China / Hong Kong Industry Focus
China Insurance Sector
Refer to important disclosures at the end of this report DBS Group Research . Equity 13 Aug 2018
Concern overdone but be selective HSI : 27,936
Investors’ recent concern over China Insurers’ non-standardised asset (NSA) quality is overdone A N ALYST Our analysis suggests insurers’ solvency is still Ken SHIH +852 2820 4920 strong even assuming 30% default in NSA [email protected] Demand for protection products remains strong, evidenced by the successful launch of China Taiping ‘s “Fu Lu Kang Rui”
Reiterate BUY on China Taiping (969 HK) and Ping an (2318 HK). TPs lowered for CPIC (2601 HK) and China Life (2628 HK) on weaker outlook. Recommendation & valuation Downgrade PICC P&C (2328 HK) to FULLY VALUED on rising insurance claim concern C l o s i n g Ta r g e t FY1 8 F S to c k Ti c ke r R a ti n g Pr i c e Pr i c e PB Yi e l d ROE Concern over NSA credit quality overdone. Investing in non- (HKD) (HKD) (X) (%) (%) standardised assets (NSAs) is a common method to lengthen Ping An - H 2318 HK BUY 72.0 115.0 2.2 1.7 17.8 insurers’ asset duration and enhance returns. In 2017, NSAs China Life - H 2628 HK BUY 19.2 24.0 1.3 2.9 11.2 accounted for 15%-25% of insurers’ total assets, with majority linked to infrastructure/ transportation, energy, real estate and China Taiping 966 HK BUY 27.1 42.0 1.3 1.0 11.3 financial segments. With 91-95% of NSAs having AAA ratings China Pacific - H 2601 HK BUY 31.5 47.0 1.6 3.8 12.8 and majority holding guarantee/collateral related credit AIA 1299 HK BUY 69.3 90.0 2.4 1.7 12.5 Manulife 945 HK BUY 143.9 196.9 1.1 1.6 4.4 enhancements, we believe investors’ concern over the credit quality of NSAs is overdone. PICC Group 1339 HK HOLD 3.6 3.8 0.6 1.4 13.0 China Re 1508 HK HOLD 1.6 1.5 0.7 3.9 7.7 Strong solvency remains. There are also concerns on the PICC P&C 2328 HK F.V. 10.0 7.8 1.2 3.0 15.6 recapitalisation risk should China’s macro-headwinds worsen. Assuming 15% of NSAs default, our sensitivity analysis Closing price as of 10 Aug, 2018 suggests that this will erode China insurers’ core solvency ratio Source: Thomson Reuters, DBS Bank (Hong Kong) Limited (“DBS HK”), by only 14-31ppts. Even assuming 30% of NSAs default, core Bloomberg Finance L.P. solvency will drop by 29-67ppts. With China insurers’ core solvency ratio (group level) reaching 226%-299% and exceeding the regulatory requirement of 100%, we believe investors are unduly worried
Higher agency morale = positive FY19F outlook. Demand for protection products remains strong in the market, as evidenced by China Taiping’s successful critical illness product launch in 2Q18, where this helped first-year premium (FYP) to recover by 10% y-o-y, based on our estimate. Ping An has also shown a similar FYP recovery while CPIC and China Life are still suffering. With a positive showing from China Taiping and Ping An despite this year’s volatile premium market, this paves the way for a more positive FY19F outlook on both companies given better agency morale compared to peers.
BUY China Taiping and Ping An; Avoid PICC P&C. We suggest investors to be selective and reiterate our BUY recommendations on China Taiping and Ping An. We lowered CPIC and China Life’s TPs to HK$47 and HK$24 respectively, to factor in a weaker outlook, and expect slower FYP to be a near-term drag. We fine-tuned PICC P&C TP to HK$7.8 to factor in the new share issuance, and downgrade the stock’s rating to FULLY VALUED given concerns over rising insurance claims as the 3-year non-claim discount (NCD) benefit expires from this year, with limited share price upside. We suggest avoiding PICC P&C.
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Industry Focus China Insurance Sector
the proportion of AAA rated NSAs are near 94% and 91% Concern over NSA asset quality overdone of the total respectively. Almost 100% of their NSA positions are AA+ rated. Thus, these are considered high Non-standardised asset (NSA) is a common asset class in which credit rated investments and insurers have yet to incur any China insurers rely to both lengthen asset duration and credit defaults on their NSA assets. enhance investment yields, given the limited availability of long maturity asset classes in China for insurers to match asset- b. Majority of NSAs are exposed to infrastructure, liability duration. On average, NSA offer investment yields transportation and energy sectors: While there is no ranging between 6%-8%, with a duration of 5-10 years standard disclosure format by industry, by looking at each depending on the debt scheme. Some have also invested in insurers’ breakdown, majority of the NSAs are related to China banks’ WMP (WMP product but the duration is shorter infrastructure (Ping An: 37%; China Life: 21%; China at usually less than 1 year. For the past 1 year, we have seen a Taiping: 42% includes real estate segment as well), trend where China insurers have increased both their NSA and transportation, energy, and environmental protection bond investment positions (Figure 1), aiming to capture rising segments, which are considered lower risk. sets. bond yields and lengthen asset durations in the face of tighter market liquidity. As at end-2017, NSAs accounted for 15-25% c. Most of the NSA exposure is covered by quasi- of insurers’ total assets, an increase of 2-10ppts y-o-y (Figure government/bank/SOE guarantees and collateral to provide 2). Besides NSAs, insurers also increased their positions in bond credit enhancement: Our major source of comfort is investments by 10-25ppts last year. coming from the high percentage of credit enhancements that these NSA assets have taken. For example, 35% of Figure 1: China insurers’ NSA positions – 2016-17 China Taiping’s NSA have quasi-central government/bank guarantees, 50% of the position hold SOE/large enterprise 30% guarantees, and 7% hold collateral/pledged assets. Only 1% of its positon is naked. Likewise, Ping An has also indicated that they only hold some high-credit entities’ NSA 25% as naked positions, most of their debt are held with guarantees or collateral. Other life insurers also have similar 20% credit enhancement measures in place.
15% Figure 2: China insurers investment asset by class
10% 100% 4% 4% 2% 2% 2016 1H17 2017 7% 11% 90% 15% 18% China Taiping PICC China Re Ping An 17% 18% 21% 12% PICC P&C CPIC China Life 80% 24% 14% 70% 24% 13% 22% 20% 16% Note: Based on investment assets, which also includes policy loans, as 60% 7% 11% a percentage of total assets 50% 40% 37% 61% 63% Source: Company data, DBS HK 30% 55% 40% 50% 50% 20% 10% 23% 9% 0% 3% 6% 6% 3% 3% Amid rising market uncertainty, investors are concerned about China PICC China Re Ping An PICC P&C CPIC China Life Taiping the credit quality of China insurers’ NSA investments. We Cash & deposit Fixed income investment Equity investment Loan Property investment Others however believe the concern in overdone based on the following reasons (Figure 3): Source: Company data, DBS HK a. 91-95%+ of China insurers’ NSAs are AAA credit rated : Based on the above, we believe investors’ concern over the Most life insurers provide a breakdown on credit ratings on asset quality of China insurers’ NSA position is overdone. Even their NSA investments apart from PICC and PICC P&C. In if assets have some small-scale defaults under a bear case the case of Ping An and China Life, more than 95% of scenario, we believe the credit risk should also be covered by their NSAs are AAA rated. And for China Taiping and CPIC, the guarantees and collateral held.
