China / Hong Kong Industry Focus China Insurance Sector

Refer to important disclosures at the end of this report DBS Group Research . Equity 1 Nov 2017

Multi-year value growth ahead HSI: 28,336 • Strong growth potential back by C-ROSS,

favourable policy direction, and structural drivers ANALYST • Favourable asset/liability mismatch position Ken SHIH +852 2820 4920 [email protected] bodes well under a rising rate environment;

China lifers’ book value is set to rise Keith TSANG CFA, +852 2971 1935 nd [email protected] • Impact from 2 phase of auto insurance pricing reform expected to be more severe; online insurers considered to be a disruptive force Recommendation & valuation • Initiating coverage on China Insurance sector. Top picks: China Taiping (966 HK), CPIC (2601 HK), and C losing Targe t FY17F Ping An (2318 HK). Top SELLs: PICC P&C (2328 HK), Stock Ticker Rating Price Price PB Yield ROE and China Re (1508 HK) (HKD) (HK D) (X) (%) (% ) Spotlight on value enhancement: We believe China’s low Ping A n - H 2318 H K BUY 68. 1 86. 0 2.4 1.5 17.8 insurance coverage, launch of China Risk-Oriented Solvency C hina Life - H 2628 H K BUY 25. 8 32. 0 1.9 1.8 9.6 System (C-ROSS), and policy guidance will continue to direct China Taiping 966 HK BUY 25.1 38.0 1.4 1.1 8.9 China life insurers to refocus on traditional life products and C hina Pacific - H 2601 HK BUY 37. 7 54. 0 2.0 2.8 11.1 value enhancement. Despite the surge in 2016, we expect A IA 1299 H K BUY 59. 4 75. 0 2.4 1.9 14.7 leading lifer’s such as China Taiping, CPIC and Ping An, to Manulife 945 HK BUY 157.2 196.9 1.0 4.8 9.9 record strong VNB growth of 30-32% CAGR in FY17-19F. The PICC Group 1339 H K H OLD 3. 7 3. 9 0.7 1.2 12.2 ability to enhance value serves as a key spotlight. China Re 1508 HK F.V. 1.7 1.5 0.8 3.5 7.9 Negative duration gap bodes well: Lacking domestic long- PICC P& C 2328 H K SELL 15. 2 11. 7 1.4 2.6 15.6 duration investable assets, China insurers are holding a mismatched portfolio, as average asset/liability duration stands C losing Targe t FY17F at 6/13 years with China Taiping’s and CPIC’s having the Stock Ticker Rating price Price PB Yield ROE widest duration mismatch. With China bond yields edging (RMB) (RMB) (X) (%) (%) Ping An - A 601318 CH BUY 64.1 75.4 2.6 1.3 17.8 upwards, China lifers’ book value is set to rise given the China Pacific - A 601601 CH BUY 42.1 47.4 2.7 2.1 11.1 negative duration gap. The expected rise in China bond yields China Life - A 601628 CH HOLD 31.0 28.1 2.7 1.2 9.6 will also alleviate life insurer’s pressure on reserves. P&C insurers suffering; online insurers a disruptive force: As A s of Oct-30, 2017 opposed to the consensus view where it expects the second Source: Thomson Reuters, DBS Vickers, Bloomberg Finance L.P. auto insurance pricing reform to have a neutral impact on P&Cs, we, however, expect the impact to be negative. The

further pricing cut along with slower China auto sales will lead

to fewer economy of scale which ultimately may result in a higher cost. Online insurers are also a potential disruptive force on the segment, given the homogenous product features. Players such as Zhong An (6060 HK, NR) and Ping An are likely to be the long term winners. Upgrading cycle intact. China insurers’ share price on average have risen 32% YTD, backed by a rise in interest rates and VNB growth. We expect the upgrading cycle to continue in FY18F, led by continuous value enhancement initiatives, and stronger earnings. We suggest that investors focus on insurers with better product mix, strong VBN growth outlook and stable investment position. Suggest to avoid P&Cs and Reinsurers due to deteriorating outlook, and competition. Top BUYs: China Taiping, CPIC, Ping An. Top SELLs: PICC P&C and China Re.

ed-TH / sa- CW

Industry Focus China Insurance Sector

Table of Contents

Investment summary 3 Multiple premium growth structure drivers ahead 4 Concentrated industry dynamics 9 Transforming into value growth 12 C-ROSS changing the industry landscape 12 Policy guidance favours protection type policy growth 14 Pressure of maintaining cost of liability “low” 16 Favourable portfolio adjustments continue 17 Value enhancement the next spotlight 19 Channel strength another key success factor: 23 P&C insurers remain under transition 25 Pure online insurers a potential disruptive force 28 An ecosystem-based growth model 31 Expanding into traditional life and P&C business 34 Ping An - Surfing on the “Fintech” wave 35 Favourable asset liability duration mismatch position 37 China Taiping, CPIC and Ping An are the main beneficiaries 38 Life insurance reserving pressure alleviating 41 750-day 10-year bond yield to trend upwards in 4Q17 43 China life insurers’ Embedded value on the rise 45 China policy update – No more universal Life riders 46 Premium sales to normalise in Hong Kong 49 Upgrading cycle to continue 52 Stock Profiles 61 Ping An Insurance (Group) Company (2318 HK / 601318 CH) 61 China Life Insurance Company Limited (2628 HK / 601628 CH) 67 China Taiping Insurance Holdings Company Limited (966 HK) 73 China Pacific Insurance (Group) Company Limited (2601 HK / 601601 CH) 79 AIA Group Limited (1299 HK) 85 Manulife Financial Corporation (945 HK) 108 The People's Insurance Company (Group) (1339 HK) 120 China Reinsurance (Group) Corporation (1508 HK) 126 PICC Property & Casualty Company Limited (2328 HK) 132

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Industry Focus China Insurance Sector

Investment summary Favourable duration mismatch with less reserving pressure

We initiate coverage on China insurance sector with a positive Lacking of domestic long-duration investable assets, China view. We see three major structural drivers ahead which will insurers are carrying a natural duration mismatch portfolio, as further drive both China life insurers’ premium and value average asset and liability duration standing at 6 and 13 years, growth in the long term. This will ultimately lead to further respectively, with China Taiping and CPIC running at the sector re-rating cycle, although China insurers' share prices on widest duration mismatch. Amid a rising interest environment, average have risen by 32% YTD. Structural drivers include a) this augurs well for China insurers to further grow their book China’s low insurance penetration with higher demand for values. In addition, as the 750-day 10-year government bond better healthcare plan and ageing population implies great yield is expected to start trending upwards from October 2017, premium growth upside, b) Launch of China Risk-Oriented this will also help to alleviate insurers’ reserving pressure, which Solvency System (C-ROSS) with policy directing towards on average had ate up 26-52% of China life insurers’ pre-tax protection-type products, providing significant VNB and EV profit during 2015 to 1H17. Earnings growth momentum is enhancement opportunity, and c) Rise in domestic interest rate expected to turn positive onward. China insurers are also accompanied by the 750-day 10-year China government bond considered more rate sensitive compared to China banks. yield, which is expected to trend upwards from October 2017, augur well for insurers’ natural duration mismatch portfolio P&C insurers still suffer. On-line insurers a disruptive force with less reserving pressure. On the other hand, given the launch of the auto insurance second pricing reform in July As oppose to the consensus view where market expects a 2017, we expect P&C insurers to continue to consolidate. neutral impact from the 2nd phase of auto insurance pricing reform, we however believe the influence should be more Trading at 1.1x P/EV versus past 5-year mean P/EV of 1.3x, we substantial. The further pricing cut coupled with the slowdown expect sector re-rating to continue. Our top BUYs are China in China new auto sales will lead to fewer premium growth Taiping, CPIC and Ping An, given their better underwriting and scale, which ultimately may result in higher combined ratio. portfolio mix, stronger value growth potential and lengthier In addition, with the strong growth potential from on-line negative duration gap. We also consider Ping An as China’s insurers, where on-line insurance segment is expected to leading Fintech innovator. Our top SELLs are PICC P&C and account for 24% of total insurance market by 2021F, up from China Re given deteriorating outlook and rising competition. 8% in 2016, we believe on-line insurers may also regard as a potential disruptive force to the P&C segment, given the Value enhancement the key spotlight homogenous product feature. Players including Zhong An (6060 HK, NR) and Ping An is likely the long-term winner. China’s insurance penetration stood at only 2.3%/1.8% for life /non-life segments respectively in 2016. Compared to Upgrading cycle to continue – BUY China Taiping, CPIC and developed countries whose penetration are at 5.1%/3.1% Ping An respectively, the level remains low. Coupled with rising demand for better healthcare and critical illness insurance China insurers’ share prices on average have risen 32% YTD coverage, and demographic shifting to an ageing population versus MSCI China of 46%, driven mainly by the rise in China whose ageing wallet remains low, China’s premium growth bond yield and strong VNB growth. Despite the strong rally, we potential remains phenomenal. With 1) the launch of C-ROSS, believe sector re-rating cycle will continue, as 1) the sector which incentivises insurers to sell more traditional life products currently trades at 1.1x P/EV versus past 5-year mean of 1.3x. given a lower capital requirement, 2) CIRC’s policy guidance to Valuation for the sector remains cheap, 2) we expect interest direct insurers’ to focus on launching more traditional life rate up-cycle to continue moving into FY18F, as US Fed expects policies while limiting the sale of universal policies, and 3) another rate hike in December 2017 and three times in 2018, pressure to maintain cost of liability at a low level, we expect 3) strong structural drivers for both premium and value growth China life insurers to speed up their underwriting portfolio remain for the sector, and 4) earnings growth to reaccelerate. adjustment towards protection-type products, which will Within regional insurers, we like AIA given its strong China ultimately lead to continuous new business value (VNB) and growth prospects although slower premium growth expected embedded value (EV) growth. in Hong Kong. We also like Manulife for its Asia Insurance and Wealth management business with undemanding valuation.

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Industry Focus China Insurance Sector

penetration rate and per capita insurance premium spending Multiple premium growth structure drivers ahead will also continue to rise in China. Low penetration implies great upside potential: China’s Life and P&C insurance penetration (defined as insurance premium China’s total insurance premium scale had reached Rmb3.1tr in over GDP) had reached only 2.3% and 1.8%, with life and 2016, and grown at an 18.9% CAGR during 2012-16. Broken non-life premium per capita at US$190 and US$147 in 2016 down by type, total premium scale of life and P&C insurance respectively, according to Swiss Re (figure 1). If compared to had reached Rmb2.2tr and Rmb872bn respectively, and grown developed countries whose average insurance penetration at 21.6% and 13.1% CAGR for the past five years (figure 2-3). rates are at 5.1% and 3.1% for life and P&C insurance Premiums, especially for life insurance policies, continued to respectively, China’s penetration level remains low. surge and increased 26.0% y-o-y in 1H17, with P&C premiums also growing by 12.8% y-o-y during the same period. Based on In particular, as an insurance policy can be considered as a China’s 13th 5-year plan, the State Council aims for China’s form of financial asset, i.e. endowment, and also its tax- total premiums to reach Rmb4.5tr, with penetration rate to exemption advantage, many high net worth individuals and reach 5% and per capita premium spending of Rmb3,500 by families in developed Asian countries tend to transfer wealth to 2020. This implies total premium CAGR of at least 13.3%, or their next generation through insurance policies, apart from per capita premium spending CAGR of at least 15.2% during real estate assets. This is also reflected in the high insurance 2017-20. As such, we believe the insurance premium growth penetration rates in markets such as Hong Kong, Taiwan, potential, both for life and P&C insurance, remains Singapore, Japan and South Korea which have even reached phenomenal. In addition to China’s low penetration rate, we 5.5-16.7% with premium per capita of between US$2,050 and also see structural drivers including longer life expectancy, US$7,679 (figures 13-14). As affordability and households’ greater demand for better health plan, and rising ageing wealth level continue to increase, we believe insurance population, which will help to drive China’s premium growth in the future.

Figure 1: Life insurance penetration rate by major markets

8 United Kingdom South Korea Japan 7 Denmark

Italy France 6 Singapore 5

4 Thailand Portugal United States Malaysia Canada 3 India Spain Germany Australia China Netherlands 2 Brazil Indonesia Premiun as % of GDP - GDP Life of % as insurance Premiun Hungary Czech Philippines Mexico Republic 1 Vietnam Poland New Zealand Argentina Russia 0 Turkey 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP per capita (US$)

Source: Swiss Re, DBS Vickers

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Industry Focus China Insurance Sector

Figure 2: China’s life insurance premium and YoY(%) plans and health expenditure in China will continue to rise. This will drive demand for better insurance coverage, in our view. Rmb bn Total life premium YoY (%) - RHS 2,500 70% 60% Figure 4: Major Asia countries’ life expectancy - Male 2,000 50% 40% 1,500 30% Years 20% 85 1,000 10% 80 500 0% 75 -10% 0 -20% 70 65 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Aug-17 60 55 Source: WIND, DBS Vickers 50 1980 1985 1990 1995 2000 2005 2010 2015 Figure 3: China’s P&C insurance premium and YoY(%) China Malaysia Japan Singapore Korea Thailand Rmb bn Total P&C premium YoY (%) - RHS Vietnam 1,000 40% 900 35% Source: World Bank, DBS Vickers 800 30% 700 600 25% 500 20% 400 15% Figure 5: Major Asia countries’ life expectancy - Female 300 10% 200 100 5% Years 0 0% 90 85 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Aug-17 80 75 Source: WIND, DBS Vickers 70 65 Longer longevity with rising demand for better healthcare: 60 According to World Bank, due to the improving living quality, 55 life expectancy of both male and female citizens in major Asia 50 countries is constantly on an upward trend (figure 4-5). In 1980 1985 1990 1995 2000 2005 2010 2015 China, average life expectancy has increased from 65 and 68 China Japan Korea years for male and female, to 75 and 78 years respectively, for Malaysia Singapore Thailand the past 35 years. We believe the longer life expectancy will Vietnam lead to higher demand especially for traditional life, annuity, and health insurance coverage, as people need to reserve more Source: World Bank, DBS Vickers and prepare ahead for their golden years.

Rising awareness on critical illnesses: China’s health awareness In addition, China’s health expenditure per capita of only towards critical illnesses is also rising, as impacted by the US$420 accounted for 5.5% of the country’s GDP in 2014. increasing occurrence of chronic diseases. Swiss Re’s China The level is considered still low as average health expenditure conducted a critical illness (CI) study, where the institution per capita has reached US$3,037 among major countries, and interviewed 3,000 Chinese consumers aged between 30 and on average accounted for 8.2% of GDP (figure 6). In more 80 and lived in tier 1-3 cities, aiming to discover the consumer developed countries such as Germany, France, and even the US, behaviour on CI insurance. Results of the survey include the total health expenditure can reach as high as US$9,403 per following (figure 7): capita (17% of GDP). As people become wealthier and health awareness increases, we believe demand for better health

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Industry Focus China Insurance Sector

Figure 6: Major countries’ health expenditure per capita Families with kids or relatives who are diagnosed with CI have substantially higher insurance coverage than those US$ who do not. 10,000 20% 8,000 16% The survey also shows the most often-mentioned reason for 6,000 12% purchasing CI insurance is to have peace of mind for the family 4,000 8% and themselves (74%), followed by reduction in the dependency on the family and spouse (62%), getting the best 2,000 4% treatment (49%) and anticipating a greater future health risk 0 0% (46%, figure 8). Overall, we believe as middle-aged consumers become older, they will continue to convey the importance of Italy India Brazil Spain Japan Korea China

France insurance coverage to the next generation, which is positive to Austria Average Thailand Malaysia Australia Germany

Indonesia the premium growth in China’s health insurance. Philippines Netherlands New ZealandNew United States

United Kingdom United Health expenditure per capita (LHS) % of GDP (RHS) Figure 8: Reason for purchasing CI insurance

Source: World Bank, DBS Vickers Peace of mind for family and themselves

Reduction in the dependenct Figure 7: Major countries’ health expenditure per capita on the family or spouse

Getting the best treatment 50% 45% Anticipating a greater future 40% health risk 35% 30% Insufficient coverage through 25% the government 20% Upgrading an existing health 15% plab 10% 5% Reasonable premium 0%

T1 T2 T3 Yes Yes No No Obtain other medical opinion Men 30-39 40-49 50-59 60-69 70-80

Women Having someone around you that suffers from a CI Tier Have Relative Age Gender cities kids diagosed Recommendation from a relative or friend

Source: Swiss Re, DBS Vickers 0% 20% 40% 60% 80%

Source: Swiss Re, DBS Vickers • Middle-aged consumers have higher insurance coverage: The survey shows that consumers aged between 30 and 49 have higher CI insurance coverage, whereas elder citizens Demographics shifting to an ageing population: Ageing are found to be inadequately covered. population is one of the critical social issues that major • Women have higher coverage than men: economies are facing today, and China is no exception. Based 28% of the women respondents claimed to have CI on the 2015 data released by the National Bureau of Statistics, insurance coverage, as compared to 23% for men. China’s current demographic structure resembles a bell-shape, • Tier 2 and tier 1 citizens are more concerned about CI: where middle-aged citizens between 20 and 59 accounted for Middle-class citizens pay more attention on CI 61% of the total population, while those aged 60 and above • Awareness on CI insurance is substantially higher for accounted for 18% (figure 9). However, as the birth rate has people who have kids or relatives diagnosed with such an been falling and the current middle-aged citizens become older illness: in the next 15 years, the group of citizens aged 60 and above is estimated to account for 25% of the total population by

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Industry Focus China Insurance Sector

2030, and the percentage will further increase beyond 2030, funding support from family members (figure 11). Meanwhile, according to Euromonitor (figure 10). We believe the its insurance funding accounted for only 2% of its overall demographic shift towards the ageing population will also ageing wallets. This implies a substantial shortfall of insurance trigger demand for long-term health protection insurance coverage for the elderly in China (Germany’s insurance products. coverage is also 2%, but we believe it is compensated by the high social welfare funding by its government). Figure 9: China’s demographic structure - 2015 By looking at China’s mortality protection gap, which is defined as the difference between the amount of income to Male Female maintain living standards and one’s savings plus life insurance Age 80+ coverage, the total aggregate number was US$32tr in 2014, Age 70-79 which is the highest among major countries based on the data released by Swiss Re (figure 12). The number is considered Age 60-69 substantial, even if compared to Japan, which is facing the Age 50-59 most severe ageing population issue globally, and whose Age 40-49 protection gap stood at only US$6.6tr, or one-fifth of China’s Age 30-39 aggregate amount. This again implies that China is under- Age 20-29 insured and is positive for its future premium growth.

