 27 August 2020 by HKPWC when the Hong Kong National Security Law had further compromised rule of law and free speech, and thereon hampered objectivity and independence of HKPWC further. Before 27 August 2020, US had suspended recognition HK's autonomous status and Hong Kong Autonomy Act commenced and any work of Hong Kong Accountants should be denied of any credit.

 

ECL misstatement risk remained because ratio of provision is in huge disparity

(in RMB million)	Impairment losses	Provision balance	Gross (Including interest receivable)	Ratio of provision
Loans and advances to customers	32,302.00	87,501.00	2,281,584.00	3.84%
Financial assets at amortized cost	5,662.00	21,943.00	2,476,160.00	0.89%

There was an abrupt increase in other comprehensive loss from financial assets carried at fair value with changes through other comprehensive income. It indicated PAIC had made use of this pandemic to absorb or cover-up previously understated loss and significant material impairment loss or fair value misstatement risk imbedded in its all the financial assets it reported.

So it’s wise to divest all the Hong Kong financial instruments such as the junk toxic assets of Ping An, Tencent, HSBC or BOC  and convert all your HKDs into USDs as soon as possible ahead of market turmoil.