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Industry Focus China Insurance Sector
Fig 3: China insurers’ non-standardised asset positions, credit rating, exposure and credit enhancements
NSA % of total % of AAA Asset type Company Descriptions Categories (Rmb bn) assets Rating /Industry expposure The credit ratings of Infrastructure creditor's Credit enhancement, quasi central govt debts/bank the PRC financial scheme & real estate guarantee and credit enhancement free products investment debt creditor's scheme 41.9%, 34.5%, large-scale enterprise guarantee 14.9%, local products is Trust plans 36.4%, Asset SOE & other guarantee products 35.9%, China 147.2 22.1% 93.8% beingcontinually management products and mortgage/pledge products 7.1%, the others 6.7%, Taiping* optimised; products asset support scheme 9.9%, and non-credit enhancement only 0.9% rated AAA accounted overseas bond fund and CBs for 93.8% 11.8%
PICC 244.9 24.8% n.a. n.a. n.a.
Over 95% of the debt Infrastructure 37.1%, Non- While some high-credit entities do not need credit plans and trust plans banking financial services enhancement for their financing, most of the debts held by Ping An have 31.6%, Real estate 17.9%, have guarantees or collaterals. AAA external ratings, Coal mining 3.3%, others Normal yield: and about 5% have 10.2% Infrastructure - 5.81% Ping An 422.8 17.3% > 95% AA+ or AA external Non-banking financial services - 6.2% ratings. Real estate - 7.9% Coal mining - 6.0% Others - 5.9% Total - 6.0%
PICC P&C 77.0 14.7% n.a. n.a. n.a.
For those NSAs with Industries include transport, Debt investment schemes: All covered by effective an external credit- municipal infrastructure, credit enhancement measures including guarantees rating, 99.7% had a energy, environment or pledge of assets rating of AA+ or protection, commercial WMPs: Mainly issued by major state-owned CPIC 203.4 17.4% 91.0% above, and of this, the property, land reserve, commercial banks or national joint-stock commercial share of AAA reached resettlement of slums, water banks 91.0%. conservancy and affordable Trust plans: Mainly provide financing for major state- housing owned non-bank financial institutions and large SOEs
Over 95% of NSAs Industry breakdown: Most other loans, or non-standardised assets, had AAA external Infrastructure 21%, Finance excluding policyholder loans are guranteed by third rating 18%, Energy 14%, parties or have pledges, or fiscal annual budget China Life 591.1 20.4% > 95% Transportation 13%, Real income as a source of repayment, or have higher estate 11%, others 23% credit rated borrowers
Note: * China Taiping’s NSA is based in HK$bn; Ping An is based on Ping An Life’s investable assets Source: Company data, DBS HK
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Industry Focus China Insurance Sector
Strong solvency The calculation of minimum capital for credit risk is based on the following: There have also been concerns on China insurers’ recapitalisation risk, should China’s macro headwinds worsen driven by system deleveraging, slower fixed asset investment ∑ MC=EX x RF growth and escalation of China-US trade war tensions. We also believe investors’ concern on the above is overdone and where EX is the risk exposure of a type of asset, and RF is the consider China life insurers’ solvency to be strong. risk factor.
China insurers’ core solvency and comprehensive solvency ratio We impute a 15% risk factor on the NSA asset class. is based on core capital (only includes Tier 1 and Tier 2 capital) Compared to the default risk factor for corporate bonds, and actual capital divided by minimum capital, respectively . where BBB rated (junk bonds) corporate bond’s default risk The calculation of minimum capital is based on (a) minimum factor is 13.5% under C-ROSS (Figure 4), we believe our 15% capital for quantitative risk, (b) minimum capital for control risk factor NSA is considered conservative. risk, and (c) additional minimum capital.
The main component is “minimum capital for quantitative Figure 4: Corporate bond default risk factor by ratings risk ”, which is the aggregate of: Asset credit rating Risk Factor (i) minimum capital for insurance risk (includes life and non-life AAA 1.5% insurance), (ii) minimum capital for market risk, (iii) minimum AA+ 3.6% capital for credit risk, less (iv) quantitative risk of diversification AA 4.5% effect, and less (v) loss absorption of special type of insurance AA- 4.9% contracts. A/A-/A+ 9.0%
BBB/BBB-/BBB+ 13.5% Under C-ROSS (China Risk Oriented Solvency System), the regulation requires that life insurers’ core solvency and Source: CBIRC, DBS HK comprehensive solvency ratios must be no less than 100% and
150%, respectively. In 2017, China insurers’ core solvency On our estimates, assuming 5% of China insurers’ NSAs ratios reached between 229-280%, and comprehensive default, the impact on insurers’ core and comprehensive core solvency ratios were in the 234-284% range (under group solvency ratio will be only 4-10ppts (Figure 5). Assuming 15% basis, Figure 5), which are way above the regulatory of NSA defaults, the impact to insurers’ core and requirements. This suggest insurers’ current solvency is strong. comprehensive solvency ratio will be 16-30ppts, which is
considered manageable given China insurers’ existing strong China insurers’ solvency remains strong even under bear case solvency level. Even assuming 30% NSA defaults (an extreme We conducted a sensitivity analysis to see what will China bear case as this is the equivalent of assuming that NPLs will insurers’ solvency ratio be like assuming (a) NSAs default by reach 30%), the impact on insurers’ solvency ratio is 29- 5%, (b) NSAs default by 10%, and (c) NSAs default by 15%. 72ppts, with China insurers’ core and comprehensive solvency Given that the default risk would be mainly reflected in the ratio maintaining at the 165% to 246%, and 165% to 252% minimum capital for credit risk (denominator) and actual/core range (with CPIC the highest and China Re the lowest). capital (numerator), to simplify the analysis, we assume there is Overall, we consider China insurers’ current solvency ratio is no correlation impact regarding minimum capital for market strong and believe insurers’ concern over the recapitalisation risk on NSA default (mainly independent and project base). risk is overdone.