Age 10-19 Figure 11: Ageing wallets of developed countries Age 0-9

-20%-15%-10% -5% 0% 5% 10% 15% 20% Society - Country Society -Family Savings Insurance

Source: National Bureau of Statistics, DBS Vickers 100% 2% 5% 5% 2% 11% 7% 7% 11% 26% 11% 80% 25% 32% 16% 25% Figure 10: China’s demographic structure – 2030 F 12% 32% 10% 10% 60% 21% 10% 7% Male Female 40% 71% 70% Age 80+ 60% 51% 53% 58% 50% 20% Age 70-79 0% Age 60-69 US Age 50-59 UK Japan China Germany

Age 40-49 Austrialia Developed Developed

world+China Age 30-39 Source: Swiss Re, DBS Vickers Age 20-29 Age 10-19 Figure 12: Mortality protection gap by major countries

Age 0-9 US$bn US$32tn -20%-15%-10% -5% 0% 5% 10% 15% 20% 10,000 9,000 Source: Euromonitor, DBS Vickers 8,000 7,000 China has the lowest ageing wallet: Ageing wallet is defined as 6,000 the total amount spent on people aged 65 and above to 5,000 supplement their income, provide for their health and social 4,000 3,000 care, and cover the inheritance they aim to pass along, 2,000 according to Swiss Re. Key funding components include: a. 1,000 Society – both funding from the country and family members, 0 b. Savings – mainly private savings, and c. Insurance products – India Japan like annuities and traditional long-term care insurance. The China Taiwan Vietnam Thailand Malaysia Australia Indonesia study shows that China has one of the lowest funding support Singapore Philippines Hong Kong Hong from the government but on the other hand has the highest Korea South Source: Swiss Re, DBS Vickers

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Industry Focus China Insurance Sector

Figure 13: Premium per capita spending - Life Figure 14: Premium per capita spending – Non-life

Hong Kong Hong Kong Taiwan Netherlands Denmark Taiwan Switzerland Switzerland United Kingdom United State Singapore Australia Japan New Zealand France Canada Norway Denmark South Korea Germany Italy South Korea United State Norway Australia France Canada United Kingdom Germany Japan Netherlands Singapore Spain Spain Portugal Italy New Zealand Portugal Malaysia Czech Republic Czech Republic Argentina Thailand Poland Brazil Hungary China Malaysia Hungary Brazil Poland China Mexico Turkey Indonesia Mexico Argentina Thailand India Russia Philippines Indonesia Vietnam Russia Philippines Vietnam India Turkey 0 2,000 4,000 6,000 8,000 0 2,000 4,000 6,000 8,000 Premium per capita (USD) - Life insurance Premium per capita (USD) - Non-life insurance

Source: Swiss Re, DBS Vickers Source: Swiss Re, DBS Vickers

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Industry Focus China Insurance Sector

Figure 16: China P&C insurers' premium market share Concentrated industry dynamics

China's insurance industry is considered as having Insurance 8M17 total 8M16 total YoY 8M17 market 2016 market Rank company premium premium (%) share(%) share (%) concentrated dynamics, with the top 3 insurers China Life 1 PICC P&C 231,014 207,105 12% 33.5% 33.5% (2628 HK, BUY), Ping An (2318 HK, BUY), and Anbang (non- 2 Ping An P&C 138,573 111,769 24% 20.1% 19.2% 3 CPIC P&C 67,955 63,430 7% 9.8% 10.4% listed) and top 10 life insurance players accounting for 43% 4 China Life P&C 42,031 38,947 8% 6.1% 6.4% and 72% of overall market share respectively based on 1H17 5 China Insurance 27,724 26,862 3% 4.0% 4.2% 6 China Continent 24,176 20,707 17% 3.5% 3.4% premium numbers (figure 15). Market concentration in P&C is 7 Sunshine P&C 21,497 17,961 20% 3.1% 3.1% even more obvious, with the top 3 companies PICC P&C (2328 8 Taiping P&C 13,909 11,811 18% 2.0% 2.0% 9 Sinosure 9,818 6,837 44% 1.4% 1.9% HK, FULLY VALUED), Ping An P&C (non-listed), and CPIC P&C 10 Tianan P&C 9,322 8,833 6% 1.4% 1.5% (non-listed) and top 10 P&C players accounting for 63% and Others 104,087 88,787 17% 15.1% 14.7% 85% of overall market share respectively (figure 16). The Total 690,106 603,048 14% 100.0% 100.0% concentrated industry dynamics are theoretically positive for Note: Unit=Rmb m, otherwise indicated maintaining a benign competition landscape. It is the same for Source: WIND, DBS Vickers the P&C sector, as we have seen market leader PICC P&C further expand its market share by 0.5ppt and at the expense However, as these high guarantee universal and high cash of smaller players. Nonetheless, the competition landscape in value products will increase insurers’ liability cost, and at the life segment is considered more intense. In particular, platform same time cast substantial liquidity risk should these insurers and small- to mid-sized insurers, i.e. Anbang Life and Hua Life incur mass policy surrender (high cash value also implies low have been grabbing premium market share away from market surrender cost for policyholders), CIRC has laid down several leaders by selling high guarantee rate universal life and high restrictions to contain the growth of these universal products cash value but short-term duration products (defined as within since 2016. We believe the regulatory measures will help to the first four years where the sum of cash value and alleviate the competition among insurers to fight for premium accumulated survival benefits outpace total premium paid growth going forward, which is positive for maintaining a during the period, we will discuss in more detail in the sound market competition landscape for the life insurance following pages). segment.

Life to outpace P&C: The premium growth of life insurance Figure 15: China Life insurers' premium market share policies has outpaced that of P&C insurance policies since 2014, driven mainly by the increasing demand for traditional life and Insurance 8M17 total 8M16 total YoY 8M17 market 2016 market Rank company premium premium (%) share (%) share (%) health, accompanied by slower auto insurance from P&C 1 China Life 402,692 341,840 18% 19.4% 19.9% segment as impacted by the two-phased launch of commercial 2 Ping An Life 272,291 199,348 37% 13.1% 12.7% vehicle pricing reform in 2015. In 1H17, life insurance 3 Anbang Life 189,035 77,821 143% 9.1% 5.3% accounted for 79% of total premiums, up from its recent 4 CPIC Life 139,985 106,560 31% 6.7% 6.3% 5 PICC Life 94,397 91,621 3% 4.5% 4.8% trough level of 64% in 2013 (figure 17). We believe the 6 Taiping Life 89,599 70,145 28% 4.3% 4.4% premium growth in life insurance policies will continue to 7 Taikang 90,831 70,052 30% 4.4% 4.1% outpace that of P&C going forward, as we expect the market 8Company New China A Life 75,417 83,460 -10% 3.6% 4.7% to continue its watch-and-wait approach over auto insurance 9 Funde Sino Life 66,063 87,302 -24% 3.2% 5.2% 10 Hua Life 65,479 33,805 94% 3.2% n.a. as impacted by the second phase of commercial vehicle pricing Others 589,518 530,886 11% 28.4% 32.6% reform which was launched in June 2017. Total 2,075,306 1,692,838 23% 100.0% 100.0% Note: Unit=Rmb m, otherwise indicated Source: CIRC, DBS Vickers

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Industry Focus China Insurance Sector

Figure 17: Total premium breakdown by life and P&C Figure 19: P&C premium breakdown by policy type

Life as % of total premium P&C as % of total premium Traffic compulsory % of total Agriculture % of total 100% Auto insurance and others % of total 90% 100% 80% 70% 80% 60% 50% 75% 76% 76% 76% 76% 40% 60% 30% 20% 40% 10% 0% 20% 5% 5% 5% 5% 6% 20% 20% 20% 19% 18% 0%

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-13 Dec-14 Dec-15 Dec-16 Jun-17 Source: CIRC, DBS Vickers Source: CIRC, DBS Vickers

Within Life insurance, growth in health insurance premium has For P&C, given auto insurance accounts for 70%+ of the share served as the main driver since 2014, posting a 53% CAGR for within P&C insurance (figure 21), with the impact from the the past four years and accounting for 18.2% of total life second auto insurance pricing reform, we expect the growth premium in 2016, compared to the 26% CAGR of total life rate to slow down moderately this year before returning to a insurance premium. Moving into 2017, with life insurers mid- to high-teen growth rate as we move into FY18F. refocusing on traditional life products, health insurance premium posted an 11% y-o-y growth in 1H17, with Good premium growth outlook for Ping An, CPIC, and AIA: traditional life premium surging by 29% y-o-y during the same Different Life insurers are undergoing different stages of value period (figure 20). Overall, we remain positive on both transformation, as driven by the launch of C-ROSS, regulatory traditional life and health insurance premium growth outlook guidance and pursuit for profitability. In general, most of the in China. life insurers have posted strong premium growth since 2016, particularly, Ping An, CPIC (2601 HK, BUY) and AIA China (whose premium growth have outpaced its peers and rose Figure 18: Life premium breakdown by policy type 30%+ y-o-y in 1H17 (figure 20). China Taiping (966 HK, BUY) also posted a relatively strong premium growth of 29.8% y-o-y Traditional life % of total life Health % of total life during the same period. We expect the strong growth Accident % of total life momentum to continue moving into 2H17F and beyond. 100% 80%

60%

40%

20%

0%

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Source: CIRC, DBS Vickers

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Industry Focus China Insurance Sector

Figure 20: China Life insurers’ premium growth YoY (%)

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-17 50%

40%

30%

20%

10%

0% China Life CPIC China Ping An PICC AIA China Taiping -10%

-20% Source: CIRC, DBS Vickers

Figure 21: China P&C insurers’ premium growth YoY (%)

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-17 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% PICC P&C Ping An P&C CPIC P&C China Life P&C Taiping P&C Source: CIRC, DBS Vickers

For P&Cs, following the impact from the first auto insurance pricing reform, Ping An P&C, Taiping P&C and even the distant market leader PICC P&C saw their growth reaccelerating in 1H17, at 11-23% y-o-y (figure 21). Nonetheless, as the second phase of auto insurance pricing reform has kicked in from July 2017, where CIRC’s intention is to smooth out competition by further lowering the auto insurance premium pricing by widening both autonomous underwriting and independent channels coefficient, we expect this to inevitably impact the near-term premium growth outlook for P&C. Fewer economy of scale may also lead to the rise in P&C insurers’ combined ratio, in our view.

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Industry Focus China Insurance Sector

effective as of 2016, China had also kicked-off its new solvency Transforming into value growth regime, namely C-ROSS, during the same year (in 2016). As The three basic spread elements that determine an insurers’ compared to Solvency I, which was introduced in China in profitability are: a) interest margin – difference between 2003, the main differences between the two regimes include investment return and cost of liability, b) mortality margin - the following (figure 22): difference between actual policy mortality rate and assumed mortality rate, and c) expense margin – difference between - Solvency I framework was based on a “scale-oriented” actual operating expense and the expense loading. In the past, concept which relied on premium scale to set the standard China insurers’ had been focusing on premium growth, and for insurers’ minimum capital requirement, whereas C- rely its profitability model by gaining interest margin. Although ROSS adopts the international “three pillar concept”, interest margin will continue to be the major earning which includes quantitative capital requirement, contributor to insurers’ profitability given the nature of spread qualitative capital requirement and market discipline business, we believe the situation is gradually changing. mechanism.

We basically see three structural drivers which will continue to - Recognition of admitted assets for both are based on lead the value transformation among China insurers given the book value. However, Solvency I took a more conservative adjustment in underwriting portfolio which will result in approach on assessing admitted liability. Therefore, under substantial new business value (VNB) and embedded value (EV) C-ROSS, capital requirement especially for long-term growth. Catalysts include a) The launch of China Risk Oriented traditional life products is lower than under Solvency I. Solvency System (C-ROSS), which incentivises insurers to sell traditional life products given a lower capital requirement, will - The minimum capital requirement under Solvency I was result in more traditional life and protection type products based on a certain percentage between reserves and being sold, b) CIRC’s policy guidance to limit the sale of premiums. On the other hand, C-ROSS enhances the risk universal policies and to also direct insurers to focus on capital requirement toward market risk, thus the launching traditional life products with Rmb2,400/year of tax requirement for minimum capital is higher than Solvency I. incentive provided for health insurance products, and c) Pressure on insurers to maintain their cost of liability at a low - Solvency ratio (actual capital/minimum capital requirement) level. In other words, insurers are now also focusing on the had to be at least 150% under Solvency I, whereas for C- profitability gain on mortality margin. ROSS, core solvency and comprehensive solvency ratios are required to be at least 100% and 150% respectively. China insurers have started to adjust their underwriting portfolios and to focus on offering traditional life and The main criticisms on Solvency I is that the regime had failed protection type products since 2015 (earlier for some and later to comprehensively reflect insurers’ risk situation as it overly for others). This has fundamentally enhanced insurers’ new focuses on insurers’ premium scale, and the regime had also business value (VNB) and in turn, its embedded value (EV), as failed to provide supervision over the enhancement on insurers’ what we had seen in 2016 and 1H17, given that VNB margin risk management capability. and value of traditional life products are substantially higher than universal and investment-type policies. Given the strong As the positive impact from C-ROSS, the capital requirement long-term demand for traditional life insurance in China, we for long-term traditional life insurance policies is lower, believe the current level of value enhancement is just the whereas the minimum capital requirement for low-profit beginning and expect “value growth” to be the key spotlight “high-cash-value” policies is higher. The new regime is for China's insurance sector in 2018F and onward. basically directing insurers to sell more traditional life and production type policies, and to discourage the sale of investment-linked and universal products given their higher C-ROSS changing the industry landscape minimum capital requirement. Insurers which already have Similar to other major markets where local regulators have higher underwriting portfolio geared towards long-term launched the second generation of capital requirement rules traditional life policies will also be able to free up more capital for the insurance industry, i.e. Solvency II launched in EU after the launch of C-ROSS. market and refined RBC capital requirement from the US both

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Industry Focus China Insurance Sector

Figure 22: Solvency I and C-ROSS regime comparison

Regime Solvency I C-ROSS (China Risk Oriented Solvency System) Date of implementation 2003 2016 1. Foundation framework based on "Scale-Oriented" concept, and Conceptual framework consist of three components: based on premium scale to set standard for minimum capital 1. Institutional Characteristics - includes the characteristic of a. requirement. One Supervision, b. Emerging market feature, and c. Risk-Oriented 2. The framework also emphasis on the supervision of with value consideration "quantitative" factors, but may lack the supervision over non- 2. Supervisory Pillars - adopt the same international "three pillar Basic framework quantitative elements, including strategic risk, operational risk, concept" as the essential part of solvency supervision, which reputational risk, and liquidity risk; includes a. Quantitative Capital Requirements, b. Qualitative 3. Main critics of the regime includes a. the coverage of risk Supervisory Requirements, and c. Market Discipline Mechanism categories is incomplete, b. difficult to assess relationship between 3. Supervisory Foundation - based on insurance company's own "asset liability assessment" and "capital requirement" and "risk", solvency management (COSM) as the framework can not fully reflect the insurer's underlying risk 1. Solvency adequacy ratio = actual solvency margin to minimum 1. Core solvency ratio = core capital to minimum capital; solvency margin 2. Aggregated solvency adequacy ratio= sum of core capital and 2. Actual solvency margin equals difference between admitted asset Solvency adequacy supplementary capital to minimum capital; and admitted liability, and minimum solvency margin is the sum of indicators 3. Integrated risk rating= a comprehensive evaluation of the overall both long-term and short-term life insurance minimum solvency solvency risk taking into account of both quantitative and margin qualitative factors

Life insurance: 4% of policy reserve and 1% of policy reserve for Sum of 1. Minimum capital requirement arise from "Quantitative investment linked policy risk" such as insurance risk, market risk and credit risk, 2. Minimum capital Non-Life insurance: Maximum of (18% of premium retained or 16% Minimum capital requirement arise from "Control risk" such as requirement of premium retained for the portion of premium surpassed operational risk, strategic risk, reputation risk, and liquidity risk, Rmb100m) and 3. Supplementary capital For Core solvency ratio >= 100%; for aggregated solvency Solvency ratio requirement >= 150% adequacy ratio >= 150% Based on book value (similar to RBC approach) and recognize Based on book value (similar to RBC approach) and recognize Assessment on "asset" admitted asset as "can be arbitrarily dispose and utilize to fulfill the admitted asset as to possess the characteristic of existence, obligation to policy holder" continuality, secondary, and non-mandatory Under conservative assumption, life insurance policy reserve is based Life insurance policy reserve is based on 750 days China Assessment on "liability" on the sum of optima estimation and risk-free margin government bond moving average to reflect the risk-free rate Similar definition as compared to C-ROSS, except difference in the The economic resources that can absorb losses in insurance Available Capital requirement over admitted liability where Solvency I required for undertakings on a going-concern basis or upon liquidation higher insurance reserve The amount of capital required according to the regulations to The amount of capital required to cover the adverse impact on the Minimum capital cover the adverse impact on the undertaking's solvency capability undertaking solvency capability arising from insurance risk arising from market risk, credit risk, insurance risk…etc Under Solvency I, requirement for available capital is higher as Under C-ROSS, requirement for minimum capital is higher as Main quantitative compared to under C-ROSS, mainly to reflect the higher requirement compared to under Solvency I regime, as it reflects risk capital differences for higher policy reserve including insurance risk, market risk and credit risk

Source: CIRC, DBS Vickers

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Industry Focus China Insurance Sector

depending on duration. These are intended to strengthen the Policy guidance favours protection type policy growth prudent management of insurers’ asset allocation and liquidity Driven by the pricing reform on universal policies to remove the management, to lower the reserve rate of universal insurance 2.5% cap of minimum guarantee rate at the beginning of products to 3% (down 50bps), thus increasing the liability 2015, China’s small- to mid-sized non-listed insurers and reserve, and to prohibit the design of “Rider” to universal and platform players, i.e. Hualife (non-listed) , Anbang Life (non- investment-linked products. Furthermore, CIRC even listed), Foresea Life (non-listed) and Sino-Life (non-listed), conducted project inspections on nine insurers, including started to offer high guaranteed returns universal and Foresea Life, Haulife and Evergrande Life, and to restrict their investment-linked insurance products, in order to absorb quick online universal product business and even completely prohibit insurance money for asset expansion purposes, i.e. M&As or Foresea Life from selling universal policies (figure 24). hostile takeovers of listed companies. In 2015 and 1H16, investment-linked policies’ premiums posted growth of 98% and 143% y-o-y respectively (figure 23). As these investment Figure 23: Investment-linked policy monthly premium policies possess the characteristics of “high cash value” and Rmb bn thus have limited surrender cost (defined as within the first FY premium - investment policy YoY (%) - RHS 250 250% four years where the cash value of the product outpaces the 200% sum of total premium paid; cash value is the amount a 200 policyholder receives when surrendering the policy). Thus, if an 150% insurer overly focuses on selling these “high cash value” 150 100% products, it could encounter substantial liquidity risk should the 50% policyholders decide to mass surrender their policies. In 100 addition, due to the fight for quick insurance money and 0% 50 intense competition, some insurers have even raised their -50% guaranteed returns to the 7-8% level, which also substantially 0 -100% increases their liability costs. -13 -16 -13 -15 y y g g Feb-14 Feb-15 Feb-16 Feb-17 Nov-13 Nov-14 Nov-15 Nov-16 Aug-14 Au Au Aug-16 May-14 May-15 Ma May-17 Ma From December 2015 to May 2017, CIRC issued a series of Source: CIRC, DBS Vickers notices and regulations, aiming to limit the sales of high cash value insurance products to within 2x or 1x of insurers’ capital

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Industry Focus China Insurance Sector

Figure 24: Solvency I and C-ROSS regime comparison

Date Policy Details As of 1 Jan 2016, insurance companies should contain its short duration (or high cash value) products' annual "Notice of further governing premium to within 2 time of insures' capital. In particular, annual premium income of products with 60% of 9-Dec-15 the high cash value insurance expected duration fall within 1 year or high cash value product with duration less than 1 year, should contain product" within 1 times of insurers' capital Insurance company should strengthen its asset liability management in order to prevent risk and duration management. The following insurers are required to submit stress test assessments: 1. P&Cs with investment "Notice to strengthjen the policies accounted for 30%+ of total asset, and equity, real estate and other financial assets accounted for 11-Dec-15 prudent management of 20%+ of total asset, 2. Life insurers with liability duration less than 5 years, and its equity, real estate and other insurers' asset allocation" financial asset accounted for 20%+ of total asset, and 3. Life insurers who's either one of its traditional life, participating, and universal products' asset return is less than its liability cost To enhance the internal control over insurers' liquidity management, insurers should establish internal control "Guidance of policy premium 15-Dec-15 system, insurers should also seek external auditing on its liquidity management, and insurers should abide by internal control" the liquidity internal control guidance issued by CIRC Insurers' should based on actuarial theory, product performance and cost efficiency management to clearly "Notice to further complete state life insurance products' surcharge, risk premium, first year strain and surrender fee. CIRC will not approve 6-Sep-16 life insurance actuarial any negative VNB policies onward. CIRC also announced to lower the reserving interest rate to 3% (by 50 bps)for system" Universal products, and restrain short duration product annual premium to be less than 50% of total annual premium received from 2019 During May to August, CIRC conducted project inspection on 9 insurance companies' Universal insurance Project inspection on 9 business. As fail to meet regulatory requirement, Foresea Life and Evergrande Life and other 6 insurers was 5-Dec-16 insurance companies' requested to cease its on-line insurance business. Foresea Life was prohibited to conduct Universal insurance Universal insurance business business as of 5 Dec., and HuaLife and Soochow Life was prohibited to propose new products for 3 month Insurers' when design insurance product should take consumer's need as priority. For long term traditional life product, insurers should focus and enhance the risk protection level. For annuity, insurers' should focus on the accumulation of endowment and pension. For health insurance, insurers' should focus on the protection of "Notice to regulate life health plan. 16-May-17 insurance policy product Furthermore, when designing Endowment and Annuity products, the first survival benefit payment should come development and design" after 5 years of contract launch and the annual payment should be within 20% of annual premium paid. For Universal and Investment-linked products, insurers' should provide variable period and premium. Insurers' can not use the form of "Rider" to design Universal and investment-linked products

Source: CIRC, DBS Vickers

We believe all these regulatory measures basically aim to each province, to nationwide. Although the tax exemption contain the premium growth in universal and investment-link amount only accounts for nearly 4% of China’s average annual policies, given the potential underlying liquidity risk. wage of Rmb68,000 (based on 2016 figures), we believe this Consequently, the premium growth in investment-linked will still help the premium growth in health insurance policies policies have started to decline substantially from 2H16 to going forward. Overall, the policy intention to redirect the 1H17, which contracted by 13% and 58% y-o-y respectively, focus to traditional life and protection type insurance products after the exponential growth seen during 2015 to 1H16 (figure is very obvious. 23).

Health insurance tax benefit extended to nationwide: In order to further enhance the penetration of health insurance coverage to the general public, CIRC, on 1 July 2017, further extended the commercial health insurance Rmb2,400/year tax- exemption plan from previous pilot-run cities such as Beijing, Shanghai, Tienjin, Chongqing, and one major pilot run city in

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Industry Focus China Insurance Sector

Figure 25: Investment-linked policy monthly premium Pressure of maintaining cost of liability “low”

Foresea Life Anbang Life Evergrande Life 1 China's insurers do not suffer from the same interest margin Hua Life Funde Sino Life Evergrande Life 2 deficit issue (issued high guaranteed, high assumed interest 8.5% rate policies prior to 2000 given the high interest rate 8.0% environment with long product duration) that the major Asian 7.5% insurers are facing, as a majority of them had already spun off 7.0% the high liability cost policies prior to IPOs. But since 4Q14 6.5% where PBOC has lowered interest rates by six consecutive times, 6.0% accompanied by the lack of a sufficiently long duration 5.5% 5.0% investable domestic asset with the rising competition, China 4.5% insurers have started to face pressure to maintain its interest 4.0% margin.

2013-01 2013-03 2013-05 2013-07 2013-09 2013-11 2014-01 2014-03 2014-05 2014-07 2014-09 2014-11 2015-01 2015-03 2015-05 2015-07 2015-09 2015-11 2016-01 2016-03 2016-05 2016-07 2016-09 2016-11 2017-01 2017-03 2017-05 2017-07 Since 1999, CIRC has been setting guidelines to require China Source: Company data, DBS Vickers insurers to set their guaranteed interest rates at no more than 2.5% for all life insurance products, and the regulation has helped China insurers keep their liability cost at a low level. It was not until August 2013, when CIRC started to conduct Figure 26: Investment-linked policy monthly premium pricing reform for various insurance product types to gradually China Taiping New China Life PICC Ping An liberalise the insurance market, and raised the guaranteed rate China Life CPIC Manulife AIA cap to 3.5%. It also opened up room for insurers to provide 5.5% even higher guaranteed interest rate insurance products, but 5.0% subject to CIRC’s approval. Since then, we believe the liability 4.5% cost pressure for insurers have started to mount. 4.0%

We believe this pressure had further mounted during 2015-16, 3.5% as China insurers, especially small- to mid-sized non-listed 3.0% insurers such as Hualife and Evergrande Life, have even offered 2.5% a universal product with a 7-8% guaranteed rate, to incentivise 2.0% policyholders to fight for premium market share (figure 25).

Major insurers such as China Life (2628 HK, BUY) had also 2013-01 2013-03 2013-05 2013-07 2013-09 2013-11 2014-01 2014-03 2014-05 2014-07 2014-09 2014-11 2015-01 2015-03 2015-05 2015-07 2015-09 2015-11 2016-01 2016-03 2016-05 2016-07 2016-09 2016-11 2017-01 2017-03 2017-05 2017-07 temporarily raised the guarantee rate to 5% for their universal Source: Company data, DBS Vickers products during 4Q15 to 1Q16, but soon lowered it to the 4% level due to rising liability cost (figure 26). In general, the guaranteed rate of major listed insurers has been maintained at Due to such pressure, we believe China insurers will refocus on 4.0-4.5%, compared to non-listed players whose average the sales of traditional life and protection type products going guarantee rates have reached the 5.0-5.5% range. forward, as the protection type policies generate higher profitability and incur a lower cost of liability.

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Industry Focus China Insurance Sector

single-payment premiums still accounting for 71% of its Favourable portfolio adjustments continue portfolio in 2016 (figure 33-36). Driven by aforementioned catalysts, China insurers had started to adjust their underwriting portfolios to increasingly gear towards traditional life and protection type policies since 2015- Figure 27: Ping An underwriting portfolio 2016 (Ping An Insurance started even earlier in 2014). The Traditional Participating Universal life Unit-linked portfolio adjustments can also be reflected by the changes in Long-term health Annuity ST A&H 100% their underwriting policies’ payment terms, given traditional life 1% 1% 1% 1% 6% 6% 6% 7% 1% 1% 3% 1% 8% 10% policies are usually purchased via regular payments and 12% 11% 80% renewal payments, rather than a single payment (more for 35% 34% 33% 30% 20% 40% 29% 25% investment-linked policies). A higher percentage of premium 60% income under regular payments and renewals can also help mitigate insurers’ liquidity risk and reflects higher customer 40% 47% 46% 42% 39% satisfaction. 49% 49% 49% 42% 20% Ping An, China Taiping and CPI lead the progress: As China 9% 11% 14% 14% insurers do not provide the same breakdowns of their 0% 3% 3% 4% 5% 2010 2011 2012 2013 2014 2015 2016 1H17 underwriting portfolios, it is difficult to conduct a uniform comparison. Nonetheless, by comparing both the portfolio Source: Company data, DBS Vickers breakdown and premium term breakdown, one can get a sense of each insurer’s progress in their portfolio adjustment.

Some China insurers which had taken an earlier initiative have Figure 28: Ping An portfolio by payment term seen compelling results. For example: Renewals Regular pay Single pay 100% Ping An – one of the first movers to have taken the initiative to 6% 4% 5% 4% 4% 3% 18% 13% adjust its portfolio since 2014. By 2016, traditional life 90% 24% 24% 25% 80% 31% 34% 35% (including participating) and protection type policies accounted 25% 70% 28% for 64% of its total portfolio, while 96% of premiums are 60% under regular payments or renewals (figure 27-28). 50% 40% 70% 72% 70% 30% 62% 65% 62% 62% China Taiping – the insurer has been relatively focusing on 54% long-term protection type policies and has been reducing its 20% short-term savings type policies since 2011. By 2016, long-term 10% 0% protection type policies accounted for 39% of its underwriting 2010 2011 2012 2013 2014 2015 2016 1H17 portfolio, with 81% of the payments under regular intervals Source: Company data, DBS Vickers and renewals (figure 29-30).

China Pacific Insurance – this insurer has higher gearing towards participating polices which accounted for nearly 80% of its portfolio in the past. Significant efforts to expand into traditional life policies were seen in 2016, with the policy type accounting for 30% of its total portfolio (93% if include participating policies). It also started to refine its policies' payment terms in 2013, with single payments accounting for 1% of its portfolio in 2016 (figure 31-32).

China Life has maintained a balanced portfolio, with results seen from its single-payment premium contraction in 2016 (down 4ppts y-o-y). On the other hand, PICC Life has been found to be the slowest on its portfolio adjustment, with

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Industry Focus China Insurance Sector

Figure 29: China Taiping underwriting portfolio Figure 32: CPI by payment term

Short term saving type Long term saving type Long term protection Others Single pay Regular pay Renewals 100% 100% 4% 4% 4% 9% 10% 9% 6% 5% 90% 90% 80% 18% 30% 33% 29% 80% 38% 30% 35% 39% 50% 34% 70% 60% 70% 64% 66% 63% 67% 73% 60% 60% 29% 19% 50% 50% 40% 39% 40% 17% 48% 65% 63% 66% 30% 16% 30% 56% 55% 16% 18% 44% 20% 42% 26% 20% 33% 36% 24% 26% 10% 22% 10% 19% 15% 8% 8% 0% 2% 0% 0% 0% 0% 0% 1% 1% 2010 2011 2012 2013 2014 2015 2016 1H17 2010 2011 2012 2013 2014 2015 2016 1H17 Source: Company data, DBS Vickers Source: Company data, DBS Vickers

Figure 30: China Taiping portfolio by payment term Figure 33: China Life underwriting portfolio

Single pay Regular pay Renewals Life Health Accident 100% 100% 3% 4% 4% 3% 2% 90% 8% 10% 12% 13% 11% 90% 33% 80% 80% 52% 50% 50% 51% 70% 70% 59% 55% 56% 60% 60% 21% 50% 89% 86% 87% 50% 40% 85% 84% 16% 40% 19% 20% 30% 16% 20% 30% 30% 25% 20% 46% 10% 20% 29% 34% 30% 0% 10% 25% 26% 20% 19% 2013 2014 2015 2016 1H17 0% 2010 2011 2012 2013 2014 2015 2016 1H17 Source: Company data, DBS Vickers

Source: Company data, DBS Vickers

Figure 34: China Life portfolio by payment term Figure 31: CPI underwriting portfolio Single pay Regular pay Short term insurance business Renewals 100% Traditional Life Participating Universal Short-term accident and health 90% 100% 5% 5% 5% 5% 6% 7% 7% 6% 80% 40% 49% 53% 52% 52% 90% 70% 56% 58% 57% 80% 60% 5% 70% 50% 64% 65% 16% 5% 60% 71% 71% 9% 9% 8% 78% 78% 77% 80% 40% 5% 8% 50% 15% 6% 30% 14% 40% 12% 14% 17% 22% 22% 20% 39% 30% 31% 25% 20% 10% 23% 21% 21% 17% 18% 30% 30% 24% 22% 10% 17% 17% 18% 15% 0% 0% 2010 2011 2012 2013 2014 2015 2016 1H17 2010 2011 2012 2013 2014 2015 2016 1H17 Source: Company data, DBS Vickers Source: Company data, DBS Vickers

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Industry Focus China Insurance Sector

Figure 35: PICC Life underwriting portfolio were undergoing a significant underwriting portfolio shift across the board. Traditional life and health Accidental short-term health Participating life insurance Universal life 100% In particular, for early movers such as Ping An, CPI and China 13% 90% 19% 16% 14% Taiping, growth in their VNB has outpaced peers by reaching 4% 3% 2% 80% 4% 52-64% y-o-y in 2016 (figure 37-42). In addition, we also see 70% strong VNB growth in China Life (up 58% y-o-y in 2016) due 60% 84% 50% 98% 97% 94% mainly to a lower base (figure 41). For other insurers including 84% 40% 77% 83% 81% like PICC Life, although their VNB also accelerated, but given a 30% slower portfolio adjustment progress, growth momentum has 20% 3% been slower than their peers (figure 43). As the room for 10% 12% 0% 0%2% 1%3% 1%5% underwriting portfolio adjustment towards traditional life 2010 2011 2012 2013 2014 2015 2016 1H17 products remains significant, the upside potential for VNB to Source: Company data, DBS Vickers further advance remains substantial.

Figure 37: China insurers’ VNB margin trend

Figure 36: PICC Life portfolio by payment term China life CPI China Taiping Ping An PICC 45% Single pay Regular pay Renewal 40% 100% 3% 4% 7% 9% 9% 9% 9% 12% 35% 90% 3% 15% 8% 7% 8% 10% 30% 80% 18% 18% 70% 25% 60% 20% 50% 93% 91% 15% 40% 84% 84% 83% 81% 70% 10% 30% 66% 20% 5% 10% 0% 0% 2010 2011 2012 2013 2014 2015 2016 1H17 2010 2011 2012 2013 2014 2015 2016 1H17 Source: Company data, DBS Vickers Source: Company data, DBS Vickers

Value enhancement the next spotlight Figure 38: Ping An’s VNB and YoY (%) trend

With the increasing underwriting portfolio shift towards Rmb m VNB - Ping An Life VNB growth YoY (%) traditional and protection type products, as well as from single- 60,000 70% payment to regular-payment duration products, this has helped 60% 50,000 to enhance Life insurers’ business value as well as to more 50% 40,000 efficiently utilise insurers’ capital in the following ways: 40%

30,000 30% Substantial enhancement in Life insurers’ value of new 20% Business (VNB): Protection type and regular-payment products 20,000 offer a higher VNB margin (VNB over first year premium), given 10% 10,000 their product duration are usually much lengthier, which 0% enables insurers to earn more mortality and expense margin, if 0 -10% 2010 2011 2012 2013 2014 2015 2016 1H17 compared to investment-type or single-payment products (usually investment-linked or short-term protection). Such Source: Company data, DBS Vickers products are also less dependent on interest margin which is more volatile. This can be evidenced by insurers’ VNB margin trend (figure 37), where an accelerating VNB margin expansion has been seen since 2015, during the period when insurers

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Industry Focus China Insurance Sector

Figure 39: CPI’s VNB and YoY (%) trend Figure 42: PICC Life’s VNB and YoY (%)

Rmb m Rmb m VNB - CPI VNB growth YoY (%) - RHS VNB - PICC Life VNB growth YoY (%) 25,000 70% 4,500 90% 80% 60% 4,000 70% 20,000 3,500 50% 60% 3,000 15,000 50% 40% 2,500 40% 30% 10,000 30% 2,000 20% 20% 1,500 10% 5,000 1,000 10% 0% 500 -10% 0 0% 2010 2011 2012 2013 2014 2015 2016 1H17 0 -20% 2011 2012 2013 2014 2015 2016 1H17 Source: Company data, DBS Vickers Source: Company data, DBS Vickers

Growth in VNB a main driver for Life insurers' EV growth: A Figure 40: China Taiping’s VNB and YoY (%) trend common way of assessing a life insurer’s long-term value is by

Rmb m VNB - China Taiping VNB growth YoY (%) looking at its embedded value (EV), which is derived from the 10,000 60% adjusted net asset (i.e. book value adjusted for property 9,000 50% 8,000 revaluations, etc. This also reflects the insurer’s accounting 7,000 40% profit), plus the value of in-force business (VIF). VNB reflects 6,000 the new business value for any year which will fall into the 5,000 30% insurer’s VIF in the following year. Thus, a stronger VNB 4,000 20% 3,000 growth will ultimately reflect a stronger EV growth and thus 2,000 10% result in a higher long-term value for insurers. In general, the 1,000 more profitable an insurance policy (higher VNB margin), the 0 0% 2010 2011 2012 2013 2014 2015 2016 1H17 higher the EV.

Source: Company data, DBS Vickers In addition to VNB and adjusted book value (i.e. accounting profit), the growth of an insurer’s EV will also depend on its EV assumption, which mainly includes risk discount rate and Figure 41: China Life’s VNB and YoY (%) trend investment return assumption, and operating deviation. We will discuss this in further detail later. Rmb m VNB - China Life VNB growth YoY (%) 60,000 60% Better capital efficiency and residual margin accumulation: The 50,000 50% residual margin is defined as the discounted value of total premiums minus the discounted value of total expenses and 40,000 40% claims. It represents the amount of profitability an insurance 30,000 30% policy generates, and can be pretty much determined and locked in upon the issuance of the insurance policy. In general, 20,000 20% the more profitable an insurance policy, i.e. protection type, 10,000 10% the higher the residual margin. It is also the major source of insurers’ accounting profits, and the amount of profit 0 0% recognised for any year will depend on how much residual 2010 2011 2012 2013 2014 2015 2016 1H17 margin is released. Source: Company data, DBS Vickers Under PRC GAAP, residual margin is classified as part of insurance liability and treated as statutory reserve under Solvency I regime. Nonetheless, under C-ROSS, residual margin

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Industry Focus China Insurance Sector

is recognised as actual capital (figure 44). This implies the more Figure 43: Solvency comparsion the residual margin an insurer has generated, the higher the solvency capital the insurer will hold. In other words, the % 2015 -Solvency I 2016 -C-ROSS capital requirements for traditional life and protection type 350 insurance policies are less than savings or investment type policies. For insurers, selling more protection type policies will 300 not only enable them to pursue value growth, but will be more 250 capital efficient at the same time and result in capital savings. 200 CPI and China Taiping saw the most capital release: 150 By comparing insurers’ change in solvency ratio from 2015 to 2016, it is also obvious that China life insurers which have 100 higher product concentration in traditional life and protection 50 type products, such as CPI and China Taiping, have seen more capital release from Solvency I to C-ROSS migration. These 0 China Life CPI Ping An PICC Life China insurers’ solvency ratio under the two regimes has increased Taiping from 201-227% range in 2015, to 251-281% in 2016 (figure 43). This is on the back of 1-26% y-o-y total premium growth Note: Solvency ratio in 2015 is based on Solvency I regime, while for the year. solvency ratio in 2016 is based on C-ROSS regime Source: Company data, DBS Vickers

On the other hand, insurers which have higher product concentration in “high cash value” policies have seen solvency ratio contraction, given the minimum capital requirement under C-ROSS is higher for high cash value products. For insurers including China Life and PICC Life, their solvency ratios contracted from 330%/226% in 2015 to 280%/251% in 2016.

Figure 44: Asset and liability assessment under Solvency I and C-ROSS

Solvency I Financial Statements C-ROSS

Capital surplus Actual Re lease Capital capital surplus Minimum Net asset through life insurance Actual capital capital

Other Minimum liabilities Other capital liabilities

Residual Other Asset margin Asset liabilities Asset Risk Risk margin margin Statutory Liabilities Liabilities reserve Liabilities Best Best e stimate e stimate reserve reserve

Source China Association of Actuaries, DBS Vickers

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Industry Focus China Insurance Sector

CPI, China Taiping and Ping An have strong value growth potential: Among China insurers, we see CPI, China Taiping and Ping An posting the highest value growth potential, given their earlier move to switch into protection type policies, lengthier product duration from existing portfolios, and productive insurance sales agents. On the back of a 58%/59% VNB growth in FY16/1H17 for CPIC, a 52%/63% VNB growth in FY16/1H17 for China Taiping, and 64%/46% VNB growth in FY16/1H17 for Ping An, we further expect on average of 35% CAGR in VNB growth in FY17-19F for the three insurers.

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Industry Focus China Insurance Sector

agent (figure 46, based on agent channel FYP divided by the Channel strength another key success factor: number of agents). China Taiping also has an relatively efficient Insurers’ channel strength and their distribution focus also play agency force, with productivity of Rmb5,983/month per agent. an important role in driving not only the premium growth but It usually takes 3- 6 months to train an agent, but the industry also the pace of product mix change, as different insurance has a high turnover rate. Thus, the ability to retain highly products rely on different distributional channels. In general, productive agents while growing the number of new agent traditional life and protection type policies are more recruits is crucial to drive an insurer’s GWP growth. In 2016, comprehensive by protection terms/conditions and contract the agent force growth for China Life, CPIC and PICC was clauses, and rely heavily on insurance agents who are well 53%, 36% and 34% y-o-y respectively, the highest among trained and have extensive product knowledge. On the other peers (figure 47). We believe these newly recruited agents will hand, investment-linked or endowment product are more boost GWP growth for these insurers in the coming years. commodity-like. Thus, insurers usually rely on bancassurance channel to sell such products, as the banks have a more extensive branch distribution and these products require little Figure 46: Agency monthly productivity product knowledge to sell. As such, the agent channel usually generates a higher margin as compared to bancassurance Rmb/agent whose margin is usually quite low. 8,000

For Life insurers, the agent channel is considered as the most 7,000 important, accounting for 34-89% of insurers’ gross written 6,000 premium (GWP) sold in 2016. Ping An owns the highest agent 5,000 force concentration (figure 45). Bancassurance channel is 4,000 considered as the second most important channel for life insurers, accounting for 5-56% of GWP, and PICC owns a 3,000 higher concentration. Other channels include telemarketing 2,000 and cross-selling. For P&C insurers, their main channels include 1,000 agents, direct sales and insurance brokers. 0 China Taiping Ping An CPIC China Life We believe insurers’ different product strategies will also result in different channel strategies. For example, CPIC is Note: The above is based on total premiums generated through agent strategically focusing on its agent channel and exist from channel divided by the number of agents lower-margin bancassurance channel. On the other hand, Source: Company data, DBS Vickers China Taiping still relatively relies on bancassurance as this is its main channel for endowment product sales.