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Industry Focus China Insurance Sector
Fig 5: Sensitivity analysis on China life insurance
Company China Taiping PICC Ping An PICC P&C CPIC China Life Stock code 966 HK 1339 HK 2318 HK 2328 HK 2601 HK 2628 HK Currency (unit) HKD (bn) RMB (bn) RMB (bn) RMB (bn) RMB (bn) RMB (bn) Actual Capital 120.5 252.0 703.5 154.6 322.9 706.6 Core Capital 116.3 198.1 680.5 127.3 318.9 706.5 Minimum capital 49.1 84.3 300.5 55.6 113.8 254.5 Core solvency ratio 237% 235% 226% 229% 280% 278% Comprehensive solvency ratio 245% 299% 234% 278% 284% 278% Actual Capital under the scenario of 1) 5% of NSA going default 113.1 239.7 682.3 150.7 312.7 677.1 2) 10% of NSA going default 105.7 227.5 661.2 146.9 302.5 647.5 3) 15% of NSA going default 98.4 215.2 640.0 143.0 292.4 618.0 * Assuming prudent case: no change in admitted liability upon decline in NSA
Core Capital under the scenario of 1) 5% of NSA going default 108.9 185.8 659.3 123.5 308.7 677.0 2) 10% of NSA going default 101.6 173.6 638.2 119.6 298.5 647.4 3) 15% of NSA going default 94.2 161.3 617.0 115.8 288.4 617.8 * Assuming prudent case: no change in admitted liability upon decline in NSA Min capital under the scenario of 1) 5% of NSA going default 48.0 82.5 297.3 55.0 112.2 250.1 2) 10% of NSA going default 46.9 80.6 294.1 54.4 110.7 245.6 3) 15% of NSA going default 45.8 78.8 290.9 53.8 109.2 241.2 * Simplified case assuming min. capital changing along with decline in exposure* risk factor
Comprehensive solvency ratio under the scenario of 1) 5% of NSA going default 236% 291% 230% 274% 279% 271% 2) 10% of NSA going default 225% 282% 225% 270% 273% 264% 3) 15% of NSA going default 215% 273% 220% 266% 268% 256% regulatory requirement>=100%
Dceline in comprehensive solvency ratio under the scenario of 1) 5% of NSA going default -9.7 ppt -8.2 ppt -4.6 ppt -4.1 ppt -5.2 ppt -6.9 ppt 2) 10% of NSA going default -19.8 ppt -16.8 ppt -9.3 ppt -8.2 ppt -10.5 ppt -14.0 ppt 3) 15% of NSA going default -30.5 ppt -25.7 ppt -14.1 ppt -12.5 ppt -16.0 ppt -21.5 ppt
Core capital solvency under the scenario of 1) 5% of NSA going default 227% 225% 222% 225% 275% 271% 2) 10% of NSA going default 217% 215% 217% 220% 270% 264% 3) 15% of NSA going default 206% 205% 212% 215% 264% 256% regulatory requirement>=50%
Dceline in core capital solvency ratio under the scenario of 1) 5% of NSA going default -9.9 ppt -9.6 ppt -4.7 ppt -4.6 ppt -5.3 ppt -6.9 ppt 2) 10% of NSA going default -20.2 ppt -19.7 ppt -9.5 ppt -9.3 ppt -10.6 ppt -14.0 ppt 3) 15% of NSA going default -31.1 ppt -30.2 ppt -14.4 ppt -14.1 ppt -16.2 ppt -21.5 ppt Note: Based on group’s solvency ratio except for China Taiping, we used aggregate of life, P&C, and reinsurance as a proxy for group solvency. Source: Company data, DBS HK
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Industry Focus China Insurance Sector
Higher agency moral = positive FY19F outlook Figure 6: China’s social insurance contribution ratio
We believe there is still demand for protection products, as Insurance type Unit contribution Individual contribution evidenced by China Taiping’s successful launch of its critical Pens ion 20% 8% illness product, “Fu Lu Kang Rui”, in late April. Comparing Unemployment City 1% 0.20% like-for-like products (Figures 8-10), China Taiping’s “Fu Lu ins urance Rural 1% n.a. Kang Rui” is competitive in the following aspects: (a) wider Injury insurance Depends on industry n.a. Maternity Insurance 0.80% n.a. age range of insured from 28 days to 65-years versus age Medical insurance 6% - 10% 2% limits of 55 to 60 years old for products offered by peers, (b) offers 100 “critical” illness coverage versus peers’ coverage of Note: contribution as % of monthly salary Source: Company data, DBS HK 80 illnesses, (c) offers 50 “mild” illness coverage versus peers’ 20-35, (d) 5 claims for mild illnesses versus peers’ 1-3 times, and most importantly, (e) annual premium is Rmb11,550 (for a 30-year old insurer), versus peers’ at Rmb12,450 to Rmb15,537, or 7% to 26% cheaper. Figure 7: Comparison of social and commercial insurance
Secular demand for life protection remains Social insurance Commercial insurance Nature Compulsory non-complusory The main reason why we believe demand for protection and 15 years of consecutive payment; Payment receive after the statutory retirement flexible health/critical illness insurance will remain strong in China is terms age that there is insufficient national social insurance coverage, Protection Lifelong protection Lifelong / term protection particularly for medical insurance. China’s social insurance period Injury Workplace only No restriction system includes pension, unemployment insurance, job injury protection Nutrition RMB 50 -200 /time; can be used for insurance, maternity insurance and medical insurance (Figure No s ubs idy bed fees and drug fees 6). For medical insurance, employers are required to contribute Subject to lower and upper 6% to 10% of an employee’s monthly salary into a national Medical reimbursement limit; Within the claims Complementary to social insurance; ins urance* limit, compensate based on definited claims post-social insurance claims medical insurance fund, while employees contribute 2% of ratio Cash value will be partly refunded and Compensation to the insured's family, their monthly pay. Death funeral cost; insufficient compensation independent of the insurance's cash protection to the insured's family value The 2% of self-contributed premium and 30% of employers’ contribution will be put into “individual” medical account Note: *commercial insurance premium is lower for those covered by social insurance while the remaining 70% of employers’ contribution is put Source: Company data, DBS HK into a “coordinating” medical insurance fund. General clinical expenses will be deducted from the “individual” account, but hospitalisation expenses and major illness clinical expenses will Expect China Taiping FYP to recover by 10% y-o-y in 2Q18 be proportionally subsidised by the “coordinating” medical While China Taiping has proactively terminated all single- insurance fund, which has a limit usually based on six times of premium products from its bancassurance channel since the the local average wage rate. In addition, for medicine beginning of this year, as such products accounted for 13% of subsidies, the national medical insurance has full coverage on FYP in 2017. With the successful launch of “Fu Lu Kang Rui”, 600 class A medicines (甲類藥) and partial coverage on 2300 we estimate China Taiping’s growth in adjusted FYP (excluding class B medicines (乙類藥). There is no coverage on new impact from existing bancassurance single-premium products) medicines and other imported medicines. Clearly, the coverage in 2Q18 would have recovered to the 10% y-o-y level (Figure under social medical insurance is considered insufficient and 11). A similar recovery trend was seen in Ping An, with 2Q18 there is an obvious need for commercial insurance to serve as FYP growth up 11% y-o-y and up 20% y-o-y in June (Figure supplementary coverage (Figure 7), especially for health and 12). critical illness insurance policies. On the other hand, we believe China Life and CPIC are struggling to accelerate FYP growth. Nonetheless, as we move into 2H18 and benefitting from a lower base, we expect FYP growth for all China life insurers to reaccelerate.