Figure 45: China insurers’ premium by channel

Agent Bancassurance Group Others Direct sales Insurance brokers 100% 2% 10% 6% 4% 5% 5% 90% 5% 13% 6% 1% 3% 80% 40% 25% 28% 41% 70% 60% 56% 50% 89% 40% 84% 30% 66% 67% 58% 54% 20% 34% 10% 0% China Taiping PICC Ping An CPIC China Life PICC P&C China Re

Source: Company data, DBS Vickers

Ping An and China Taiping have the highest agent productivity: A key matrix of measuring the effectiveness of agent channel is the agents’ productivity. Among China life insurers, Ping An has the highest agent productivity of Rmb7,625/month per

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Industry Focus China Insurance Sector

Figure 47: China Life insurers’ premium breakdown by type and channel

Ticker 966 HK 1339 HK 2318 HK 2601 HK 2628 HK Company name China Taiping PICC Ping An CPIC China Life Currency HKD (m)RMB (m)RMB (m)RMB (m)RMB (m) First year premium 48,064 89,531 121,707 37,393 206,996 - Single paid 21,835 73,430 15,666 1,512 113,051 - First year regular paid 26,229 16,101 106,041 35,881 93,945 Renewal premium 61,960 12,727 231,673 78,017 223,502 Others 370 2,857 1,894 21,952 - Total premium 110,395 105,115 355,274 137,362 430,498 Total premium YoY (%) 11% 17% 29% 27% 18% Premium by type Traditional life 3,962 85,572 51,089 27,058 361,905 Long term health 8,820 0 44,237 13,667 54,010 Participating 68,308 16,595 144,419 87,479 - Universal Life 1 91 92,860 42 - Investment linked 1 - 1,752 - - Annuity 25,989 - 12,605 - - Others 3,314 2,857 26,819 9,116 14,583 % of total Traditional life 4% 81% 14% 20% 84% Long term health 8% 0% 12% 10% 13% Participating 62% 15% 39% 64% 0% Universal Life 0% 0% 25% 0% 0% Investment linked 0% 0% 0% 0% 0% Annuity 24% 0% 3% 0% 0% Others 3% 3% 7% 7% 3% Premium by channel Agent 64,185 35,559 314,651 115,410 282,136 Bancassurance 43,632 59,166 16,536 - 108,256 Group 370 10,389 1,894 4,268 24,915 Others 2,207 22,193 17,684 15,191 % of total Agent 58% 34% 89% 84% 66% Bancassurance 40% 56% 5% 0% 25% Group 0% 10% 1% 3% 6% Others 2% 0% 6% 13% 4% No. of agent 261,922 189,261 1,110,805 653,000 1,495,000 Agent forece YoY (%) 13.0% 33.6% 27.7% 36% 52.7% Premium/agent (RMB) 71,801 NA 91,495 61,008 50,042 Persistency rate 13 months Individual/Banca: 95%/94% 91% 91% 92% 90% Persistency rate 25 months Individual/Banca: 89%/89% 85% 87% 87% 86% Source China Association of Actuaries, DBS Vickers

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Industry Focus China Insurance Sector

P&C insurers remain under transition Figure 48: No claim discount (NCD) coefficient

As opposed to life insurance sector where outlook for premium Item Claim record NCD coefficient growth is expected to remain robust in FY18F and onwards, No claim Consecutive 3 years without claim record 0.60 we believe China’s P&C insurance market will continue to discount Consecutive 2 years without claim record 0.70 (NCD) No claim record in prior year 0.85 consolidate as we move into FY18F, mainly impacted by the and Newly insured or 1 claim record in prior year 1.00 implementation of the second auto insurance pricing reform prior 2 claim records in prior year 1.25 which was launched in July 2017, and the potential slowdown year 3 claim records in prior year 1.50 in China's new auto sales. claim 4 claim records in prior year 1.75 record 5 or more claim records in prior year 2.00 Auto insurance pricing reform leads to a “wait and see” mode: Source: CIRC, DBS Vickers The auto insurance pricing reform first took place in 2012, when CIRC issued the “Notice to strengthen commercial vehicle insurance pricing management”, and gave P&C insurers Based on the above formula and car drivers’ prior year claim the autonomy to set their own commercial vehicle auto record, all others being equal, P&C insurers can set their auto insurance clauses and pricing, subject to certain solvency and insurance premium with deepest discount pricing at 0.4335 combined ratio criteria (i.e. solvency and combined ratio of at times (NCD 0.6 x 0.85 x 0.85), and the highest pricing at 2.645 least 150% and 100% respectively for two consecutive years) times (NCD 2.0 x 1.15 x 1.15) of the prior year's premium. and the possession of data on more than 300,000 consumers. Prior to 2012, P&C insurers can only choose from three Such mechanism was designed to basically set auto insurance standardised clauses with total pricing discount of no more premium based on car drivers’ driving behaviour, and at the than 30% of the benchmark premium. same time to provide incentive to car drivers. This will also help to reduce P&C insurers’ claim expenses, as under this structure, In 2014, CIRC further issued the “Opinion to deepen car owners who meet minor accidents are unlikely to make commercial vehicle pricing reform and management” to set claims as doing so would result in higher premiums for the the fundamental guideline for auto insurance pricing to include next year. The first pricing reform was extended to nationwide benchmark pure risk premium, additional fee base and soon after in June 2016. adjustment coefficient factors. This sets the fundamental Since the launch of the first pricing reform, growth in P&C pricing equation for future pricing reforms. total premium had slowed down from 16% y-o-y in 2014, to 11% and 9% y-o-y in 2015-16 (figure 3), as P&C insurers took The first official auto insurance pricing reform was introduced a “wait and see” attitude at the initial stage of the new system in April 2015, where CIRC appointed six provinces, namely while auto insurance accounts for 70%+ of P&C’s total Heilongjiang, Shangdong, Qingdao, Guangxi, Shaanxi, and premium. A positive sign was seen from P&C insurers’ loss ratio Chongqing as the pilot run regions. CIRC also officially (total claims over total premiums), which on average was down stipulated the auto insurance premium formula as follows: 1-4 ppts in 2016 (figure 49), and in line with the policy's goal.

Auto insurance premium = Benchmark premium x Premium Nonetheless, due to competition, P&C insurers’ expense ratio adjustment coefficient increased by 1-3 ppts during the same year (figure 50), thus leaving P&C insurers’ combined ratio unchanged (figure 51). As Among which: such, this paves the way for a second pricing reform.

Benchmark premium = Benchmark pure risk premium/(1- additional cost rate);

Premium adjustment coefficient = No claim discount (NCD) x Autonomy underwriting coefficient x Coefficient of independent channels x Traffic violation coefficient;

Autonomy underwriting and independent channel coefficient can be set within [-15%, +15%]

The NCD coefficient is set in the following manner (figure 48):

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Industry Focus China Insurance Sector

Figure 49: China P&C insurers' loss ratio trend Second pricing reform aims to smoothen P&C insurers’ competition: PICC P&C Ping An P&C CPIC P&C Taiping P&C 70% The second auto insurance pricing reform took effect in July 68% 2017 (figure 54), aiming to smooth P&C insurers’ rising 66% competition which resulted in a rise in expense ratio after the 64% first pricing reform was implemented. The second reform 62% focused on widening the range of autonomous underwriting 60% and independent channels coefficient for different jurisdictions 58% (figure 52), aiming to further reduce auto insurance pricing and 56% 54% at the same time exert cost pressure on P&C insurers in order 52% for them to scale back on competition. 50% 2012 2013 2014 2015 2016 1H17 Figure 52: Second auto insurance pricing reform Source: Company data, DBS Vickers Automonus Independent Jurisdiction underwriting channel coefficient coefficient Shenzhen [0.70 - 1.25] [0.70 to 1.25] Figure 50: China P&C insurers' expense ratio trend Henan [0.80 - 1.15] [0.75 to 1.25] Tienjin, Hebei, Fujian, Guangxi, Sichuan, [0.75 - 1.25] [0.75 to 1.25] PICC P&C Ping An P&C CPIC P&C Taiping P&C Qinghai, Qingdao and Xiamen 50% All others [0.85 - 1.15] [0.75 to 1.25] 48% 46% Source: CIRC, DBS Vickers 44% 42% 40% Based on the second reform guideline, all others being equal 38% and considering the different jurisdictions, the deepest 36% discount pricing P&C insurers can set is at 0.294 times (NCD 34% 0.6 x 0.70 x 0.70, taking Shenzhen for example), while the 32% highest pricing can be set at 3.125 times (NCD 2.0 x 1.15 x 30% 2012 2013 2014 2015 2016 1H17 1.15) of the prior year's premium.

Source: Company data, DBS Vickers While it may take more time for the full effect of the second pricing reform to be felt, we believe the immediate negative

impact is a further slowdown in P&C premium growth, given the lower insurance pricing while P&C insurers may again take Figure 51: China P&C insurers' combined ratio trend a “wait and see” approach at the initial stage of the new

PICC P&C Ping An P&C CPIC P&C Taiping P&C reform, as what we saw during the first pricing reform. 104% China's new auto sales slowdown may also be a concern: 102% China's new auto sales grew strongly to 28m, or up 13.7% y- o-y in 2016, driven mainly by the increasing popularity of Sport 100% Utility Vehicle (SUV) and the reduction of purchasing tax on cars (with 1.6-litre or smaller engine capacity) from 10% to 5%. 98% Due to the high base, coupled with the moderate increase in purchasing tax from 5% to 7.5% effective from the beginning 96% of 2017, year-to-July new auto sales inched up by merely 4.6%

94% y-o-y. With the purchasing tax set to revert to 10% starting 2012 2013 2014 2015 2016 1H17 from next year, we believe China’s new auto sales may slow down further moving into 2018F. Source: Company data, DBS Vickers

Historically, P&C monthly premium y-o-y (%) growth has correlated positively with China's new monthly new auto sales

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Industry Focus China Insurance Sector

y-o-y (%) growth (figure 53). We thus believe a potential new Figure 53: China auto sales and P&C premium YoY (%) auto sales slowdown may also lead to a slowdown in China’s auto insurance premium growth. As automobile ownership in P&C monthly premium YoY (%) China auto sales YoY (%) 80% China had reached 200m vehicles in 1Q17, according to the

Ministry of Public Security, with annual new auto sale reaching 60% the 25m+ figure, this implies a low double-digit premium growth for auto insurance per year. With also a negative 40% impact from the initial stage of the second pricing reform, we thus expect the P&C insurance sector to remain under 20% consolidation as we move into 2018F. 0% -09 -14 r-06 r-11 r-16 g g p p p Jul-07 Jul-12 Jan-10 Jan-15 Jan-05 Jun-10 Jun-15 Jun-05 Feb-07 Oct-08 Feb-12 Oct-13 Feb-17 A A A Sep-06 Sep-11 Sep-16

Dec-07 Dec-12 Nov-10 Nov-15 Nov-05 Mar-09 Mar-14 Au Au -20% May-08 May-13

-40% Source: WIND, DBS Vickers

Figure 54: Progress of China auto insurance pricing reform

Date Policy detail CIRC issued "Notice to strengthen commercial vehicle insurance pricing management" which allows P&C insures who met with following criteria to stipulate clauses and pricing of auto insurance based on self data. Criteria includes: 1. Insurers who have Mar-12 issued auto insurance for more than 3 years, 2. Combined ratio no less than 100% for consecutive recent two years, 3. Solvency ratio no less than 150% for consecutive recent two years, and 4. Owns 300k auto insurance data CIRC issued "Opinion to deepen commercial vehicle pricing reform and management" and to set out guideline for auto Jul-14 insurance pricing to include benchmark pure risk premium, additional fee base, and adjustment coefficient CIRC issued "Pilot run program of deepen commercial vehicle pricing reform and management" and appoint 6 regions, Apr-15 including Heilongjiang, Shangdong, Qingdao, Guangxi, Shaanxi, and Chongqing as the first pilot run regions Auto insurance pricing reform pilot run program was further extended to 18 regions, including Beijing, Hebei, Shaanxi, Liaoning, Jun-15 Shanghai, Jiangsu, Zhejiang, Fujian, Jiangxi, Hainan, Guizhou, Yunnan, Tibet, Gansu, Shenzhen, Dalian, Ningbo, and Xiamen. Jun-16 China automobile insurance price reform was adopted nationwide Second round of auto insurance reform was debuted. Major adjustment includes to set different autonomous underwriting Jul-17 coefficient and coefficient of independent channels for different jurisdictions. Lowest auto insurance premium can reach from first round's 0.43x discount to 0.34 in certain region Source CIRC, DBS Vickers

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Industry Focus China Insurance Sector

young tech-savvy generation customer group. Online Pure online insurers a potential disruptive force operations may also help to reduce operating costs and to As of 2016, total insurance sold through online channels had enhance efficiency. However, we believe the players who may reached Rmb245bn, accounting for 7.9% of total premium create a disruptive force to the offline insurance industry is the sold (figure 55). Online premium growth witnessed an pure online operators, such as Zhong An (6060.HK) and exponential growth during 2012-15, where CAGR reached leading Fintech innovator, i.e. Ping An. 173% during the period, driven by the sale of universal and investment-linked products mainly from online platform players. A Rmb1.4tr market by 2021F: According to Oliver Wyman, China's online insurance market can be broken down into the three following segments, 1. Online distribution segment, 2. Figure 55: China’s total online premium and YoY (%) Technology-enabled upgrade segment, and 3. Ecosystem-

Rmb bn Total online premium Total online premium YoY (%) - RHS oriented innovation segment. The Online distribution segment 300 250% will be the market where insurers (both offline and online)

250 treat the online platform as another distribution channel, 200% whereas the latter two segments are driven by online insurers 200 150% which utilise technology and data analysis capability to 150 customise their product offerings and adopt dynamic pricing 100% mechanism to set a balance between premium and risk. 100

50% 50 China’s total online insurance addressable market reached

0 0% Rmb363bn in 2016, with online distribution segment, 2012 2013 2014 2015 2016 technology-enabled upgrade segment and ecosystem-oriented Source: CIRC, DBS Vickers innovation segment reaching Rmb302bn, Rmb41bn and Rmb20bn respectively. By 2021F, Oliver Wyman forecasts Growth witnessed a clear slowdown in 2016 (up only 9.5% y- China’s total online insurance addressable market to reach o-y), as CIRC set strict rules to regulate sales of universal Rmb1,413bn, posting a 31.2% CAGR during the period (figure insurance products and measures to contain potential 56). Of this, the technology-enabled upgrade and ecosystem- operating risk arising from online insurers. However, as CIRC oriented innovation segments are expected to post stronger also opened up the online channel for insurers to sell CAGR of 41% and 62% respectively, significantly outpacing traditional life products, accident policies, family P&C insurance, the growth rate of 15%+ y-o-y posted by the whole insurance liability, credit guarantee insurance, or any P&C insurance market. By 2021F, the online insurance market is expected to product which can be independently and completely sold and account for around 24% of the total market. underwritten, and whose claims can be processed online, we believe the growth potential of online insurance remains Figure 56: Zhong An’s shipping return insurance phenomenal in the long run. Moreover, for traditional offline insurers, online insurance can be treated as another fast- Rmb bn growing channel especially suitable for targeting younger 1500 223 generations who are heavy internet users. 1200 62% Cagr 229 Three definition of online insurers: We believe there are three 900 main participants in the so-called “online insurance” segment, 600 41% Cagr 1. Traditional offline insurers which mainly treat online 961 20 platform as another sales channel, 2. Pure online insurers who 300 41 do not have offline presence and hence have to self-create 302 26% Cagr 0 their online ecosystems, and 3. Third-party online platform 2016 2021F Online distribution Technology enabled upgrade Ecosystem oriented innovation operators which operate under an “open platform” and cooperate with offline traditional life insurers to distribute their products. Source: Oliver Wyman, DBS Vickers

In general, the traditional offline insurers and third-party online Below, we will discuss on pure online insurers and the platform operators basically see the online opportunity as implication to technology-enabled upgrade and ecosystem- another distribution channel which is suitable for distributing oriented innovation market segments. long-tail products and able to reach cost-conscious as well as

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Industry Focus China Insurance Sector

Huge exponential growth potential: As of 1H17, four pure online platform, ranging from product offering, premium online insurer licences had been issued by CIRC while many are underwriting to claim processing. As such, their business model still in queue seeking approval. These four online insurers is labour-light. The different business model can also have include Zhong An, TK.cn, 1 An, Answern (figure 60). Zhong An reflected to a slight different cost structure, where commission was the first to obtain an online insure licence back in & acquisition fee, claim expense account for larger portion of November 2013. Its premiums during 2014-16 registered a traditional insurer, whereas pure online insurers have higher 107% CAGR, and a further 80% y-o-y in 1H17 (figure 57), SG&A due mainly to the amortization of its IT equipment substantially outpacing the P&C insurance industry's growth. If (figure 59). we aggregate the premium sales from the four pure online insurers, premium growth in 2016 would have been 96% y-o-y, Figure 58: Pure online insurers' premium and YoY (%) and 166% y-o-y in 1H17, showing the same exponential Rmb m premium growth potential (figure 58). Total pure online P&C monthly premium YoY (%) ‐ RHS 800 250% 700 200% Figure 57: Zhong An's monthly premium and YoY (%) 600 500 150% Rmb m Zhong An monthly premium YoY (%) ‐ RHS 400 600 140% 300 100% 200 500 120% 50% 100 100% 400 0 0% 80% 16 17 15 16 14 15 16 17 15 16 15 16 15 17 16 15 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 300 ‐ ‐ Jul Jul Jan Jan Jan Sep Sep Nov Nov Nov Mar Mar Mar May May 60% May 200 40% Note: above shows the aggregate premium of the four pure online 100 20% insurers Source: CIRC, DBS Vickers 0 0% 16 17 15 15 16 14 15 16 16 17 15 15 16 16 17 15 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jan Jan Jan Sep Sep Nov Nov Nov Mar Mar Mar May May May Source: CIRC, DBS Vickers Figure 59: Cost and expense structure comparison Traditional insurers versus pure online insurers: We believe the Net claims Net commission & acquisition SG&A main difference between traditional insurers and pure online 100% insurers is that the former provide homogeneous products to 90% 21% serve consumers' clear and tangible needs. Product pricing is 80% 35% 11% based on actuarial models and statistical data such as mortality 70% and morbidity table with an assumed interest rate yield curve. 60% 5% Products are mainly sold through mass sales forces or physical 50% channels, i.e. bancassurance. 40% 68% 30% 60% Pure online insurers such as Zhong An, which by nature 20% possesses an online operator and technology gene, utilises its 10% big data and cloud computing technology to analyse mass 0% Traditional player Pure online insurer consumer behaviour data to find opportunity and provide customised and tailor-made insurance products for the certain Source: Zhong An, DBS Vickers ecosystem it identifies. Due to its strong consumer behaviour analysing capability, it can also provide dynamic pricing based on the different risk profile each consumer possesses. In addition to the sunk cost needed to spend on IT investment initially, the pure online insurers operate mainly through the

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Industry Focus China Insurance Sector

Figure 60: China’s pure online P&C insurers

Online insurer Zhong An TK.cn 1an.com Answern

Logo

To pursue development of the financial services To integrate platform (online and traditional) and Solving problems from clients and improving their Prov iding simple insurance products that are Vision industry powered by technological innovation product (life and P&C insurance) chains liv es understandable to ordinary users

Date of obtaining Nov 2013 Nov 2015 Feb 2016 J un 2015 first license Yinzhijie Technology (15%), Brightoil Petroleum Ximeng Land (15%), Honghai Mingzhu Software Ant Financial (16.04%), Tencent (12.09%), Ping (15%), Yinbixin AM(14%), Fubon Hengye (14.5%), Tongyu Century Technology (14.5%), An Insurance (12.09%), Shenzhen J ia De Xin Major shareholders Taikang Life (100%) Technology (14%), Hengyi Xinyuan Technology Yinzhu Group (14%), CCX Investment (14%), Investment (11.28%), Unifront Holding (7.25%), (14%), Daneng Industrial (14%), Jinjiuchen Hanhaixuan (14%), Zhongbang GlobalNet Cnhooray Internet Technology (6.53%) Trading (14%) Computer (14%) Awarded 2016 Innovative Brand in China Milestones #1 in customer serv ed and policy sold in 2016 F irst online platform for life insurance products Staff av erage age lower than 30 Insurance Operating highlights (Rmb mn; Otherwise stated) 2016 Total premium 3,408 675 224 75.3 2016 Net profit 9.4 n.a. n.a. n.a. 2016 Solvency ratio 727% 1011% 703% 1574% Customer base (mn) 492 n.a. n.a. n.a. Major product offering E-commerce Shipping Return Policy, Account Lifestyle Safety Policy, Phone Accident Policy, Phone Shipping Return Policy Online Pay ment Safety Policy consumption Screen Crack and Accident Policy Baobei Open Platform, Mashanghua, Quick Loan Consumer finance Policy , Hua Bao Critical Illness Health Policy , Personal Clinic Policy , Personal Clinic Policy , Walk to Wellness Policy , Critical Illness Policy , High-end Personal Clinic Personal Clinic Policy, Registration Service Policy, Health Diabetes Policy , Colorectal Cancer Policy , Children Reimbursement Policy , F emale Exclusiv e Illness Huanlebao Accident Policy Comprehensiv e Policy Policy Auto Damage Policy , Third Party Liability Policy , Auto insurance Baobiao Auto Insurance Car Theft Policy , Driv er/Passenger Seat Liability Answern Auto Insurance Policy , Selected Repair Poicy Flight Accident and delay policy, Jijiubao, Train Offshore V ISA Trav el Policy , Onshore Trav el F ull-y ear Comprehensiv e Trav el Policy , J insuoy ijia Trav el Accident Policy, Hotel Cancellation Policy, Flight Skiing Accident Policy , Trav el Accident Policy Protection Policy F amily P&C Policy , Huanlebao Accident Policy Ticket Change Policy Xilinmen F amily P&C Policy , Property All Risk Policy , Employ er Liability Policy , Cargo F reight Bank Card Safety Policy , F amily P&C Policy (theft, Others Policy , Brightful Life Annuities Policy (Child), Family P&C Insurance fire, explosion, thunder, water pipe), Motor Driver Long-term Regular Life Policy , Elderly Accident Policy Annuities/Pensions

Online insurer Zhong An TK.cn 1an.com Answern

Technological application Image recognition, smart learning, machine Distribution channels, product design, operational AI n.a. n.a. learning, anti-fraud management Automatic claims settlement, clearing and Block chain settlement, identification verification, risk control n.a. n.a. n.a. of transaction Front-end (underwriting, claims settlement, credit Distribution channels, product design, operational Cloud computing ratings), back-end (claims settlement, capital n.a. n.a. management reserv e, pay ment) Insurance pricing, credit analy sis and rating, Distribution channels, product design, operational Big data n.a. n.a. precision marketing management Speed series, smart series, block chain Web 3.0 n.a. n.a. n.a. infrastructure Major partners Taobow, Chuchujie, Weidian, Xiaomi, Wechat, Bailian Insurance Platform, Qing Song Chou, CIT IC Credit Card cent er, DX Clinic s, Y i Hao Xinyoulingxi Internet Finance, Qunar, Kalaibao, Online and offline Fenqile, Aiyoumi, CYDC.com, Didi, Alitrip, Ctrip, J upaopen, Xiaomi, Bundwealth, Shuidihuzhu, Pharmacy, Xinjingbao, Baoduoduo, Didi, Ctrip, J ubaopen, Baobei, Formax, Zhanggui, partners Qunar, LY.com, Ping An, Chang An Auto, China Zhongmin Insurance, OK Bao Shang Cheng, Tuniu Wukongbao, Baiquanbao Eastern Airline, Air China Shijilongteng, eLong, Suning Insurance,

Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

An ecosystem-based growth model Figure 62: Zhong An's insurance premium breakdown Pure online insurers can be regarded as an insurance service 7% 4% integrator which creates a link between the online ecosystem Healthcare Others and insurance provider. By utilising their strong data analytic capability, they can identify consumers’ needs and integrate insurance product services into existing online ecosystems. This creates a virtual circle and win-win situation for both online platform operators and pure online insurers, as subject to the 48% E-commerce insurance product offering, it can usually alleviate consumer’s 32% concerns on transacting online. Travel

The ecosystem-based growth model can also be reflected on 9% the different premium type breakdown between traditional Consumer finance P&C insurers and pure online insurer. For traditional P&C insurers, auto insurance basically dominates the underwriting Source: Company data, DBS Vickers premium and accounts for 73% of total premiums (figure 61).