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Industry Focus China Insurance Sector
Fig 8: China insurers’ critical illness product comparison
Product name 平安福 2018 版 国壽福 乐安康 福禄康瑞 康乐一生B版 多啦A保 康护一生 Ins urer Ping An China Life Taikang Life China Taiping Fosun United Hong Kang Life TaiKang 18 - 55 18 - 60 30 days to 60 28 days to 65 28 days to 55 30 days to 55 30 days to 60 Insured age years old years old years old years old years old years old years old Protection lifelong lifelong lifelong lifelong lifelong lifelong till 105 years old Bas ic info period Payment terms 30 years 30 years 20 years 20 years 30 years 30 years 20 years
Max. insured RMB 500K RMB 500K RMB 500K RMB 500K RMB 500K RMB 500K RMB 450K amount Cooling-off 90 days 180 days 180 days 90 days 180 days 180 days 180 days period No. of illness 80 80 60 100 80 105 70 covered Critical illness 4 categories; 3 times Times 1 1 1 1 1 1 of compensation
No. of illness 20 30 22 50 35 55 30 covered Categories N.A. / N.A. N.A. N.A. 4 N.A. Mild illness Times 3 1 3 5 3 2 3
Insured amount RMB 100K RMB 100K RMB 100K RMB 100K RMB 100K RMB 150K RMB 405K
Interval / / / / / 180 days /
Death Benefit Insured amount Insured amount Insured amount Insured amount Insured amount Insured amount Insured amount
mild illness mild (additional mild illness Ins ured mild illness mild illness (additional rider mild /critical illness mild /critical illness Other rider) /critical illness (additional rider) protections needed) Critical illness / Policyholder Critical illness / Mild illness / death / total Critical illness / (additional rider death / total Critical illness / n.a. n.a. n.a. paralysis + mild Death required) paralysis Death illness Insurance case RMB 500K, payment terms (20 years), life long protection RMB 10,760 /yr Men (30 years old ) premium RMB 15,537.6 /yr RMB 13,950 /yr RMB 12,450 /yr RMB 11,550 /yr RMB 10,323 /yr RMB 10,950 /yr (insured amt: RMB amount 400K) Source: Company data, DBS HK
Fig 9: China Insurtech like-for-like critical illness product Fig 10: Type of illnesses covered by “Fu Lu Kang Rui”
Product name 樂活e生重疾險 - 至尊版 泰康重疾保 - 至尊版 Illness type Detail Insurance Co. Z hongAn TK.cn Tumor, Brain, Heart and Vasular, Muscle, Eyes, 30 days to 60 years old 30 days to 50 years old Special Insured age Renal, Lupus, Limb, Lung, Liver, Testis, Ovary, Bas ic Protection disease info 1 year 1 year Pancreas, Paralysis, Coma, Ears, Burn injuries, Maxperiod insured - (50) critial/mild RMB 500K/RMB 100K RMB 500K/RMB 100k Face, Arthritis, Anemia, and others illnes s Cooling-off Tumor, Heart and Vascular, Neuron, Renal, period 90 days 90 days Limb, Coma, Liver, Ears, Eyes, Paralysis, Lung, No. of Critical illness 70 70 Burn injuries, Face, Spinal cord, Bowel, illnes s Critical illness covered Mild illness 30 10 (100) Anemia, Muscle, Diabetes, Arthritis, Asthma, Lung, Pancreas, Brain, HIV, Bone, Limb and Men (30 years old ) RMB 800 RMB 845 eye, Lymph, Spinal cord, Spine, and others premium amount Source: Company data, DBS HK Source: Company data, DBS HK
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Industry Focus China Insurance Sector
According to PI Financial Service Intelligence, a market researcher on the global insurance sector, agency retention Figure 11: China insurers’ total premium growth y-o-y among China insurers is likely to be low this year with overall (%) agency headcount likely to decline due to soft premium
YoY (%) growth. In July, Ping An and CPIC have seen their agency 60% headcount drop by 5% m-o-m and 3% m-o-m, respectively, 50% while on the other hand, China Taiping’s headcount has 40% increased by 12% m-o-m in the same month. A similar strong 30% growth in agency headcount was also seen in China Taiping 20% Hong Kong. With China Taiping demonstrating its nimbleness 10% to response quickly to market dynamics with a strong product 0%
-10% pipeline, we believe this will pave way for stronger premium
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Mar-18 growth as we move into FY19F, compared to its peers.
May-16 May-17 -20% May-18 -30% NCL China Life CPIC PingAn China Taiping Rising auto insurance claims negative for P&C Note: above figure based on accumulated total premium growth Source: Company data, DBS HK We are negative on P&C insurers, as we believe the 3-year benefit of the non-claim discount (NCD) for auto insurance will expire this year, given the first auto pricing reform was conducted back in 2015 (Figure 13). This suggests that starting from 2018, drivers will not have further incentives not to lodge Figure 12: Ping An’s first year premium growth y-o-y (%) claims anymore, which makes it almost certain that insurance claims for auto insurance will started to climb this year, laying 70% pressure on P&C’s combined ratio, and thus underwriting 60% profitability. Furthermore, with the third auto pricing reform 50% 40% underway where CIRC has further relaxed and widened both 30% autonomous underwriting and independent channel 20% coefficient (Figure 14) for cities under the pilot programme, 10% this basically implies growth in auto premium will further slow 0% from this year onwards. Coupled with the lukewarm new auto -10%
sales in China, we see this as another negative factor for P&C
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May-17 May-18 -30% insurers. Ping An's first year premium YoY (%) Ping An's renewal YoY (%)
Source: Company data, DBS HK Figure 13: Auto insurance NCD coefficient
NCD Item Claim record coefficient Better FYP growth = higher agency morale = positive FY19F Consecutive 3 years without claim record 0.60 Amid this year’s volatile premium market, we believe insurers No claim Consecutive 2 years without claim record 0.70 that can demonstrate their ability to response quickly to the discount No claim record in prior year 0.85 changing market with a strong product pipeline will standout. (NCD) and Newly insured or 1 claim record in prior year 1.00 In particular, this will enable the insurer to better retain its prior year 2 claim records in prior year 1.25 agency force and maintain higher agency morale given that claim 3 claim records in prior year 1.50 record 4 claim records in prior year 1.75 commission fees earned by the agent is what matters at the 5 or more claim records in prior year 2.00 end of the day. With better morale and lower turnover at the agency level is ultimately positive to premium growth ahead. Note: above figure based on accumulated total premium growth Source: Company data, DBS HK