On the other hand, premium derived from e-commerce Shipping return insurance (lifestyle consumption ecosystem) ecosystem accounts for 48% of total underwriting premium, Shipping return insurance is currently the most widely offered followed by travel ecosystem (32%), consumer finance (9%), online insurance service by pure online insurers. Online and healthcare (7%), taking Zhong An as an example (figure shipping costs usually account for a substantial portion of the 62). Below, we provide an illustration of the three major types total budget when making an online purchase. Although of insurance premiums which pure online insurers offer under sellers provide a 7-day review period and buyers are free to different ecosystems. return the merchandise to the seller, nonetheless, the return

shipping cost is borne by the buyers. As such, buyers may feel

uncertain when making online purchases. Shipping return Figure 61: Traditional P&C insurers' premium breakdown insurance is designed to be embedded in the ecosystem of 1% 11% online retail platform, i.e. Taobao marketplace, and buyers can Accident Others purchase the shipping return insurance at a low cost (average 2% Cargo of Rmb0.4) to cover the cost and risk should the buyer decide 5% Health to return the item to the merchant. It not only helps to reduce

4% buyers' purchasing cost, but also helps to alleviate the Liability uncertainty when a consumer makes an online purchase, which may ultimately lead to more online transactions. 4% Commercial property If we take Zhong An as an example, the scale of its shipping return insurance premiums had reached Rmb1.2bn in 2016, 73% Auto growing at a 40% CAGR for the past two years and accounting for 35% of its total gross written premium. Its

major ecosystem partner, Taobao marketplace, is also Source: CIRC, DBS Vickers cooperating with other online insurers to provide shipping return insurance products and this may impact on Zhong An’s

near-term growth outlook for such product line. However, as

China’s e-commerce growth continues to surge, demand for

shipping return insurance is likely to be on the rise.

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Industry Focus China Insurance Sector

Figure 63: Zhong An’s shipping return insurance Figure 64: Zhong An’s travel insurance

Source: CIRC, DBS Vickers

Source: Ctrip, DBS Vickers Flight delay and travel insurance (travel ecosystem) Travel insurance is another growing market for pure online insurers. When a consumer makes a cancellation, or a change The underwriting premiums for Zhong An’s health insurance in travel schedule, it will usually incur a sizeable penalty fee. In had grown substantially in 2016 to Rmb205m, up from addition, often when a flight or baggage delay occurs, the Rmb13m in 2015 and accounting for 6% of total written traveller's remaining travel schedule will also be negatively premiums for the year. With the continuous rise in health impacted (if there is a transfer flight to catch). Flight delay and awareness accompanied by increasing demand for various related travel insurance is thus designed and embedded in types of health insurance, we believe the growth potential in online travel agents' ecosystems, i.e. Ctrip and Qunar, to help online health insurance will remain phenomenal (figure 65). cover such uncertainty and monetarily compensate travellers should the incident occur. Flight delay and travel related Figure 65: Mi Band and exercise monitoring insurance are purchased together with a flight ticket online (figure 64).

Zhong An started to cooperate with Ctrip (CTRP US, NR) to first offer “Flight Delay Policy” in 2015, and by 2016 its travel insurance had reached a scale of Rmb1.1bn, growing at a phenomenal rate of 394% CAGR for the past two years and accounting for 32% of its total written premiums for the year.

Interactive health insurance (Health ecosystem) Zhong An has cooperated with high-tech wearable device manufacturers, such as Mi Ban, Ledongli and Meizu, to provide an interactive health insurance product, such as “Walk to Wellness Policy”, to basically connect and monitor consumers’ personal exercise data with insurance products covering major chronic diseases. By utilising the data collected by these Source: Xiaomi, DBS Vickers wearable devices, Zhong An can further analyse and gain insights beyond consumers’ historical medical records. This also enables the insurer to offer more health policies targeted at customers’ customised needs. It can also adopt dynamic pricing to offer a lower premium for consumers who have been exercising more frequently, as presumably the more you exercise the healthier you are.

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Industry Focus China Insurance Sector

Figure 66: Zhong An's major insurance products

Product Generic buyers' version of Phone accident policy and Jijiubao - Flight accident Shipping return policy Walk to Wellness policy Baobiao Auto Insurance type shipping return policy phone screen crack policy and delay

Insure against damages caused Insure against shipping fees to the insured vehicles by Insure against extended flight Insure against expenses incurred Insure against shipping fees (door-to-door pickup or Insure against expenses incurred collision, fire, explosion, delay over a certain length of Protection due to damage of insured incurred due to purchase return deliv ery serv ices) incurred due for critical illness typhoon, mudslides and theft time or flight accidents for last- products in qualified accidents to purchase return and liabilities to passengers and minute travellers cargos After merchant's distribution of Earlier of one year from goods and before earlier of 30 days immediately after effective date or one-time free One month from effective date One year from effective date Six hours after official time of Period goods receipt confirmed by activation of monthly plan repair or replacement of insured and is renewable and is renewable departure or landing buyers or automatic transaction products platform Walk to Wellness Policy Online channel (mi.com), direct Online platform (Didi Chuxing, Underwriting WeChat public account, Zhong 100% online 100% online sales during purchase of Xiaomi Xiaomi, WeChat), offline WeChat Yaoy iy ao channel An/Mi Band/Ledongli mobile products platform (Xiaomi) applications 1. F ollow Walk to Wellness 1. Buyer elects for shipping Policy WeChat public account 1. Activate monthly plan after return before confirming receipt or download Zhong An/Mi Trav ellers purchase the policy in purchase through real name 1. Complete online of goods, 2. Merchant Band/Ledongli mobile airport using WeChat Yaoyiyao registration, 2. Reach consensus questionnaire regarding approves the election, 3. Buyer applications, 2. Assessment of four hours before actual with merchant for returning 1. F ill in personal information, personal infomation, vehicle updates correct logistic customers' sports habit, 3. departure and two hours after goods and complete logistic 2. Submit a picture of phone licence and motor type, 2. Procedure information upon return of Select appropriate claim limit event of flight delay (not information, 3. Apply for door- screen through Zhong An app Select appropriate policies, 3. goods, 4. System recognises and required steps, 4. Holder necessary to purchase at least to-door pickup and fill in on another phone Online payment including claims automatically after can enjoy 1-day premium one day before actual merchant address, 4. Goods Alipay, WeChat Pay and Union merchant confirms receipt of exemption in the next month departure comparred to collection from couriers within Pay goods, 5. System reviews for meeting walking traditional flight delay policy) two hours transaction and deliv ers claims requirements in the current month RMB 0.15-3.30 for merchant and RMB 0.20-9.90 for buyer RMB 37.8 on average per year RMB 7.4-155.2 (5,000 steps), RMB 1,500 on average per version depending on (phone screen crack policy), RMB 9.8-206 (10,000 steps), year, subject to customer Premium transaction v olume, distance RMB 9.9/month RMB 1-50 on random basis variable amount (phone RMB 11.3-238.8 (15,000 package of basic and additional between place of departure accident policy) steps) per month policies and receipt and scope of merchant business

1. Damage from collision/natural disasters - partial reimbursement RMB 5-20 (delivery services), for reasonable repair or full RMB 1,000 per flight RMB 7-22 (door-to-door Depending on market reimbursement if the insured RMB 100,000 (5,000 steps), depending on multiple factors Claim pickup) depending on distance RMB 50 for 5 times in 30 days reinstatement v alue of insured vehicles have no recoverable RMB 150,000 (10,000 steps), including airport circumstances, range/limit between place of departure (totalling RMB 250) products, it also represents max values, 2. Loss from theft - RMB 200,000 (15,000 steps) weather conditions, flight and receipt, regardless of actual claim limit purchase price less appropriate situations and time of purchase shipping return fees depreciation, 3. Liability to passengers - from RMB 10,000- 100,000

Repair services can be onsite and complimentary pick-up Fund transfer to Alipay, Settlement Fund transfer directly to Alipay Fund transfer directly to Fund transfer of compensated serv ices or returning the dev ices n.a. WeChat Pay and Union Pay method account specified account amount to WeChat account to designated processing accounts centres free of charge

Collect trav el and v ehicle Co-developed with Mi Band, Eligible policy holder: Domestic information from Didi Chuxing, 1. Co-developed with Xiaomi, Ledongli App and WeChat. holder (exclude HK, Macau and Tuhu and Chang'an Motors. Co- Alipay , China Unicom, 2. If the More than 5 million mobile Taiwan) aged between 18 and developed with Ping An. Claim approval complete within products are insured by multiple application users have Co-dev eloped with WeChat, Others 55 Zhongan splits GWP and 72 hours contracts, claim amount will be authorised Zhong An to obtain Air Union and V ariflight Eligible product: Goods do not expenses by sharing 70% of apportioned based on total data on walk steps as of exceed 3kg with shipping fees above-mentioned, while Ping claim limit of all contracts December 2016. No surrender is no less than RMB 50 An is responsible for claim allowed settlement process Source: Zhong An Insurance, DBS VICKERS

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Industry Focus China Insurance Sector

a digitalised claim assessment system (similar technology has Expanding into traditional life and P&C business been seen from Ping An). It has developed a graphic-based In addition to the online offering of ecosystem and scenario- photo technology, and its policyholders simply need to take a based insurance products, pure online insurers are also starting photo of their damaged automobile and upload the photo into to expand their footprint into the “offline” traditional life and the system and the damage assessment will be automatically P&C insurance market. A good example is Zhong An, where conducted online. Based on Zhong An’s experience, 65% of the online insurer cooperated with Ping An to expand into the the car damage assessment do not require humans. By auto insurance business by offering “Baobiao Auto Insurance” launching the digitalised technology, this not only enables the in November 2015. With an average premium of Rmb1,500 insurer to achieve a more efficient assessment turnaround time, per annum, Baobiao Auto insurance offers auto insurance but will also substantially help to lower the cost and reliance on coverage including damage caused by collision, fire, explosion, on-ground claim assessor manpower. typhoon, or mudslide, as well as theft, etc. Under the cooperation, Zhong An can continue to utilise its mass data Taikang targeting at health insurance market: TK.cn is the only analysis capability and online operating efficiency to adopt pure online insurer established by an existing offline life insurer, dynamic pricing with the advantage of streamlined purchasing namely Taikang Life (figure 66). TK.cn was formerly Taikang and settlement processing to aim for targeted customers and Life's e-commerce division. Since its establishment in 2000, provide customised products. On the other hand, Ping An can when TK.cn successfully issued the first ever online insurance offer services in offline claim settlement assessment by policy in China, the entity has undergone several development leveraging its large offline claim assessor force. Through such stages, including the establishment of an e-commerce platform “online-to-offline” insurers' cooperative business model, online for Taikang Life, the launch of online virtual insurance card and insurers can not only successfully expand their footprint to the regular-payment policies, and is recently focusing on leveraging offline insurance market, but also to solve the main issue of its advantages online to develop its health insurance business. inadequate on-ground support for online insurers when The insurer has cooperated with nursing homes, hospitals and tapping into the offline arena. medical centres nationwide to develop its unique healthcare insurance supply chain. At the same time, TK.cn is also working In 2016, premium income from auto insurance was only with Alibaba, Tencent, and Ctrip to expand it scenario-based Rmb3.4m, accounting merely for 0.1% of Zhong An’s total online insurance product offering. One of the key premium sold for the year. While the business is still at its early characteristics is the cooperation with Tencent to provide a stage, we see exponential growth in the near future, as Zhong “One-stop claim” service. Policyholders when applying for An has successfully obtained auto insurance-related business insurance claims can simply take a photo and upload it, and licences in 18 regions in China, up from only five licences as at claim proceeds will be automatically transferred to the end-2015. policyholders' WeChat accounts.

The devil is in the details: As traditional auto insurance Developing into “insurance” and “system module” service products are quite standardised, Zhong An has designed more provider: In addition to pure online insurers' utilisation of their diversified products, such as day-to-day basis, mileage-driven mass data computing and analysis capability to expand into basis and user basis auto insurance policy in order to fulfil various insurance segments and markets, we believe the long- different customers’ needs. In addition to its tie-up with Ping term business model for pure online insurers includes 1. An, Zhong An has also teamed up with its main ecosystem Insurance service providers – business structure will be more partner, Didi, to help collect and analyse customer diversified to include ecosystem and scenario-based insurance consumption behaviour data in order to conduct more products, and traditional insurance products such as auto, precision pricing and marketing. By analysing whether a car health and traditional life insurance products, and 2. System owner is a frequent taxi taker, this provides insights on a module service provide – the Big data computing and analysis consumer's frequency in driving cars. Furthermore, whether capability is the key strength of pure online insurers, which we the consumer is a businessman, educated person or heavy believe is difficult for traditional life insurer to expand into. A credit card user also provides insights on one’s driving business opportunity may arise by providing “modularised behaviour (cautious or careless). computing system” services to various parties and in return receive a service fee. Adopting digitalised technique on claim assessment: While the current practice of car collision damage assessment still relies on insurers' on-ground claim assessors, Zhong An is launching

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Industry Focus China Insurance Sector

Ping An - Surfing on the “Fintech” wave increase operating performance in various edges. For the past four years, relentless effort has been spent to continuously Among the traditional life insurers, we see Ping An as “the” migrate its business system onto Cloud and at present, 70%+ insurer which has the most advanced financial technology of its core business system is now deployable under Ping An among peers which invested heavily to develop their Fintech FinCloud. This has substantially reduced the amount of capability, and has successfully leveraged from its technology paperwork and greatly enhance its productivity and data advancements into its business operations which has in turn storage capability. helped not only to enhance its operating performance and efficiency, but also to mitigate various operating risks. This has In addition, by leveraging its strength in AI, Ping An has helped to transform Ping An from a pure traditional financial developed a world-class face-recognition technology with an service provider into a real Fintech practitioner. accuracy rate of 99.8%, the highest accuracy rate recorded so far worldwide (figure 68). The system also has strong Ping An positions itself as a world leading personal financial computing capability which can process and handle 30,000 services provider, and aims to fulfil its customers' various faces per minute. Applications from its face recognition financial services needs and to ultimately enhance their living technology have been adopted in several of its businesses units, standards. The insurer focuses on two main business segments, an obvious example being its online financing platform, namely which are the financial service industry and healthcare industry. Pu Hui. The face recognition technology is used to assist in the Through the business integration with internet, Ping An has verification of Pu Hui’s online customers’ identity, as well as to uniquely developed four main ecosystems, namely 1. Financial assist in analysing the credit worthiness of its iLoan applicants. service ecosystem, 2. Healthcare service ecosystem, 3. Auto Per the company, one’s facial expression can easily reflect service ecosystem, and 4. Real estate finance ecosystem (figure whether a person is feeling anxious especially when being 67). Throughout the years, Ping An has expanded from a pure asked critical questions. This can help to identify whether a life and P&C insurer, into the banking and asset management person is lying or telling the truth, thus assisting to prevent businesses. With its long-devoted development of internet potential fraud and to substantially reduce Pu Hui’s credit risk. channel, Ping An also operates the largest online financial asset and P2P platform in China, namely Lufax, where the platform Figure 68: Ping An insurance Fintech application - 1 is positioned as an open financial service online marketplace with 28m registered users. The platform has accumulated Rmb5.7tr worth of transactions and Rmb420bn of assets under management.

Figure 67: Ping An insurance business model

Source: Ping An, DBS Vickers

Source: Ping An, DBS Vickers

Big Data, Ping An FinCloud and Artificial Intelligence: By leveraging its Big data, Ping An FinCloud and Artificial Intelligence (AI) computing capability, Ping An has applied its strength from Fintech into its business operations, which has substantially helped to enhance its operating efficiency, improve business accuracy and risk, reduce cost of labour and

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Industry Focus China Insurance Sector

Figure 69: Ping An insurance Fintech application -2 Figure 70: Ping An insurance Fintech application - 3

Source: Ping An, DBS Vickers Source: Ping An, DBS Vickers

With the enhancement in processing turnaround time, the face recognition system not only helps to improve efficiency and Figure 71: Ping An insurance Fintech application - 4 productivity, but also helps to enhance its customers’ user experience. Few examples including to significantly reduced Pu Hui’s online identity verification from 24 hours previously to three minutes while the processing capacity has increased by five times to 50,000 applicants per day. For Ping An P&C, it has also helped to enhance its insurance processing efficiency from two hours previously to one minute. For Ping An Bank, it also helps to reduce the turnaround time of its remote visa review from 20-30 minutes previously to five minutes, and online identity verification from five minutes previously to only two seconds now. At present, the facial recognition system has accumulated 300m usages applied in Ping An’s various business operations, with the application of such usage continuous to rise.

Another example of Ping An’s FinTech application is its Source: Ping An, DBS Vickers computer vision-based intelligent vehicle damage assessment system at Ping An P&C (figure 70). Through the application of AI and Ping An FinCloud, the system is able to assess vehicle damage claims for its auto insurance simply through the upload of the external picture of the policyholders’ vehicle. The system segregates cars into 14 different parts, and can categorise car accidents into four damage levels, which includes intact, spray painting, repair and change. The system has again helped to improve P&C business’ efficiencies, and to enhancement the claim accuracy, prevent claim fraud and help to substantially reduce labour cost.