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Industry Focus China Insurance Sector
upward trend for all listed P&Cs and players have been subsidising profit through fewer claims as a result of the NCD discount during the past 3 years. We note that only the top 6 Figure 14: 2nd and 3rd auto insurance pricing reform largest players have been able to make an underwriting profit and fighting for scale and market share is merely one of the Juristiction Third pricing reform Second pricing reform few ways that P&Cs can be profitable. Given the nature of Underwriting Channel Underwriting Channel Regions coefficient coefficient coefficient coefficient high product homogeneity, we believe the commission pricing Sichuan 0.65 - 1.15 0.75 - 1.15 agreement inked by the major P&C players may instil discipline Shanxi 0.85 -1.15 for now but longer term competition continues to be fierce in Shandong 0.85 - 1.15 this segment. 0.75 - 1.15 Fujian 0.70 - 1.15 0.75 - 1.15 Henan 0.80 - 1.15 X iamen 0.75 - 1.15 Figure 15: P&C insurers’ expense ratio trend Shenzhen 0.70 - 1.25 0.70 - 1.25 X injiang 0.75 - 1.15 0.85 - 1.15 0.75 - 1.15 50 Tianjin 0.75 - 1.15 0.75 - 1.15 0.70 -1.15 48 Inner 46 Mongolia 44 Jiangs u 0.75 - 1.15 0.85 - 1.15 0.75 - 1.15 0.85 - 1.15 42 Shanghai 40 Beijing 38 36 Note: above figures based on accumulated total premium growth 34 Source: Company data, DBS HK 32 30 T oo optimistic toward the self-disciplined commission pricing 2013 2014 2015 2016 2017 The market is optimistic on the commission pricing agreement China Taiping PICC P&C China Re Ping An P&C CPIC P&C initiated by the top 4 P&C insurers, to set a cap on commission rates for all (new and old) auto insurance in an effort to Source: Company data, DBS HK maintain some pricing discipline among P&Cs in the auto insurance market and reduce the pressure of rising expenses. The agreement has set a commission expense cap at 25% for Be selective. BUY China Taiping and Ping An. Downgrade new cars and 20% for old cars, with 5% buffer for mid-small PICC P&C to FULLY VALUED size P&C insurers. We believe investors’ concern over lifer’s NSA and On 20 July, the CIRC also released a ruling on commercial auto recapitalisation risk are overdone, but we suggest taking a insurance pricing supervision, requesting P&Cs to set auto selective stance. We believe nimble players and market leaders insurance pricing based on “reasonable, fair and sufficient” will continue to stand out but players with slower market principles. P&Cs going forward are also requested to submit a response may have a slower growth outlook as we move into range of commission fees offered to channel intermediaries FY19F. We reiterate BUYs on China Taiping and Ping An. We and direct sales/agent, and circumstances governing the use. have lowered TPs on CPIC and China Life to HK$47 (from Nonetheless, CIRC did not “quantify” the range of commission HK$54) and HK$24 (from HK$29), respectively. rates or set any pricing cap. We fine-tuned PICC P&C’s TP to HK$7.8 to factor in new share We however believe the market is overly optimistic on the issuance via capital reverse conversion, and downgrade our above two initiatives. rating to FULLY VALUED, due to limited share price upside and concern over the rising insurance claims in auto insurance Difficult to scale back pricing competition. given the expiry of the 3-year NCD benefit. This will continue Given that auto insurance products are quite standardised with to pose a challenge for the company to maintain underwriting a short duration, P&Cs tend to resort to pricing competition in profitability. We also believe market is also overly optimistic order to gain market share. By looking at P&C insurers’ toward the self-disciplined commission pricing agreement. We expense ratio (Figure 15), the ratio has constantly been on an suggest investors avoid PICC P&C.
Page 9
Industry Focus China Insurance Sector
Figure 16: China Insurers’ P/EV candle chart Figure 17: China insurers’ P/B candle chart
PEV (x) Peak cycle PB (x) Peak cycle 3.0 3.0 5Y avg 5Y avg Current Current 2.5 2.5 Trough cycle Trough cycle
2.0 2.0
1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0 Average China PICC China Re Ping An CPIC China Life Manulife AIA Average China PICC China Re Ping An PICC CPIC China Manulife AIA Taiping Taiping P&C Life Source: DBS HK Source: DBS HK
Peer comparison table
PB(X) PE(X) Div Yield ROE EPS CA GR Price Mk t Cap F Y17 F Y18F F Y19F F Y17 F Y18F F Y19F F Y17 F Y18F F Y19F F Y17 F Y18F F Y19F 16A -18F Cov erage T ick er (LC) (US$ m) (X) (X) (X) (X) % % (%) (%) (%) H-share insurers Ping An 2318 HK 72.0 160,882 2.5 2.2 1.9 15.1 13.0 11.0 1.4% 1.7% 1.9% 17.8% 17.8% 18.1% 15.3% China Life Insurance 2628 HK 19.2 84,775 1.4 1.3 1.2 14.1 12.2 10.6 2.5% 2.9% 3.3% 10.2% 11.2% 12.0% 39.7% China Taiping Insurance 966 HK 27.1 11,950 1.5 1.3 1.2 15.9 12.2 8.0 0.4% 1.0% 1.5% 9.9% 11.3% 12.8% 28.3% PICC Group 1339 HK 3.6 18,916 0.7 0.6 0.5 8.5 7.2 6.1 1.2% 1.4% 1.7% 12.2% 13.0% 13.5% 12.6% PICC P&C 2328 HK 10.0 27,231 0.9 1.2 1.1 7.5 8.4 7.9 4.0% 3.0% 3.2% 15.7% 15.6% 15.0% -1.2% China Reinsurance 1508 HK 1.6 8,430 0.8 0.7 0.7 10.7 9.7 7.9 3.6% 3.9% 4.8% 7.3% 7.7% 9.0% 5.9% China Pacific Insurance 2601 HK 31.5 41,449 1.7 1.6 1.5 16.3 13.2 11.1 3.0% 3.8% 4.5% 10.9% 12.8% 14.0% 22.9% A v erage 1.4 1.3 1.2 12.6 10.8 8.9 2.3% 2.5% 3.0% 12.0% 12.7% 13.5% 17.7% A-share insurers Ping An - A 601318 CH 60.4 160,885 2.5 2.2 1.9 15.1 13.0 11.0 1.4% 1.7% 1.9% 17.8% 17.8% 18.1% 15.3% China Life Insurance - A 601628 CH 22.3 84,776 2.0 1.8 1.7 19.6 16.9 14.6 1.8% 2.1% 2.4% 10.2% 11.2% 12.0% 39.7% China Pacific Insurance - A 601601 CH 33.9 41,449 2.2 2.1 1.9 20.9 16.9 14.2 2.4% 3.0% 3.5% 10.9% 12.8% 14.0% 22.9% A v erage 2.2 2.0 1.8 18.5 15.6 13.3 1.9% 2.2% 2.6% 13.0% 13.9% 14.7% 26.0% Regional insurers AIA 1299 HK 69.3 105,307 2.6 2.4 2.2 17.4 19.7 17.2 1.4% 1.7% 1.9% 16.1% 12.5% 13.1% 13.9% Manulife 945 HK 143.9 35,944 1.1 1.1 1.0 18.7 19.7 N.A. 3.6% 1.6% 1.9% 4.7% 4.4% 5.2% -18.8% AXA CS FP 21.9 59,831 0.7 0.7 0.7 8.8 8.1 7.8 6.1% 6.4% 6.7% 8.9% 9.4% 9.4% 4.1% Ageas AGS BB 45.3 10,353 0.9 0.9 0.8 11.2 10.7 9.8 4.7% 4.9% 5.1% 8.1% 8.3% 8.5% 16.8% Allianz SE ALV GY 185.9 91,274 1.2 1.1 1.1 10.6 10.0 9.4 4.7% 5.0% 5.3% 11.7% 12.0% 12.1% 10.7% A v erage 1.3 1.2 1.2 13.3 13.6 11.1 4.1% 3.9% 12.3% 11.9% 6.9% 5%