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Industry Focus China Insurance Sector

Under a negative duration gap and a falling interest rate, as Favourable asset liability duration mismatch position liability value will increase more than asset value, thus a Asset liability management (ALM) is the fundamental element detrimental reduction in equity value will be seen. On the other of insurance companies’ operations, especially for life insurers hand, amid a rising interest rate environment, the fall in liability (P&C policies have a short duration), given the liability-driven value will be greater than the drop in asset value, thus business mode. As insurance policies, especially for protection increasing one’s equity value. type life insurance policies, usually have a lengthier policy duration of 20-30 years, a critical ability for insurers is to find Shortage of long-duration assets in China: Bond investment is and invest in an asset with a similar length of duration to considered an ideal fixed income instrument for an insurance match its liability. The major risks an insurer encounters include company to lock in its investment returns and future cashflows interest rate risk, credit risk, liquidity risk, and market risk, to match its policies issued, while its usual longer-investment while interest rate risk is considered most critical. Interest rate duration with tax-exempt benefits can also help insurers to risk can be manifested into many ways, such as market value seek a more balanced ALM (duration matching) and to risk associated with the market value of the assets, economic enhance recurring yield. Bond yield in China is higher than that risk associated with the present value of the cash flows or of major markets, which helps insurance companies to gain accounting risk associated with the financial statement value of stable and higher investment returns, but its average duration asset and liabilities, and ultimately a function of gains and is relatively short. losses on reinvestment and disinvestment of the actual cash flows that are realised in th future. ALM basically is a concept Bond investment accounted for more than 34% of China for insurers to manage their interest rate risks. insurers’ investment portfolio in 1H17, as “other” investment categories include debt investment scheme and fixed income Negative duration + Rising interest rate = Higher equity value: funds, per the data from CIRC (figure 73). However, China’s Duration is an estimated measure to calculate the price average bond duration only reached 4.5 years with those for sensitivity of both asset and liability values to a change in government bonds and bonds issued by policy banks at 5.8 interest rate. Duration gap analysis (duration difference and 4.6 years respectively (figure 74). As of 1H17, 58% of between asset and liability) examines the sensitivity of the bonds issued in China had a duration of less than five years, market value of the financial institution’s net worth to changes while only 3% of the bond issuance (mainly government bond) in interest rate, in other words, a measure of interest rate risk. had a duration longer than ten years (figure 75). Since 2008, Positive duration gap (asset duration > liability duration) implies due to the rise in insurance penetration in China, the its asset is more price sensitive than its liability, while negative outstanding amount of total premiums has been substantially duration gap (liability duration > asset duration) refers to the outpacing that of China's bond issuance (figure 76). All in all, opposite (figure 72). this basically implies that China is facing a shortage of high quality investment instruments with stable income and long duration. Figure 72: Illustration of negative duration gap Figure 73: China insurers' asset allocation Change in equity value - RHS Asset Liability 200 50 Bank deposit Bond Stock and equity fund Others 180 40 100%

160 Equity value increases 30 value Equity in Change 90% 17% along with higher 24% 29% 140 20 36% 37% interest rate 80% 10% 120 10 70% 11% 100 0 15% 60% 80 -10 13% 13% 50% 43% 60 -20 38% 40% 40 -30 34% 32% 34% 30%

Assey and liability Value Assey liability and 20 -40 0 -50 20% 29% 27% 10% 22% 19% 16%

0.0% 0.5% 0.9% 1.4% 1.8% 2.3% 2.7% 3.2% 3.6% 4.1% 4.5% 5.0% 5.4% 5.9% 6.3% 6.8% 7.2% 7.7% 8.1% 8.6% 9.0% 9.5% 9.9% 0% Interest Rate Dec-13 Dec-14 Dec-15 Dec-16 May-17 Source: DBS Vickers Source: CIRC, DBS Vickers

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Industry Focus China Insurance Sector

Figure 74: Average duration of different asset classes China Taiping, CPIC and Ping An are the main beneficiaries

Years Given the shortage of long-duration investable assets, China 25 insurance companies are basically operating under a natural asset liability duration mismatch, with liability duration 20 substantially outpacing that of asset duration. On average, 15 insurers’ asset duration has reached six years, while the average liability duration has reached 12.8 years. Insurance 10 companies which have a higher concentration of long-term

5 protection type policies and endowments, such as China Taiping and CPIC, generally hold a lengthier liability duration of 0 30 and 20 years respectively in their portfolio (figure 80). WMP - Bank China Average bond Policy bank PPP project government bond Under a downward interest rate trend such as what we had bond seen during 2014 to 2016 in China, life insurers are feeling the Source: FTSE Russell, DBS Vickers pressure of not earning enough returns to meet the pricing of the liabilities, which has resulted in lower earned rates on

insurer portfolios, decreased investment income, higher reserve Figure 75: China new issued bonds by duration – 1H17 pressure, spread compression and decline in the ability to issue dividends. 25%

20% Three common ways for insurance companies to enhance their investment yields under an interest rate downcycle, which 15% includes 1. Increase credit spread – invest in lower credit quality investment by taking more credit risk, 2. Increase expected 10% return – invest in riskier assets, and 3. Increase yield to maturity (YTM) – selling shorter-duration assets with lower YTM and 5% reinvest in longer-duration and higher-YTM assets. Similar

0% investment behaviour has been seen among China insurers Less than 1 1-3 years 3-5 years 5-7 years 7-10 years More than during the same period, as driven by pressure for enhancing year 10 years asset yield, investment in risker assets has increased while asset Source: ChinaBond, DBS Vickers allocation to low-risk low-return term deposits has been reduced (figure 76).

Figure 76: China 10 yrs+ bonds with insurance premium Figure 77: China insurers’ asset/liability durations

Rmb bn Years 3,500 Asset duration Liability duration 30 3,000

2,500 25

2,000 20 1,500

1,000 15 30

500 10 20 0 15 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 13 5 9 More than 10 years Total insurance premium 7 7 7 7 6 6 4 1 5 0 Source: ChinaBond, CIRC, DBS Vickers China PICC China Re Ping An PICC P&C CPIC China Taiping Life

Source: Company data, DBS Vickers

Benefit from natural duration mismatch: However, the situation had started to change as we moved into 2017. Given

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Industry Focus China Insurance Sector

the tightening of market liquidity as PBOC aimed to fend off their bond investments by 5ppts (to 35%) and 3ppts (to 39%) Rmb depreciation pressure and at the same time to direct respectively. In addition, insurers including Ping An, CPI, China corporate segment and financial industry to deleverage, Life and China Re were found to have also increased their domestic interest rate and China bond yield alike (figure 78) investment allocations to equity investments (either stocks, have turned from a downward cycle into an upward cycle, and equity funds or equity-linked WMP) by 2-3ppts, thanks to the we believe this upward trend of interest rate cycle in China will good performance of both A-shares and H-shares with continue moving into 2018F. attractive dividend yield offered. PICC and PICC P&C, on the other hand, contracted their equity investment positions by China Taiping, CPIC and Ping An hold the widest duration 9ppts and 3ppts respectively in 1H17. mismatch positions: Now with interest rate trending upwards, accompanied by a negative duration gap position (liability By 1H17, CPI and China Taiping had held a higher investment duration lengthier than asset duration), this bodes well for position in fixed income by allocating 50-64% of their China life insurers and we expect the equity values of insurers investable assets to this asset category. China Re and China with a duration mismatch position to be on the rise. Among Taiping also held a higher investment position of 16-19% in which, driven by its strategy of focusing on long-term equity investment. With the interest rate cycle trending endowments which offer long duration, China Taiping holds upwards, accompanied by continuous good performance in A- the widest duration mismatch positioning of 21 years, given its share/H-share markets with yield seeking demand, we believe liability duration is as long as 30 years (figure 77). Likewise, China insurers will continue to increase their asset allocations CPIC and Ping An also hold a wide duration gap of 13 years to both bond and equity investments. On the other hand, their and 8 years respectively, given their focus on protection type cash and term deposit positions are expected to continue to products which offer liability duration of 20 years and 15 years trend down (figure 79). respectively. Figure 79: Listed China Insurers’ asset allocation - 2016

Cash & deposit Fixed income investment Equity investment Figure 78: China government bond yield by duration Loan Property investment Others 1% 0% 0% 100% 3% 2% 1% 0% China gov't 1 year bond yield China gov't 2 year bond yield China gov't 3 year bond yield 5% (% 14% 14% 90% 20% 1% 18% ) China gov't 5 year bond yield China gov't 10 year bond yield China gov't 20 year bond yield 19% 17% China gov't 30 year bond yield 80% 17% 13% 5.5 14% 70% 16% 19% 13% 5.0 60% 18% 16% 4.5 50% 47% 31% 40% 41% 47% 29% 4.0 50% 30% 31% 3.5 20% 29% 25% 25% 3.0 10% 18% 17% 17% 4% 2.5 0% China Taiping PICC China Re Ping An PICC P&C CPIC China Life 2.0 1.5 Source: Company data, DBS Vickers 1.0 Ping An, PICC and CPIC post the highest recurring yields: Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 China insurers’ recurring investment yield had hit the 4.2-6.0% Source: WIND, DBS Vickers range in 2016, with Ping An posting the highest rate of 6% Investment allocation: More bonds and stocks, less cash: In and PICC P&C posting the lowest of 4.2%. As China's bond general, all the insurers in 1H17 had contracted their cash or yield and dividend yield of large capitalisation cyclical stocks, term deposit positions and allocations to either bond or equity such as China Financials and Telecom, at 5%+, we expect investments in order to earn higher asset returns. With China China insurers’ recurring yield to increase steadily in the long bond yield trending upwards, the majority of China insurers term. On the other hand, the performance of insurers’ total have increased their investment allocations to include more investment yield, which ranged between 4.6% and 5.8% in bond investments, as they aim to steadily lengthen their asset 2016, will depend on market volatility and the amount of duration. Among which, China Taiping was found to increase earnings recognised from their trading assets (figure 80). the most by allocating 45% of its investment assets to bond investments (up 6 ppts), followed by China Re which increased

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Industry Focus China Insurance Sector

Figure 80: Insurance companies’ asset allocation, investment yield, and accounting category breakdown

Ticker 966 HK 1339 HK 1508 HK 2318 HK 2328 HK 2601 HK 2628 HK 945 HK 1299 HK Company name China Taiping PICC China Re Ping An PICC P&C CPIC China Life Manulife AIA HKD (m) RMB (m) RMB (m) RMB (m) RMB (m) RMB (m) RMB (m) CAD (m) US$ (m) By asset class: Cash & deposit 74,279 138,613 45,056 330,212 93,430 36,397 611,704 15,151 4,431 Fixed income investment 165,930 253,265 48,869 923,512 110,645 468,805 1,148,894 168,622 108,027 Equity investment 63,606 132,866 30,090 279,236 67,038 121,984 308,856 19,496 14,713 Loan 75,953 168,778 26,260 395,396 63,855 167,478 339,100 81,708 3,573 Property investment 18,447 - 3,122 43,442 4,902 8,657 1,191 14,132 5,496 Others 5,498 114,216 4,252 - 40,106 - 43,538 22,760 1,239 Total investment asset 403,713 807,738 157,649 1,971,798 379,976 941,625 2,453,283 321,869 137,479 % of total Cash & deposit 18% 17% 29% 17% 25% 4% 25% 5% 3% Fixed income investment 41% 31% 31% 47% 29% 50% 47% 52% 79% Equity investment 16% 16% 19% 14% 18% 13% 13% 6% 11% Loan 19% 21% 17% 20% 17% 18% 14% 25% 3% Property investment 5% 0% 2% 2% 1% 1% 0% 4% 4% Others 1% 14% 3% 0% 11% 0% 2% 7% 1% Net investment yield (%) 4.6% 5.7% 5.1% 6.0% 4.2% 5.4% 4.6% n.a. 4.9% Total investment yield (%) 5.1% 5.8% 5.5% 5.3% 5.2% 5.2% 4.6% n.a. 5.7% 6 /3 years Asset duration (years) 9 years 5.5 years 7 years 4 years 6-7 years 5 years n.a. n.a. (Life/P&C) 7 /1 years Liability duration (years) 30 years 7 years 14-15 years <= 1 year 20 years 12 -13 years n.a. n.a. (Life/P&C) Bond maturity profile: % of aseet mature within 1 year (est) 8% 18% 11% 34% 33% 13% 18% n.a. 3% % of aseet mature within 1-5 year (est) 31% 40% 34% 43% 40% 38% 35% n.a. 14% Bond investment breakdown: Fair value through P&L 2,618 4,109 394 70,392 3,251 13,797 154,406 148,579 23,526 Available-for-sale 30,610 114,591 29,992 193,904 65,743 150,134 399,758 26,231 90,092 Hold to maturity 132,702 121,831 18,483 1,009,714 41,651 304,874 594,730 - - % of total Fair value through P&L 2% 2% 1% 6% 3% 3% 13% 85% 21% Available-for-sale 18% 48% 61% 15% 59% 32% 35% 15% 79% Hold to maturity 80% 51% 38% 79% 38% 65% 52% 0% 0% Note: Above duration numbers refer to life insurance business only; Source: Company data, DBS VICKERS

Figure 81: China insurers’ bond investment by type China Re and PICC P&C may face higher marked-to-market Fair value through P&L Available-for-sale Hold to maturity risks on bond investments: As the market value of bonds is 100% negatively correlative with the interest rate movement, with 90% China’s interest rate trending upward, insurers may face 80% 38% 38% 51% 52% 70% marked-to-market (MTM) risk on their bond investment 65% portfolios which may negatively impact their near-term 60% 80% 79% 50% profitability, book values and embedded values, nonetheless, 40% we believe the impact is manageable. Among China insurers, 30% 61% 59% 35% 48% China Taiping, Ping An and CPIC categorise 65-80% of their 20% 32% 15% 10% 18% bond investments under “Hold-to-maturity” accounting 13% category, which is exempted from MTM (figure 81). On the 0% 2% 2% 1% 6% 3% 3% China PICC China Re Ping An PICC P&C CPIC China Life other hand, China Re and PICC P&C may face higher MTM Taiping risks given 62% of their bond investment portfolios are under Source: Company data, DBS Vickers either the fair value or available-for-sales category, which is MTM.

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Industry Focus China Insurance Sector

Figure 82: Insurance companies’ debt security maturity profile

966 HK 1339 HK 1508 HK 2318 HK 2328 HK 2601 HK 2628 HK 1299 HK Category China Taiping PICC China Re Ping An PICC P&C CPIC China Life AIA HKD (mil) RMB (mil) RMB (mil) RMB (mil) RMB (mil) RMB (mil) RMB (mil) US$ (mil) Carrying amount 241,884 240,531 74,762 2,156,291 174,500 730,423 1,148,894 113,618 Carrying amount / undiscounted cash flow by maturity <= 1 year 18,474 42,557 8,431 722,611 58,171 93,173 210,589 3,098 >1 year & <= 3 year 214,105 74,840 96,661 25,382 928,015 69,878 279,366 16,341 >3 year & <= 5 year 188,740 > 5 year 148,209 190,992 55,792 1,323,323 98,656 614,982 1,014,074 89,723 no maturity 361 90,841 Sum of undiscounted CF 241,884 330,210 89,605 2,973,949 226,705 1,078,362 1,627,508 109,162 % of debt securities maturing within 1 year (est) 8% 18% 11% 34% 33% 13% 18% 3% % of debt securities maturing within 1-5 year (est) 31% 40% 34% 43% 40% 38% 35% 14% Note: China Taiping’s debt securities include (HTM+AFS+HFT+FVTPL) + loans and receivables (by carrying amount); China Re’s debt securities include (HTM+AFS) + loans and receivables; AIA’s carrying amount also includes unit-link products Source: Company data, DBS VICKERS

Ping An and PICC P&C may face higher reinvestment risks: - Transitional discount rate based on quadratic interpolation One of the major interest rate risks that insurers are facing is method, if 20 years < t < 40 years; the reinvestment risk of their investable assets. As China lacks good quality investable assets with long durations, China - Terminal discount rate of 4.5%, if t > 40 years insurers will constantly face reinvestment risk, especially when their recurring yield has already reached a relatively high level, ; t= numbers of years and may face challenges to maintain a high investment yield. CIRC also extended the compound premium to include Based on insurers' debt security maturity profile as of end-2016, counter-cyclical premium and liquidity premium, but lowered Ping An and PICC P&C may face higher reinvestment risks the scale from 150bps to 120bps. This rule has been compared to their peers, as debt securities maturing within one implemented and back dated to the beginning of 2017. The year accounted for 34%, 33%, and 24% of their debt changes in discount rate definition have alleviated some of the securities portfolio respectively (figure 82). With Ping An, and reserving pressure, especially for insurers which have a higher PICC P&C’s recurring yields reaching 6.0% and 5.1% product concentration in protection type policies, especially respectively, compared to China’s current 10-year government from the defined 4.5% long-term discount rate. bond yield of 3.7% and AA-rated corporate bond yield of 5.0%, we believe it may be challenging for insurers to sustain a By looking at the formula, obviously, China life insurer’s high recurring return without either lengthening their asset contact liability reserving has a direct correlation with the durations or earning some credit spread (investing in lower- upward or downward movement of China government bond grade bonds). yield trend. Reserving discount rate is the discounting factor of future expected liability cash outflow of the life insurance written. Another interpretation is to consider the discount rate Life insurance reserving pressure alleviating as the expected future investment return an insurer can China life insurers’ contract liability reserving for non- generate. As such, when the discount rate moves upwards, the investment-linked policies (mainly referring to protection type) amount of contract liability reserve the life insurer requires to is based on the discount rate referred from the 750-day set aside will be lower. On the other hand, when the discount average 10-year government bond yield, with less than 150-bp rate goes downwards, the life insurer will face pressure to set adjustment for liquidity premium. In March 2017, aiming to aside more reserves in order to fulfil its future liabilities. The enhance the scientific methodology and at the same time to amount of contract liability insurers set aside will also impact match with the yield curve assumption under C-ROSS, CIRC on the timing of the accounting profit to be recognised. Simply announced and refined the contract liability reserving discount put, the less contract liability reserve a life insurer needs to set rate to the following three stages: aside, the more the accounting profit that will be earlier released will be positive to the life insurer’s profitability.

- 750-day moving average of 10-year government bond yield, if 0 < t <= 20 years;

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Industry Focus China Insurance Sector

Figure 83: China government 10-year bond yield and 750-day moving average

China gov't 10 year bond yield (%) 750 days moving average China 10 year gov't bond yield (%) (%) 5.5

5.0

750 days moving average 4.5 China 10 year bond yield will start trending upward from Oct. 2017 4.0

3.5

3.0

2.5

2.0

01/06/05 05/06/05 09/06/05 01/06/06 05/06/06 09/06/06 01/06/07 05/06/07 09/06/07 01/06/08 05/06/08 09/06/08 01/06/09 05/06/09 09/06/09 01/06/10 05/06/10 09/06/10 01/06/11 05/06/11 09/06/11 01/06/12 05/06/12 09/06/12 01/06/13 05/06/13 09/06/13 01/06/14 05/06/14 09/06/14 01/06/15 05/06/15 09/06/15 01/06/16 05/06/16 09/06/16 01/06/17 05/06/17 09/06/17 01/06/18 Source: ChinaBond, DBS VICKERS

Figure 84: 750 days moving average and YoY spread

750 days moving avgerae Year Spread (bps) bond yield (%) 2010 3.57 -17 2011 3.56 -2 2012 3.60 4 2013 3.72 12 2014 3.81 10 2015 3.78 -3 2016 3.46 -32 1H17 3.31 -15

2H17F 3.27 -4 Source: ChinaBond, DBS Vickers

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Industry Focus China Insurance Sector

750-day 10-year bond yield to trend upwards in 4Q17 increase in contract liability reserving had eaten on average 26%, 52%, and 48% of life insurers pre-tax profit in 2015, With the normalisation of China’s liquidity crunch in late 2013 2016, and 1H17 respectively. While the scale of earnings accompanied by the six consecutive interest rate cuts from impact may differ given insurer’s different product mix and PBOC from 4Q14, China's 10-year government bond yield has liability duration, nonetheless, the trend and direction is the undergone a downward cycle since 4Q13. As the 750-day same. Although China Taiping does not disclose the change in moving average has roughly two years of lagging effect, the its contract liability reserving figure, management indicated negative impact from the decline in China’s government bond that the trend basically follows its industry peers. However, yield on China life insurers’ reserving pressure had started to with the continuous tightening in market liquidity, things are flow through in 2015. The most negative impact from the starting to change. decline in government bond yield was seen during 2016 and 1H17, where the 750-day moving average of China's Insurers’ reserving pressure to alleviate from 4Q17F onwards: government bond yield fell 32bps and 15bps respectively Since 4Q16, China's government bond yield has been turning (figure 84). This had undoubtedly put pressure on China life from a downward cycle to an upward cycle, driven by the insurers to increase their contract liability reserving and in turn liquidity tightening in China’s money market, and this upward impacted their profitability during the period. trend has continued to persist although the pace has started to moderate in 2H17. If we assume that China's government From life insurers which have announced the changes to their bond yield will remain at 3.67%, this suggests that the 750- contract liability reserving as impacted by the change in day moving average discount rate will also start to trend accounting assumption (mainly driven by discount rate change), upwards from 4Q17F and beyond. We believe this will it is easy to see that the drop in discount rate assumption substantially help to alleviate the reserving pressure on China driven by China's government bond yield decline during 2015 life insurers, and thus provide an upward boost to profitability. and 1H17 had caused the amount of incremental reserving to substantially increase during the same period (figure 85). The

Figure 85: China life insurer’s reserving increase/decrease as impact by discount rate assumptions Rmb m 2012 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17 Increase/(decrease) in contract liability reserve due to assumption change YoY (%) YoY (%) YoY (%) YoY (%) YoY (%) China Life (318) 1,493 (4,179) 9,497 14,736 13,181 n.m. n.m. n.m. 55% 23% China Re n.a. n.a. n.a. n.a. 719 n.a. n.a. n.a. n.a. n.a. n.a. CPIC 260 3,761 4,648 4,844 9292 4,188 1346.5% 23.6% 4.2% 91.8% 3.9% Ping An 54 2,305 1,102 23,175 28,909 15,417 4168.5% -52.2% 2003.0% 24.7% 67.0% Pre-tax earnings of life insurance business China Life 10,968 29,451 40,402 45,931 23,842 15,929 168.5% 37.2% 13.7% -48.1% 20.4% China Re 2,934 4,291 7,008 9,889 6,402 3,889 46.3% 63.3% 41.1% -35.3% 12.7% CPIC 6,113 11,914 14,500 24,311 16,085 9,598 94.9% 21.7% 67.7% -33.8% 7.6% Ping An 32,338 46,224 62,353 93,503 94,411 65,548 42.9% 34.9% 50.0% 1.0% 16.9% % of pre-tax earnings of life insurance business China Life 2.9% -5.1% 10.3% -20.7% -61.8% -82.7% n.m. n.m. n.m. n.m. n.m. China Re n.a. n.a. n.a. n.a. -11.2% n.a. n.m. n.m. n.m. n.m. n.m. CPIC -4.3% -31.6% -32.1% -19.9% -57.8% -43.6% n.m. n.m. n.m. n.m. n.m. Ping An -0.2% -5.0% -1.8% -24.8% -30.6% -23.5% n.m. n.m. n.m. n.m. n.m. Life insurance reserve China Life 1,375,504 1,482,946 1,588,900 1,698,773 1,825,956 1,975,664 7.8% 7.1% 6.9% 7.5% 9.8% China Re 34,262 38,898 44,576 54,110 37,164 n.a. 13.5% 14.6% 21.4% -31.3% n.a. CPIC 385,283 441,924 493,905 545,127 616,059 680,394 14.7% 11.8% 10.4% 13.0% 15.5% Ping An 882,593 1,030,212 1,206,816 1,419,958 1,625,473 1,815,005 16.7% 17.1% 17.7% 14.5% 18.6% Gross total life premium China Life 331,010 363,971 430,498 532,240 652,215 345,967 10.0% 18.3% 23.6% 22.5% 18.3% China Re 59,299 67,375 73,753 80,434 86,677 67,829 13.6% 9.5% 9.1% 7.8% 34.7% CPIC 163,228 176,923 191,805 203,305 234,018 163,785 8.4% 8.4% 6.0% 15.1% 24.5% Ping An 176,068 197,040 225,364 269,107 314,651 250,031 11.9% 14.4% 19.4% 16.9% 34.6% Note: China Taiping does not disclose the change in contract liability reserving figure Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

The increase in discounting rate implies an early release of market and investors will welcome an acceleration in insurers’ accounting profit, but profitability is not the only indicator to earnings growth, and this will be positive to sentiment on assess an insurer’s value. Nonetheless, we believe both the China life insurers' share price performance.

Figure 86: China insurers and H-share listed insurers’ EV comparison

Ticker 966 HK 1339 HK 1508 HK 2318 HK 2601 HK 2628 HK 945 HK 1299 HK Company name China Taiping PICC China Re Ping An CPIC China Life Manulife AIA Currency HKD (m) RMB (m) RMB (m) RMB (m) RMB (m) RMB (m) CAD (m) US$ (m) CA/U.S./JP/HK: CN / HK / TH / SG: Discount rate (%) 11.0% 10.0% 10.5% 11.0% 11.0% 10.0% 7.5% / 8.25% 9.55% / 7% / / 5.75% / 10.0% 8.6% / 6.9%

Equity: Gov't bonds: Non asset- Non-investment- The investment CA/U.S./JP/HK: CN/ HK / TH / SG: driven: 5% linked: from returns for LT Grading from 8.8% / 9.8% / 3.5% / 2.5% / 4.8% with an Asset-driven biz: 4.75% to 5.0%. biz are assumed 4.6% to 5% 6.0% / 11.0% 3.2% / 2.5% Investment return (%) increase of 0.05% 5.3% Domestic: 5-6% Investment to be 4.85% in by 0.2% every Bond: Local equities: annually up to 5.0% Overseas: linked is slightly 2016, 4.9% in year CA/U.S./JP/HK: CN/ HK / TH / SG: 5-6% higher 2017 and 5.0% 1.8% / 2.44% / 9.3% / 7.6% / 0.04% / 1.86% 9% / 7%

Gross Written Premium 111,554 105,548 31,366 291,264 137,362 430,498 36,659 21,757 Value of New Business (VNB) 9,115 4,131 1,220 50,805 19,041 49,311 1,226 2,750 VNB growth YoY (%) 28.8% 53.0% 10.9% 32.2% 58.4% 56.4% 22.0% 25.1% Life insurance business: Adjusted net worth (a) 44,130 39,076 14,443 129,949 78,556 349,528 42,269 16,544 Value of in-force business (before CoC) 49,116 21,949 5,365 265,897 113,727 332,317 37,031 23,137 Cost of capital (CoC) (1,197) (3,468) (1,608) (35,535) (10,680) (29,787) (16,373) (2,906) Adjustment* ------5,338 Value of in-force business (after CoC) (b) 47,919 18,481 3,757 230,362 103,048 302,530 20,658 25,569 Adjustment* - - - - - (16,453) Embedded value (a)+(b) 92,049 57,557 18,200 360,311 181,604 652,058 46,474 42,113 - Non-controlling interests (22,920) (11,511) - - (3,105.43) - - - EV attri Owners of the Company 69,129 46,046 18,200 360,311 178,499 652,058 46,474 42,113 EV attri Owners of the Company growth (YoY) 5% 4% 0% 11% 20% 16% -3% 10% Group's Reported book value 56,169 126,101 71,182 383,449 131,764 303,621 41,832 34,984 Adjustments (incl.property revaluation) 24,759 12,994 1,592 23,891 12,887 45,907 437 (18,440) Group's Adjusted book value ( c) 80,928 139,095 72,774 407,340 144,651 349,528 42,269 16,544 Value of in-force business (before CoC) 49,116 23,704 5,365 265,897 113,727 332,317 37,031 23,137 Cost of capital (CoC) (1,197) (3,792) (1,608) (35,535) (10,680) (29,787) (16,373) (2,906) adjustment** ------5,338 Value of in-force business (after CoC) (d) 47,919 19,912 3,757 230,362 103,047 302,530 20,658 25,569 adjustment *** ------(16,453) - Embedded value (group) ( c)+(d) 128,847 159,007 76,531 637,702 247,698 652,058 46,474 42,113 Adjustment for MI (26,373) (11,942) - - (1,759) - - - Embedded value (shareholders) 102,474 147,065 76,531 637,702 245,939 652,058 46,474 42,113 EV per share (per share) 28.5 3.5 1.8 34.9 27.1 23.1 148.4 27.2 EV growth YoY (%) 5% 12% 0% 16% 20% 16% -3% 10% Adjusted BV/Reported BV (x) 1.4 1.1 1.0 1.1 1.1 1.2 1.0 0.5 EV/Reported BV (x) 1.8 1.2 1.1 1.7 1.9 2.1 1.1 1.2 P/BV (x) 1.6 1.1 1.0 2.4 2.2 1.9 1.2 2.7 P/EV (x) 0.9 0.9 0.9 1.5 1.2 0.9 1.0 2.2 Solvency ratio (%) 251% 284% 258% 210% 294% 297% 230% 404% Note: *Adjustment for AIA: VIF adjusted to reflect Hong Kong reserving and capital requirements / Adjustment for Manulife: VIF adjusted to Carrying value of debt and preferred shares; **Adjustment for AIA: After-tax value of Group Office expenses; ***Adjustment for Manulife: VIF adjusted to Carrying value of debt and preferred shares; China Taiping's EV growth is lower than peers, mainly due to the adjustment of FX (listed in HK). If calculated under RMB, TPL and Taiping Group's EV growth would have been 12.4% and 11.7% y-o-y respectively; China insurers’ EV above is based on C-ROSS. Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

China life insurers’ Embedded value on the rise

Embedded value (EV) is a measure of the business value of an insurance company (mainly used for measuring life insurers). It Figure 87: China insurers’ EV and VNB growth – 1H17 comprises shareholder’s adjusted net worth plus the present value of future expected cashflows to shareholders from the in- 80% force business, less the costs of holding regulatory solvency 70% capital to support the in-force business. New business value 60% (the new premium written for the year) will also falls in the 50% value of in-force business. 40% 30% In 2016, on average, China insurers delivered a 10.5% y-o-y 20% embedded value growth on their respectively life insurance 10% businesses, and a 12.2% y-o-y growth at the group level. CPIC 0% posted the fastest EV growth of 20% y-o-y, driven mainly by its China PICC China Re Ping An CPIC China Life Taiping EV growth VNB growth astonishing NBV growth of 58% y-o-y for the year. Apart from CPIC, Ping An and China Life all posted relatively strong EV Note: Above growth comparison based on 2016 growth ranging from 16-17% y-o-y. China Taiping’s EV and Source: Company data DBS Vickers VNB growth have fallen short, posting growth of 5% and 29% y-o-y respectively. This is mainly due to the adjustment on operating to reporting currency as its listing company is Sensitivity analysis – Investment returns more sensitive to rate registered in Hong Kong (reporting currency HKD) while the changes: A life insurer’s VIF, EV, and profitability, are more Rmb depreciated by 6% over the years. If we exclude the sensitive to changes in investment returns than interest rate exchange rate impact, its EV growth for the year would have movements (figure 88, refers to discount rate in table below). been 12% y-o-y. Due to different product mix, duration gap and investment asset allocation, the magnitude of the insurers' sensitivity may Given VNB is a critical component to drive VIF and differ but the direction of the movement should be the same. subsequently EV, thus the faster an insurer can deliver its VNB From the sensitivity analysis released by insurers, China Taiping growth, the stronger the growth seen in its EV. As China is less sensitive to both risk discount rate movements and insurers are refocusing on higher-value protection and health investment return movements. We believe this is mainly due to insurance and product margins, we believe the continuous its higher percentage of underwriting portfolio in savings and product mix shift will consistently lead to better VNB growth, protection type policies which are more immune to interest which will in turn serve as a major driver for insurers’ future EV rate sensitivity, accompanied by a higher percentage of bond growth. To put it another way, we also see great potential for investments under Hold-to-Maturity accounting classification. China life insurers’ EV to advance further. PICC and China Re are found to be more sensitive towards investment return changes, and we believe this is mainly due to China insurers continued to post strong VNB growth in 1H17, their higher investment portfolio exposure to equity-related on average at 50% h-o-h, with China Taiping reporting the assets and higher portion of bond investments categorised strongest VNB growth of 63% h-o-h (figure 87, PICC posted under either Fair value through P&L or available-for-sales VNB growth of 76% h-o-h mainly due to a low base). This had accounting item, which are periodically subjected to marked- helped to deliver, on average, a 9% h-o-h growth in EV, with to-market revaluation. Reinsurers and P&C insurers also tend to Ping An posting a strong EV growth of 16% h-o-h, followed by have shorter liability durations, and thus need to maintain China Taiping’s 12%. As China insurers are required to factor certain flexibility in their investment portfolios in order to meet in the marked-to-market change of their Hold-to-Maturity duration matching. bond investments in their adjusted net worth calculations, coupled with rising interest rates, this may have a negative impact on their adjusted book value calculations. Nonetheless, we see the impact as manageable given growth in insurers’ VNB, while VIF plays a more important part in driving their EV.

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Industry Focus China Insurance Sector

Figure 88: China insurers’ sensitivity on interest rate and investment return to VIF, EV and PBT

Unit: m in local currency 966 HK 1339 HK 1508 HK 2318 HK 2601 HK 2628 HK 945 HK 1299 HK Sensitivity analysis: China Taiping PICC China Re Ping An CPIC China Life Manulife AIA VIF 47,919 19912 3,757 230,362 103,048 302,530 20,658 25,569 Risk discount rate (+50bps) -3% -4% -4% -4% Risk discount rate (-50bps) 3% 4% 4% 5% Risk discount rate (+100bps) -9% -10% -21% Risk discount rate (-100bps) 11% 12% 25% Risk discount rate (+200bps) -20% Risk discount rate (-200bps) 32% Investment return (+50bps) 11% 25% 26% 13% 17% 17% 6% 1% Investment return (-50bps) -11% -23% -26% -13% -17% -17% -8% -1% Group's EV 102,474 147,065 76,531 637,702 245,939 652,057 46,474 42,113 Risk discount rate (+50bps) -1% -1% -2% -2% Risk discount rate (-50bps) 1% 2% 2% 2% Risk discount rate (+100bps) -3% -1% -9% Risk discount rate (-100bps) 3% 1% 11% Risk discount rate (+200bps) -12% Risk discount rate (-200bps) 19% Investment return (+50bps) 4% 8% 1% 5% 7% 8% 3% 0% Investment return (-50bps) -4% -7% -1% -5% -7% -8% -4% -1% Market Risk PBT sensitivity 9,250 25,319 6,402 72,368 16,085 23,842 3,329 4,776 change in interest rate Using VaR 160 +50bps not significant 5% -1% 1% -4% -50bps not significant -5% 1% -1% 5% Equity financial assets?prices Using VaR 484 +10% 17% 3% 14% 16% 21% -10% -17% -3% -14% -22% -21% Note: * Embedded value refers to life insurance operations; ** Ping An - Bonds carried at FVTPOL and AFS, Floating interest rate bonds, floating term deposits and Loans and advances to customers; *** Manulife - Equity financial assets' price on PATMI Source: Company data, DBS VICKERS

annuity/endowment products. The new regulation is effective from October 2017. China policy update – No more universal Life riders CIRC’s new regulations on the insurance sector have been In particular, China insurers have experienced a successful “Kai focusing on life insurance product supervision and regulation, Men Hong”- open year campaign this year, with total life requirement for disclosure on related party transactions, premium growing at 37% y-o-y in the first quarter of the year. investment cap and requirement on insurance companies’ One of the main reasons was the great popularity of such equity investments and guidelines for participation in PPP “protection/savings type + universal life rider” products sales projects and other investments (figure 89). Noticeably, many (figure 90), as the majority of this year’s hero “Kai Men Hong” regulation updates are intertwined with the restriction on products were based on annuity + universal rider (optional). universal life product sales. Policyholders can not only enjoy life-long protection and long- term savings but also fulfil their investment needs. One important notice from CIRC was issued in May 2017, which requires flexibility in universal life and investment-linked Due to the new regulation which imposes restrictions on products to accommodate any irregular timing and amount of universal life and investment-linked riders, we believe this may additional premium purchases. Furthermore, insurance affect China insurers’ “Kai Men Hong” campaign for 2018. companies are prohibited from offering universal life or Nonetheless, given the continuous rising demand for investment-linked products as a form of “rider”, which is used protection and savings type products, as well as China’s low to add on to the underlying insurance policies (usually on the insurance penetration, we believe this adverse impact will only back of protection or savings-type products). The riders had in be temporary, while long-term structural demand remains the past incentivised customers to purchase traditional life and strong.

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Industry Focus China Insurance Sector

Figure 89: Recent China life insurance policy updates

Date Subject Document Main content

Insurer’s regulating fees include 1. lower of 0.4% of registered capital or RMB 2m on insurer, 2. between RMB 0.3m and RMB 1m or 1% of registered capital on insurance AMC, 3. between RMB 3,000 and RMB Notice on adjusting regulating 50,000 or 0.4% of registered capital on insurance intermediaries. Business regulating fees include a. 0.6% of J an. 2016 Regulating fees fees in insurance industry [CIRC annual premium for liability , credit and short-term health insurance, b. 0.8% of annual premium for accident 2016 No.9] and other P&C insurance, c. 0.4% of annual premium for life and long-term health insurance, d. 0.4% of income other than annual premium, e. 0.4% of total income for insurance intermediaries.

1. Solvency requirement for insurers selling SMT products. (min comprehensive solvency: 100%; min core Life insurance product solvency: 50%), 2. Premium income from SMT should be less than greater of 2*invested capital or 2*net Mar. 2016 [CIRC 2016 No.22] superv ision assets in latest quarter. Insurers are giv en 5-y ear transition period to fulfill the requirement, 3. Insurers not allowed to sell short term products -> expected 60% of policy with duration less than 1 year

Companies should disclose related party transactions include 1. use of capital for investment and trust purposes, 2. asset transactions involving RMB 300,000 with related persons or RMB 3 mn with related Notice on strengthening Regulating related parties companies, 3. ownership transactions involving RMB 300,000 with related parties or RMB 3 mn with related J ul. 2016 disclosure of related party transactions companies. Companies must report to CIRC within 10 days after signing the agreement and disclose on transactions [CIRC 2016 No.52] company website and Insurance Association of China. Board of directors hold the ultimate responsibility for compliance of related party transactions.

1. Reducing universal life product's guaranteed rate cap on to 3% from 3.5%, 2. policy loan cannot be Notice of China Insurance higher than 80% of cash value or account value, 3. for duration higher than 3 years but less than 1 year, Life insurance product Regulatory Commission on Sep. 2016 cap is imposed for a certain percentage of annual premium (2016: <=90%, 2017: <= 70%, 2018: <=50%), superv ision Strengthening the Supervision 4. Starting from 2019/2020/2011, SMT products cannot be higher than 50%/40%/30% of total annual of Life Insurance Products premium.

Life insurance product New insurers are only allowed to sell regular life insurance in the first year of operation, effective from Jan Dec. 2016 CIRC (2016) No. 113 superv ision 2017. No new branch is allowed to set up in one year if there is serious breach of rules.

Define general equity investment as acqn from insurance company with or without connected party on less Regulation regarding than or equal to 20% of listco. If it is higher than 20%, it is considered as significant equity investment. Cap J an. 2017 CIRC [2017] No.9 equity investment of equity investment: 30% of last quarter's total asset, and cap of single stock investment (except acqn on listico or listed commercial banks): 5% of total last quarter's total asset

PPP Inv estment criteria:1. It should be National or provincial key projects, 2. The main social capital contributor should be leading enterprise (credit rating: not lower than AA+, have issued bonds in public Mar. 2017 PPP project CIRC [2017] No.41 market), 3. Contract of the PPP project contract is included in the annual budget and medium-term financial plan for the fiscal expenditure for municipal government

1. Insurance product design should be protection oriented. 2. should be explicitly explained in the promotion leaflet. It cannot include wordings "wealth management"“ ” and Investment planning" “ ”, 3. 理财 投资计划 Regulating life insurance Universal insurance products, investment-linked insurance product design should provide non-fixed May. 2017 CIRC Life 2017 No. 134 and universal life product additional insurance premiums, flexible adjustment of the amount of insurance and other functions. The insurance company shall not design a universal insurance product or an investment-linked insurance product in the form of a rider.

Insurer debt investment plan on infrastructure:1. The project should be approved by the state council. Debtor having long term AAA rating can skip credit enhancement, 2. Pojects belonging to OBOR, Beijing- May. 2017 Investment CIRC fund 2017 No. 135 Tianjin-Hebei cooperation, Yangtze River economic zone, military and civ ilian integration, "Made in China 2025" and Hebei Xiong'an are handled with priority.