J apan & Korea insurers Samsung Life Insurance Co Ltd 032830 KS 97,000 16,573 0.6 0.5 0.5 8.9 11.4 10.3 3.3% 2.6% 2.9% 6.3% 4.7% 5.2% 14.7% Hanwha Life Insurance Co Ltd 088350 KS 5,110 3,809 0.4 0.4 0.4 7.7 7.0 5.8 2.7% 2.9% 3.4% 5.6% 5.7% 6.7% -1.7% Tongyang Life Insurance Co Ltd 082640 KS 7,360 1,027 0.5 0.5 0.4 8.7 7.9 7.4 3.5% 4.1% 4.7% 6.1% 6.1% 6.3% -16.2% Japan Post Insurance Co Ltd 7181 JP 2,331 12,770 0.7 0.7 0.6 15.2 14.8 14.2 2.9% 3.1% 3.2% 4.6% 4.6% 4.7% -5.0% Dai-ichi Life Holdings Inc 8750 JP 2,086 21,881 0.6 0.6 0.5 10.1 10.1 9.5 2.6% 2.7% 2.9% 5.6% 5.6% 5.6% -18.4% T&D Holdings Inc 8795 JP 1,665 9,475 0.9 0.8 0.8 12.8 11.9 11.5 2.4% 2.6% 2.8% 6.9% 7.0% 7.1% 6.2% A v erage 0.6 0.6 0.5 10.6 10.5 9.8 2.9% 3.0% 3.3% 5.8% 5.6% 5.9% -3.4%
ASEAN insurers Bangkok Life BLA TB 33.3 1,701 1.4 1.3 1.156 12.9 11.2 10.38 2.2% 2.5% 2.7% 11.2% 11.4% 11.5% 18.2% Note: BBG consensus used for non-rated (NR) stocks Closing price as of 10 Aug, 2018
Source: DBS HK
Page 10
Industry Focus China Insurance Sector
China Life Insurance (2628 HK EQUITY, HK$18.96, BUY, Target Price 12-mth HK$ 24.00) China Life Insurance (601628 CH Equity, RMB22.08, HOLD, Target Price 12-mth RMB 21.06) Forecast & Valuation Ge neral Data
FY Dec (RMB m) 2016A 2017A 2018F 2019F At A Glance Net earned premiums 426,230 506,910 528,761 581,646 Issued Capital - H shares (m shs) 7,441 Net investment income 109,147 122,727 126,378 134,373 - Non H shrs (m shs) 20,824 Net Profit 18,741 31,873 36,952 42,679 26 EPS (RMB) 0.69 1.16 1.34 1.55 H shs as a % of Total EPS (HK$) 0.79 1.33 1.54 1.77 Total Mkt. Cap (HK$m/US$m) 535,899 / 68,268 EPS Gth (%) (44.3) 67.2 15.7 15.3 Major Shareholders PE (X) 23.9 14.3 12.3 10.7 China Insurance (%) 68.4 DPS (HK$) 0.28 0.46 0.53 0.61 Major H Shareholders (%) Net Div Yield (%) 1.5 2.4 2.8 3.2 BlackRock, Inc. (%) 8.3 BV Per Share (HK$) 12.32 13.02 13.85 15.06 JPMorgan Chase & Co. (%) 6.1 P/Book Value (X) 1.5 1.5 1.4 1.3 85.6 P/EV (X) 0.7 0.6 0.6 0.5 H Shares-Free Float (%) ROAE (%) 6.0 10.2 11.2 12.0 3m Avg. Daily Val. (US$m) 98.3
Earnings Rev (%): 8 8 Consensus EPS (RMB) 1.41 1.66 Other Broker Recs: B: 19 S: 1 H: 9
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F
Total weighted premium income 0 0 0 0 Total Investment 2,453,283 2,591,652 2,721,235 2,884,509 Gross written premiums 430,498 511,966 534,035 587,447 Segregated funds net assets 0 0 0 0 Net earned premium 426,230 506,910 528,761 581,646 Property, plant and equipment 30,389 42,707 42,707 42,707 Investment income 109,147 122,727 126,378 134,373 Other assets 213,279 263,232 329,230 388,421 Other operating income 5,404 13,718 11,482 14,754 T otal assets 2, 696,951 2, 897,591 3, 093,172 3, 315,637 T otal income 540,781 643,355 666,621 730,772 Net life reserves - traditional 1,847,986 2,025,133 2,182,566 2,357,002 Benefits and claims (407,045) (466,043) (476,363) (519,773) Net life reserves - 195,706 232,500 244,125 256,331 Underwriting and policy (52,022) (64,789) (69,718) (77,278) investment contracts acquisitionFinance cost costs (4,767) (4,601) (4,601) (4,601) Segregated funds net liabilities 0 0 0 0 Other expenses (58,960) (73,394) (76,988) (83,452) Other Liabilities 345,611 314,648 319,953 325,524 T otal expenses ( 522,794) ( 608,827) ( 627,670) ( 685,104) T otal liabilities 2, 389,303 2, 572,281 2, 746,644 2, 938,857
Share of profit of associated 5,855 7,143 9,281 9,964 Shareholder's equity 303,621 320,933 341,573 371,159 and JVs Participating policyholders' 0 0 0 0 Profit before tax 23,842 41,671 48,233 55,632 equity Income tax expense (4,257) (8,919) (10,323) (11,907) Minority interest 4,027 4,377 4,955 5,621 Minority interest (458) (499) (578) (666) T otal equity 307,648 325,310 346,527 376,780 Preferred dividend (386) (380) (380) (380)
Key Financials & Ratios Key Assumptions FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F
Du Pont analysis (%) Net profit / premium income 4.4 6.3 7.0 7.3 Gross written premium growth 18.3 18.9 4.3 10.0 Premium income / total asset 15.8 17.5 17.1 17.5 Agency growth 52.7 5.6 (5.0) 2.0 Total asset / total equity 9 9 9 9 Agency productivity growth 8.5 (2.5) (30.0) 5.0 Return on equity 6.0 10.2 11.2 12.0 Expense ratio 19.5 19.7 20.3 20.4 Loss ratio N/A N/A N/A N/A Embedded value(RMB m) Combined ratio N/A N/A N/A N/A Book value 303,621 320,933 341,573 371,159 VNB margin 23.8 26.9 28.1 27.1 Adjusted items 45,907 49,567 24,784 12,392 Net investment return 4.6 4.9 4.8 4.8 Adjusted book value 349,528 370,500 366,356 383,551 Total investment return 4.6 4.9 4.8 4.8 Value-in-force 302,530 363,673 422,720 471,281 EV growth 16.4 12.6 7.5 8.3 Adjustment (if any) 0 0 0 0 Solvency ratio 297.2 277.6 275.9 276.5 Group embedded value 652,058 734,173 789,076 854,832
Per share analysis(RMB) EPS 0.69 1.16 1.34 1.55 BPS 10.74 11.35 12.08 13.13 DPS 0.24 0.40 0.46 0.53 EVPS 23.07 25.97 27.92 30.24
Capital Strength (%) Leverage ratio 9 9 9 9 Solvency ratio 297.2 277.6 275.9 276.5
Source: Company, DBS HK
Page 11
Industry Focus China Insurance Sector
China Pacific Insurance Group (2601 HK EQUITY, HK$31.05, BUY, Target Price 12-mth HK$ 47.00) China Pacific Insurance Group (601601 CH Equity, RMB33.39, BUY, Target Price 12-mth RMB 41.23) Forecast & Valuation Ge neral Data
FY Dec (RMB m) 2016A 2017A 2018F 2019F At A Glance Net earned premiums 219,573 263,554 297,349 339,965 Issued Capital - H shares (m shs) 2,775 Net investment income 46,472 53,443 59,535 67,946 - Non H shrs (m shs) 6,287 Net Profit 12,057 14,662 18,209 21,551 31 EPS (RMB) 1.33 1.62 2.01 2.38 H shs as a % of Total EPS (HK$) 1.53 1.85 2.30 2.73 Total Mkt. Cap (HK$m/US$m) 281,375 / 35,844 EPS Gth (%) (32.0) 21.6 24.2 18.4 Major Shareholders PE (X) 20.4 16.7 13.5 11.4 Baosteel Group Co., Ltd (%) 14.9 DPS (HK$) 0.80 0.92 1.15 1.36 Shenneng (Group) Co., Ltd. (%) 13.5 Net Div Yield (%) 2.6 3.0 3.7 4.4 Shanghai Haiyan Inv. Management Co., Ltd. (%) 5.2 BV Per Share (HK$) 16.67 17.40 18.68 20.26 Major H Shareholders (%) P/Book Value (X) 1.9 1.8 1.7 1.5 P/EV (X) 1.0 0.9 0.8 0.7 Schroders Plc (%) 13.0 ROAE (%) 12.9 16.5 22.6 26.7 Blackrock (%) 8.1 Gic Private Limited (%) 6.0 Earnings Rev (%): 8 8 H Shares-Free Float (%) 72.9 Consensus EPS (RMB) 2.21 2.60 3m Avg. Daily Val. (US$m) 80.1 Other Broker Recs: B:22 S:1 H:4
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F
Total weighted premium income 0 0 0 0 Total Investment 941,776 1,081,282 1,222,923 1,385,957 Gross written premiums 234,063 281,644 319,736 363,629 Segregated funds net assets 0 0 0 0 Net earned premium 219,573 263,554 297,349 339,965 Property, plant and equipment 16,664 17,950 17,950 17,950 Investment income 46,472 53,443 59,535 67,946 Other assets 62,252 71,992 71,992 71,992 Other operating income 36 2,408 3,465 3,465 T otal assets 1, 020,692 1, 171,224 1, 312,865 1, 475,899 T otal income 263,452 316,211 356,884 407,910 Net life reserves - 693,826 802,239 925,813 1,068,445 Benefits and claims (168,691) (196,969) (224,823) (255,344) traditionalNet life reserves - 48,796 56,268 63,740 71,212 Underwriting and policy (69,973) (82,634) (90,018) (102,362) investment contracts acquisitionFinance cost costs (2,444) (3,703) (3,746) (3,793) Segregated funds net 0 0 0 0 Other expenses (8,906) (15,071) (16,440) (19,914) liabilitiesOther Liabilities 143,307 171,598 171,598 171,598 T otal expenses ( 250,014) ( 298,377) ( 335,027) ( 381,412) T otal liabilities 885,929 1, 030,105 1, 161,151 1, 311,255
Share of profit of associated 18 74 88 88 Shareholder's equity 131,764 137,498 147,684 160,131 and JVs Participating policyholders' 0 0 0 0 Profit before tax 16,085 21,102 25,411 30,051 equity Income tax expense (3,801) (6,111) (6,793) (8,017) Minority interest 2,999 3,621 4,030 4,513 Minority interest (227) (329) (409) (484) T otal equity 134,763 141,119 151,714 164,644 Preferred dividend 0 0 0 0
Key Financials & Ratios Key Assumptions FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F
Du Pont analysis (%) Net profit / premium income 5.5 5.6 6.1 6.3 Gross written premium 15.2 20.3 13.5 13.7 Premium income / total asset 21.5 22.5 22.6 23.0 growthAgency growth 35.5 33.8 2.0 15.0 Total asset / total equity 8 8 9 9 Agency productivity growth (0.9) (1.1) (4.0) (2.0) Return on equity 12.9 16.5 22.6 26.7 Expense ratio 38.4 39.5 39.8 40.1 Loss ratio 61.3 59.8 59.8 59.6 Embedded value(RMB m) Combined ratio 99.6 99.3 99.6 99.7 Book value 38,772 45,722 56,681 69,128 VNB margin 32.9 39.4 40.9 41.9 Adjusted items 39,784 31,566 21,741 11,679 Net investment return 5.2 5.3 5.5 5.6 Adjusted book value 78,556 77,288 78,423 80,806 Total investment return 4.9 5.3 5.5 5.6 Value-in-force 103,047 136,749 164,648 195,121 EV growth 19.6 16.4 13.5 13.4 Adjustment (if any) 64,333 72,129 81,759 92,592 Solvency ratio 253.4 245.3 228.2 224.5 Group embedded value 245,936 286,166 324,830 368,519
Per share analysis(RMB) EPS 1.33 1.62 2.01 2.38 BPS 14.54 15.17 16.30 17.67 DPS 0.70 0.80 1.00 1.19 EVPS 27.14 31.58 35.85 40.67
Capital Strength (%) Leverage ratio 8 8 9 9 Solvency ratio 253.4 245.3 228.2 224.5
Source: Company, DBS HK
Page 12
Industry Focus China Insurance Sector
PICC Property & Casualty (2328 HK EQUITY, HK$9.64, Downgraded to Fully Valued, Target Price 12-mth HK$ 7.80) Forecast & Valuation Ge neral Data
FY Dec (RMB m) 2016A 2017A 2018F 2019F At A Glance Net earned premiums 270,261 309,076 343,943 382,657 Issued Capital (m shrs) 6,899 Net investment income 15,073 15,382 17,044 18,839 66,509 / 8,473 Net Profit 18,020 19,807 21,979 23,733 Mkt. Cap (HK$m/US$m)
EPS (RMB) 1.22 1.34 0.99 1.07 Major Shareholders EPS (HK$) 1.39 1.53 1.13 1.22 PICC Holding (%) 69.0 EPS Gth (%) (17.5) 9.9 (26.0) 8.0 31.0 PE (X) 6.9 6.3 8.5 7.9 Free Float (%) DPS (HK$) 0.35 0.39 0.29 0.31 3m Avg. Daily Val. (US$m) 49.4 Net Div Yield (%) 3.7 4.0 3.0 3.2 BV Per Share (HK$) 9.22 10.29 7.71 8.62 P/Book Value (X) 1.0 0.9 1.3 1.1 P/EV (X) N/A N/A N/A N/A ROAE (%) 15.8 15.7 15.6 15.0
Earnings Rev (%): 8 8 Consensus EPS (RMB) 1.53 1.68 Other Broker Recs: B:16 S:2 H:7
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F
Total weighted premium income 0 0 0 0 Total Investment 379,884 415,371 452,725 493,814 Gross written premiums 311,160 350,314 390,321 435,162 Segregated funds net assets 0 0 0 0 Net earned premium 270,261 309,076 343,943 382,657 Property, plant and equipment 14,977 15,531 15,531 15,531 Investment income 15,073 15,382 17,044 18,839 Other assets 81,088 93,664 104,468 116,258 Other operating income 4,658 5,632 5,404 5,678 T otal assets 475,949 524,566 572,724 625,603 T otal income 289,992 330,090 366,390 407,174 Net life reserves - traditional 242,093 264,748 296,488 331,637 Benefits and claims (171,759) (192,520) (215,684) (241,611) Net life reserves - N/A N/A N/A N/A Underwriting and policy (86,101) (99,287) (109,936) (121,524) investment contracts acquisitionFinance cost costs (1,208) (1,998) (1,484) (1,484) Segregated funds net liabilities 0 0 0 0 Other expenses (11,418) (13,699) (14,511) (15,716) Other Liabilities 114,544 126,704 126,704 126,704 T otal expenses ( 270,486) ( 307,504) ( 341,615) ( 380,335) T otal liabilities 356,637 391,452 423,192 458,341
Share of profit of associated 2,945 4,575 4,532 4,806 Shareholder's equity 119,306 133,107 149,525 167,252 and JVs Participating policyholders' 0 0 0 0 Profit before tax 22,451 27,161 29,307 31,646 equity Income tax expense (4,430) (7,353) (7,327) (7,911) Minority interest 6 7 8 9 Minority interest (1) (1) (1) (1) T otal equity 119,312 133,114 149,533 167,262 Preferred dividend 0 0 0 0
Key Financials & Ratios Key Assumptions FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Gross written premium growth 10.5 12.6 11.4 11.5 Du Pont analysis (%) Agency growth 0.0 0.0 0.0 0.0 Net profit / premium income 6.7 6.4 6.4 6.2 Agency productivity growth 0.0 0.0 0.0 0.0 Premium income / total asset 56.8 58.9 60.1 61.2 Expense ratio 34.8 35.1 34.5 34.3 Total asset / total equity 4 4 4 4 Loss ratio 63.6 62.3 62.7 63.1 Return on equity 15.8 15.7 15.6 15.0 Combined ratio 98.4 97.3 97.2 97.4 VNB margin 0.0 0.0 0.0 0.0 Embedded value(RMB m) Net investment return 4.4 4.3 4.3 4.4 Book value 0 0 0 0 Total investment return 5.2 4.3 4.3 4.4 Adjusted items 0 0 0 0 EV growth 0.0 0.0 0.0 0.0 Adjusted book value N/A N/A N/A N/A Solvency ratio 286.9 278.3 258.6 242.5 Value-in-force 0 0 0 0 Adjustment (if any) 0 0 0 0 Group embedded value N/A N/A N/A N/A
Per share analysis(RMB) EPS 1.22 1.34 0.99 1.07 BPS 8.05 8.98 6.72 7.52 DPS 0.31 0.34 0.25 0.27 EVPS 0.00 0.00 0.00 0.00
Capital Strength (%) Leverage ratio 4 4 4 4 Solvency ratio 286.9 278.3 258.6 242.5
Source: Company, DBS HK
Page 13
Industry Focus China Insurance Sector
DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows:
S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) B U Y (>15% total return over the next 12 months for small caps, >10% for large caps) H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FU LLY VALUED (negative total return i.e. > -10% over the next 12 months) S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 13 Aug 2018 16:29:38 (HKT) Dissemination Date: 14 Aug 2018 08:21:30 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified.
GEN ERAL DISCLOSURE/DISCLAIMER
Th is report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research . Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contain ed in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, wh o should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communica tion given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, an d there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecas ts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will var y significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US -registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
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Industry Focus China Insurance Sector
A N ALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that th e views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendati ons or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity wh o is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates a s part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
C O MPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions i n Ping An Insurance (Group) Company (2318 HK), China Pacific Insurance (Group) Company Limited (2601 HK), China Life Insurance Company Limited (2628 HK), Picc Property & Casualty Company Limited (2328 HK), China Taiping Insurance Holdings Company Limited (966 HK), Aia Group Limited (1299 HK), and The People'S Insurance Company (Group) (1339 HK) recommended in this report as of 08 Aug 2018.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. C o mpensation for investment banking services:
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
4. D isclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendation s published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities i n respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Industry Focus China Insurance Sector
R ESTRICTIONS ON DISTRIBUTION Ge neral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. A ustralia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DB S Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the r ecipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian l aws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
H o ng Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities.
I ndonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR S ingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such pers ons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Th ailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. U nited This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority
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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) c opied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. D u bai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3 rd Floor, I n ternational Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Fi nancial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for C entre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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Industry Focus China Insurance Sector
U nited Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Em irates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. U nited States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject c ompany, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shou ld contact DBSVUSA directly and not its affiliate. O ther In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, j urisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. D BS Bank (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2521-1812
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Industry Focus China Insurance Sector
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H O NG KONG MA LAYSIA S INGAPORE D BS Bank (Hong Kong) Ltd A llianceDBS Research Sdn Bhd D BS Bank Ltd C o ntact: Carol Wu C o ntact: Wong Ming Tek (128540 U) C o ntact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E
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