Source: CIRC, DBS VICKERS

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Industry Focus China Insurance Sector

Figure 90: China life insurer’s main products for “Kai Men Hong” open year campaign

Insurer Ping An China Life PICC China Taiping CPIC New China Life

Product logo

2017 2017 — 2017 — Product name 国寿开门红鑫福赢 人保开门红 鑫享 太平洋开门红 东 “ ” 平安赢越人生 太平卓越臻享 · 新华保险 福享一生 家 至尊 方红 状元红 Product type Annuity + UL (optional) Annuity + UL (optional) Annuity + UL (optional) Annuity + UL (optional) Annuity Annuity + UL (optional) Individuals between 0 Individuals between 0 Individuals between 0 Individuals between 0 Individuals between 0 Individuals between 0 Eligible policyholder and 65 years old and 70 years old and 57 years old and 70 years old and 18 years old and 66 years old Protection period Permanent Until age of 88 Permanent Permanent Permanent Permanent Min insured amount 100,000 100,000 30,000 50,000 50,000 50,000 mentioned (Rmb) Payment period 3/5/10 years 3/5/10 years 3/5/10 years 1/3/5 years 5/10 years 1/3/5/10 years Guarantee rate for 5.0% 4.5% 3.5% 6.0% N/A 2.5% universal account 1. Survival funds: return 1. Survival funds: 20% 30% of insured of sum of basic insured 1. Fixed interest: 1. Survival funds: 20% amount before age of 1. Survival fund: return amount and survival funds of insured amount 60 and 20% of insured 30% of insured cumulative dividend amounted to 20% of 1. Survival funds: 20% every year, 2. amount after age of amount immediately immediately after insured amount every of first year premium Education funds: extra 60, 2. Pensions: return after 10 days of waiting period and at year, 30% of premium within 10 days after 20% of insured 100% of premium at waiting period, 2. end of every year, 2. paid in the first year of effective date, 2. amount before age of age of 60, 3. return 100% of sum of Dealth compensation: underwriting; 2. Regular survival funds: 18, 3. University Succession funds: for basic and participating sum of total premium Variable interest: 20% of insured education fund: 50% asset transfer to insured amount, 3. paid and cash value of policyholder dividend amount every year of insured amount descendents, 4. Policyholder dividend cumulative dividend, 3. from Ping An, 3. until age of 29, 3. every year between investment account: subject to company investment account: Jucaijin investment Caring fund: full age of 18 and 21, 4. credit rating 3.5%, operating monthly compound account: 5% principal repayment pension: return total Product features historical return performance, 4. Death interest, no compound interest, 4. and transfer to closed premium paid at age of around 6%, 5. Death compensation: 120% commission required Contingent funds: loan investment account 60, 5. Death compensation: based of account value, 5. for fund transfer, 4. borrowing limited to (4.5% crediting rate) compensation: larger on larger of total Investment account: Renewal exemption: 80% of account value, at age of 30, 4. Income of total premium paid premium or total 6% annual return, 6. appilcable for death or 5. Death from empty account: or cash account value, account value, 6. Succession fund: larger full incapability compensation: get 3% of insured amount 6. Policyholder Contingent funds: loan of total premium paid between age of 18 extra 20% of insured every year until age of dividend: based on limited to 95% of cash or cash account value, and 60, 5. Contingent amount for death or 88, 5. Accident operating performance value less outstanding 7. Principal repayment funds: 80% of cash full incapability for protection limited to of CPIC, 7. Contingent payment, 7. in 3 years, 8. account value, 6. holder aged 18 or insured amount. funds: based on 90% Policyholder dividend Contingent funds: 95% Additional accident below, 6. Sucession of cash acount value of subject to company of insured amount. policy: discount of fund. all insurance products. operating 30% off, insured performance. amount of larger of 10x Account value with no Account value with no Account value with no Account value with no fund withdrawal: 1. fund withdrawal: 1. fund withdrawal at fund withdrawal: 1. Rmb 608,600 at age of Rmb 153,000 at age of 4.5% rate: 1. Rmb Growth in account value Rmb 6.93 mn at age of N/A N/A 10, 2. Rmb 7.63 mn at 18, 2. Rmb 1.48 mn at 539,000 at age of 10, 80, 2. Rmb 32.32 mn at age of 50, 3. Rmb age of 50, 3. Rmb 2. Rmb 3.27 mn at age age of 105 48.75 mn at age of 90. 14.13 mn at age of of 50, 3. Rmb 19.78 mn Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

Premium sales to normalise in Hong Kong Fig 93: Market getting more concentrated

Hong Kong Market At A Glance 90%

Hong Kong is one of the largest insurance markets in Asia 80%

Pacific (ranked #2 in Asia according to Swiss Re in 2016). It is 70% 13% 16% 20% 11% 60% 10% a well-developed insurance market with high insurance 9% 8% 9% 9% 8% 10% 8% penetration (premiums as a percentage of GDP: 17.6% from 50% 10% 12% 16% 16% 21% 28% Swiss Re in 2016) driven by strong awareness of life insurance 40% 13% 20% 18% 8% 8% 19% 30% protection. The insurance market is dominated by several key 14% 13% 20% 20% 22% 14% 10% players with the top 5/10 players accounting for 76%/93% of 19% 13% 10% 20% 17% 17% Hong Kong’s annual premium equivalent (APE) in the first half 10% 10% 10% 11% 14% 0% of 2017. AIA, China Life, Prudential and HSBC Life are among 2010 2011 2012 2013 2014 2015 2016 2017 H1 the biggest players with their combined market share Prudential HSBC Life China Life BOC Life AIA consistently making up 60-70% of the total market. (Figure 91 & Figure 92). Source: Bloomberg Finance L.P., HKOCI, DBS Vickers

Driven by frenzy from Mainland Chinese Visitors (MCV) The market consolidation is continuously driven by aggressive Recall that People’s Bank of China (PBOC) announced the expansion from AIA, China Life and Prudential. The total reform of the USD-CNY fixing rate quote on 11 August 2015, market share commanded by the top-5 players increased from aimed at a more market-oriented pricing, triggered by 61% in 2010 to 76% in 1H17, of which AIA and China Life disparity between the spot and the fixing rate since the were the largest winners, boosting their market shares from beginning of 2015. The pricing reform was perceived as a 9% to 20% and 8% to 18% respectively. Prudential also “green light” for yuan depreciation. The concerns over yuan expanded its presence from 10% to 17% (Figure 93) depreciation in turn drove the need for Chinese residents to

diversify their RMB-denominated assets. The declining Fig 91: Market share comparison in HK (based on APE) confidence over yuan also magnified capital outflows, leading to more capital-tightening measures against moving capital 1H17 APE from onshore to offshore. Other 13% AIA 20% AXA China Fig 94: Yuan depreciation and foreign reserve 3% Manulife 4% 4500 7.2 Hang Seng Life 4% 4000 7 3500 6.8 BOC Life China Life 3000 8% 6.6 18% 2500 6.4 2000 6.2 1500 HSBC Life 6 13% Prudential 1000 17% 500 5.8 Source: Bloomberg Finance L.P. , DBS Vickers 0 5.6 17 17 16 16 15 15 14 14 17 16 15 14 17 16 15 14 16 15 14 16 15 14 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Nov Nov Nov Mar Mar Mar Mar May May May May China foreign reserve (USD bn) USDRMB Fig 92: Market share (% of APE) comparison in HK Source: Bloomberg Finance L.P., DBS Vickers

FY17H1 (HK$ mil) Annual Premium Equivalent (APE) Market Share The worries over yuan depreciation and tighter capital controls AIA 10502 20% China Life 9153 18% have in turn boosted the demand for HKD/USD-denominated Prudential 8947 17% assets as a way to diversify assets. This has translated into HSBC Life 6655 13% BOC Life 4068 8% robust demand for life insurance policies because of 1) a Hang Seng Insurance 2242 4% Manulife 1950 4% channel to move capital out of China, 2) the nature of AXA 1512 3% HKD/USD settlements, 3) comparatively cheaper pricing FWD Life 1065 2% BEA Life 1028 2% compared to China. The annualised premium equivalent (APE) MetLife 946 2% Top 10 players total 48067 93% from offshore buyers showed explosive growth starting from Market total 51644 100% 3Q15 (3Q15: 66% y-o-y to 3Q16: 145%). As of 3Q16, Source: Bloomberg Finance L.P., HKOCI, DBS Vickers offshore buyers accounted for 43% of Hong Kong’s total APE, up from 28% in 1Q14, signalling the increasing importance of Mainland Chinese Visitors (MCV) (figure 95) to the Hong

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Industry Focus China Insurance Sector

Kong insurance market. While OCI no longer discloses the Fig 97: APE growth comparison breakdown between offshore and onshore purchases since 3Q16, it is reasonable to believe that offshore purchases 100% remain significant in Hong Kong. 90% 80% 70% Fig 95: APE growth took off from offshore in 3Q15 60% 50%

160% 40% 140% Yuan sharp depreciation boosted 30% 120% insurance purchases from offshore 20% 100% 10% 80% 0% 60% AIA Prudential Manulife Industry 40% FY15 FY16 CAGR (FY14 ‐ 16) 20% 0% Source: Bloomberg Finance L.P., Company Data, DBS Vickers 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3

Onshore APE (y‐o‐y growth) Offshore APE (y‐o‐y growth) Total APE (y‐o‐y growth) Active Steps Taken by China’s regulators Source: Bloomberg Finance L.P., HKOCI, DBS Vickers One of the favourite insurance products of mainland Chinese is universal-type life insurance. The product has few protection

features but has high cash value which can be used as AIA and Prudential more exposed to offshore customers collateral for policy loans from insurance companies (usually Per the APE disclosure from HKOCI, we can see that AIA and 80-90% of cash value). In figure 98, an insurance promotion Prudential were more accepted by offshore customers. In the leaflet targeting mainlanders highlights three main first nine months of 2016, APE contribution from offshore characteristics including 1) Capital appreciation, 2) Swapping customers accounted for 72% and 68% of Prudential and yuan into USD, and 3) Moving capital from onshore to AIAs’ APE in HK respectively (figure 96). Meanwhile, offshore. Manulife’s exposure to offshore customers was less, accounting for 31% of 9M16 total APE. While we see some We highlight one of the most common ways of moving signs of slowdown in view of yuan stabilisation and active capital out of China in figure 99. For example, a person from steps taken to prevent capital outflow from regulators, we mainland purchases an insurance policy worth US$1m from believe Manulife will be less susceptible to normalisation an insurance company using a bank card and then uses the ahead in 2H17, compared with other insurers. policy’s cash value as a collateral for policy loan (80-90% of

cash value) from an insurance company or from a bank. In

addition, HK's low interest rate makes financing cheaper using Fig 96: Offshore exposure of insurers in 9M16 a policy loan, and in turn lowers the overall transaction cost of moving capital to offshore.

72% 70% 68% 62% To avoid deterioration of capital outflow, China regulators 53% 51% 45% including PBOC, SAFE and CBRC have collectively taken active 40% 38% 37% 33% 33% 31% 27% steps to fill the loopholes in the past two years. These include capping the transaction limit and number of transactions using credit cards, limiting the number of transactions, reducing personal FX purchases and cross-border limits (Figure 101).

Source: Bloomberg Finance L.P., HKOCI, DBS Vickers

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Industry Focus China Insurance Sector

Fig 98: Promotion leaflet from insurance agent Sales Growth Normalisation Ahead With multiple tightening measures taken under capital control by Chinese regulators, lessening yuan depreciation (RMB/USD up 5% YTD-August) and stabilising foreign reserve in China, we believe insurance sales will normalise in 2H17 given weakening demand from offshore customers. According to Prudential’s (2378 HK, Non-rated) interim report, the company felt the moderation in the level of sales in HK and expects this to continue in the second half of this year. Prudential’s guidance is particularly indicative of Hong Kong sales, in our view, given its high exposure to offshore Source: Internet, DBS Vickers customers (highest among insurers in 9M16).

Fig 99: Example of moving out capital from onshore Fig 100: APE moderation seen in 2Q17 (AIA and Pru)

35000 140%

120% 30000 100% 25000 80%

20000 60%

15000 40% 20% 10000 0% 5000 ‐20%

0 ‐40% 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 AIA Pru Industry AIA growth Pru growth Industry growth Source: Company data, HKOCI, DBS Vickers

Source: DBS Vickers

Figure 101: Series of regulations taken by China’s regulators

Source: CIRC, HKOCI, UnionPay, SAFE, DBS Vickers

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Industry Focus China Insurance Sector

Upgrading cycle to continue expected to result in an acceleration of China insurers’ profitability from 4Q17F onwards, which will also provide a China insurers’ share price on average have posted up 32% positive sentiment on share price performance. YTD, driven mainly by the rise in China interest rate, the parallel shift in China bond yield, and strong VNB growth. Prefer Life over P&C. Top BUYs: China Taiping, CPIC and Ping Among the insurers, China Taiping, Ping An and AIA were a An; top SELLs: PICC P&C and China Re clear outperformers, with share prices up by 37-50% and Within China insurance sector, we prefer Life insurers over P&C outperforming the HSI by 10-20% YTD. If we look back at a insurers, as we expect the P&C players to continue to be hit by longer horizon and since 2016, Ping An Manulife and AIA have China’s second phase of auto pricing reform, which may outperformed, with their share prices up 29-36% (figure 103- ultimately result in a temporary rise in combined ratio and 104). slower earnings growth. We are negative on China’s reinsurance segment, as we do not foresee the fierce Despite the strong YTD rally, we believe the sector upgrading competition easing in the near term, while market leader China cycle is only at its beginning and expect more share price Res is likely to continue to lose market share. We suggest upside, given 1) the sector is currently trading at 1.1x P/EV, investors to focus on life insurers which have a better which is still below its past 5-year mean P/EV valuation of 1.29x underwriting portfolio mix, strong VNB growth potential and (figure 102). Even by taking a 3-year view, the sector is stable investment position. Amid an upward interest rate cycle, currently trading in line with its past 3-year mean, but still we also like insurers which have the widest negative duration below 1x standard deviation of 1.2x and recent peak level of gap, as we believe this will ultimately transform into higher 1.35x P/EV in 2015. Therefore, we believe valuation for the equity value for the company. Our top picks include China sector remains cheap, 2) We expect interest rate up-cycle to Taiping, CPIC and Ping An. We suggest investors to avoid PICC continued moving into FY18F, as the US Fed expects another P&C and China Re. Within regional insurers, we like AIA given US interest rate hike in December 2017, and three times in its strong China growth prospects although slower premium 2018. We believe this will indirectly lead to further upward growth is expected in Hong Kong. We also like Manulife, given shift in China’s interest rate and bond yield, and 3) Strong its long-term opportunity in Emerging Asia, with the worse structural drivers remains for China insurance sector, given low likely over for its US legacy business. Its cheap valuation is insurance penetration, significant value product mix shift another appeal, in our view. towards protection and savings type product which will continue to drive insurers’ VNB and EV growth in the coming years. The alleviated reserving pressure for life insurers due to 750-day average 10-year China government bond yield is also

Figure 102: China insurance sector P/EV valuation

PEV (x) 2.8

2.3 +1 STD: 1.82x 1.8

1.3 Mean: 1.29x

0.8

0.3 ‐1 STD: 0.76X

(0.2) 2010 2011 2012 2013 2014 2015 2016 2017 Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

Figure 103: China insurers relative share price performance to Heng Shen Index (YTD)

China Taiping PICC Ping An PICC P&C CPI China Life Manulife AIA China Re 40.0

30.0

20.0

10.0

0.0

(10.0)

(20.0) Relative share price price to Heng share (%) Relative Shen Index

(30.0) 1/2/2017 2/2/2017 3/2/2017 4/2/2017 5/2/2017 6/2/2017 7/2/2017 8/2/2017 9/2/2017 10/2/2017 Source: Company data, DBS VICKERS

Figure 104: China insurers relative share price performance to Heng Shen Index (2016 till current)

China Taiping PICC Ping An PICC P&C CPI China Life Manulife AIA China Re 30.0

20.0

10.0

-

(10.0)

(20.0)

(30.0)

(40.0) Relative share price to Heng Shen Index (%) (50.0) 1/1/2016 3/4/2016 5/6/2016 7/8/2016 9/9/2016 2/3/2017 4/7/2017 6/9/2017 9/1/2017

1/22/2016 2/12/2016 3/25/2016 4/15/2016 5/27/2016 6/17/2016 7/29/2016 8/19/2016 9/30/2016 12/2/2016 1/13/2017 2/24/2017 3/17/2017 4/28/2017 5/19/2017 6/30/2017 7/21/2017 8/11/2017 9/22/2017 10/21/2016 11/11/2016 12/23/2016 10/13/2017 Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

Figure 105: China insurers’ past 5-year peak, trough, average and current P/EV

PEV (x) Peak cy cle 3.0 5Y avg Current 2.5 Trough cyclcyclee 2.0

1.5

1.0

0.5

0.0 AIA PICC CPIC China Taiping Ping An Average Manulife China Re China Life Source: DataStream, DBS VICKERS

Figure 106: China insurers’ past 5-year peak, trough, average and current P/BV

PEV (x) Peak cy cle 3.0 5Y avg Current 2.5 Trough ccycycle 2.0

1.5

1.0

0.5

0.0 AIA CPIC PICC China Taiping Ping An Average Manulife China Re China Life Source: Company data, DBS VICKERS

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Industry Focus China Insurance Sector

Ping An – H (2318 HK)

PEV Band PB Band

HK$ 1.6x HK$ 2.8x 70 70 2.4x 1.4x 60 60 2.0x 1.1x 50 50 0.9x5 1.6x 40 40 1.2x 30 0.7x 30

20 20

10 10 0 0 12 13 14 15 16 17 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

China Life – H (2628 HK)

PEV Band PB Band

HK$ HK$ 1.6x 50.0 50.0 45.0 1.4x 45.0 40.0 40.0 3.10x 1.1x 35.0 35.0 2.65x

30.0 0.9x 30.0 2.20x 25.0 25.0 1.75x 0.6x 20.0 20.0 15.0 15.0 1.30x 10.0 10.0 5.0 5.0 0.0 0.0 12 13 14 15 16 17 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

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Industry Focus China Insurance Sector

China Taiping (966 HK)

PEV Band PB Band

HK$HK$HK$HK$ HK$ 1.2x 40 40 1.0x 2.0x 35 35 30 1.7x 30 0.8x 25 25 1.4x 0.6x 20 20 1.1x 15 15 0.4x 0.8x 10 10

5 5

0 0 12 13 14 15 16 17 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

PICC Group (1339 HK)

PEV Band PB Band

HK$ HK$ 7 7 1.8x 1.5x 1.5x 6 6 1.2x 1.3x 5 5 1.1x 0.9x 4 4 0.9x 3 3 0.7x 0.6x 2 2

1 1

0 0 12 13 14 15 16 12 13 14 15 16

Source: Bloomberg Finance L.P. , DBS Vickers

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Industry Focus China Insurance Sector

PICC P&C (2328 HK)

PE Band PB Band

HK$ HK$ 25 25 2.2x 12.5x 1.9x 20 11.1x 20 9.8x 1.7x 15 15 1.4x 8.4x 10 1.1x 7.0x 10

5 5

0 0 12 13 14 15 16 17 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

China Re (1508 HK)

PEV Band PB Band

HK$ HK$ 4 4

4 1.4x 1.50x 3 3 1.2x 1.33x

1.0x 3 1.15x 0.98x 2 0.9x 2

0.7x 2 0.80x 1 1

1

0 0 15 16 15 16

Source: Bloomberg Finance L.P. , DBS Vickers

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Industry Focus China Insurance Sector

China Pacific – H (2601 HK)

PEV Band PB Band

HK$ 1.5x HK$ 50.0 1.3x 50.0 2.60x 45.0 45.0 1.1x 2.30x 40.0 40.0 2.00x 0.9x 35.0 35.0 30.0 1.70x 30.0 1.40x 0.7x 25.0 25.0 20.0 20.0 15.0 10.0 15.0 5.0 10.0 12 13 14 15 16 17 0.0 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

AIA (1299 HK)

PEV Band PB Band

HK$ 2.0x HK$ 65.0 65.0 7 1 1.8x 2.4x 60.0 60.0 2.2x 55.0 1.7x 55.0 50.0 50.0 2.0x 1.5x 01.8x 45.0 45.0 1.3x 1.6x 40.0 3 40.0 35.0 35.0 30.0 30.0 25.0 25.0 20.0 20.0 12 13 14 15 16 17 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

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Industry Focus China Insurance Sector

Manulife (945 HK)

PEV Band PB Band

HK$ 1.15x HK$ 1.36x 200.0 200.0 11.20x 180.0 0.99x 180.0 160.0 160.0 1.04x 0.83x 140.0 140.0 0.87x 120.0 0.66x 120.0 0 0.71x 100.0 100.0 0.50x 80.0 80.0 60.0 60.0 40.0 40.0 20.0 20.0 0.0 0.0 12 13 14 15 16 17 12 13 14 15 16 17

Source: Bloomberg Finance L.P. , DBS Vickers

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Industry Focus China Insurance Sector

Valuation comparison

PB(X) PE(X) Div Yield ROE EPS CAGR Price Mkt Cap FY16 FY17F FY18F FY16 FY17F FY18F FY16 FY17F FY18F FY16 FY17F FY18F 16A-18F Coverage Ticker (LC) (US$ m) (X) (X) (X) (X) (X ) (X) % % % (%) (%) (%) (% ) H-share insurers Ping A n 2318 HK 68. 1 173,986 2.7 2.4 2.0 16.4 14.2 12.3 1.3% 1.5% 1.7% 17.4% 17.8% 17.8% 15.3% C hina Life Insurance 2628 HK 25. 8 128,927 2.0 1.9 1.8 32.7 20.4 18.0 1.1% 1.8% 2.0% 6.0% 9.6% 10.1% 34.6% China Taiping Insurance 966 H K 25 .1 12 ,139 1.6 1.4 1.3 18.9 16.9 13.5 0.5% 1.1% 1.3% 8.2% 8.9% 9.9% 18.3% PICC Group 1339 HK 3 .7 21 ,207 1.0 0.7 0.6 9.2 8.6 7.3 1.1% 1.2% 1.4% 11.8% 12.2% 13.0% 12.6% PICC P&C 2328 HK 15 .2 31 ,399 1.6 1.4 1.2 12.5 11.5 9.2 2.4% 2.6% 3.3% 15.8% 15.6% 17.1% 16.7% China Reins urance 1508 HK 1 .7 9 ,508 0.9 0.8 0.8 11.9 10.8 9.6 3.1% 3.5% 3.9% 7.4% 7.9% 8.4% 11.2% China Pacific Insurance 2601 HK 37.7 55,403 2.2 2.0 1.9 23.8 18.9 15.5 2.2% 2.8% 3.4% 9.1% 11.1% 12.7% 23.9% Average 1. 8 1. 6 1. 4 15.8 12.8 10. 8 1.6% 2.0% 2. 4% 10. 5% 11. 8% 12. 8% 18.5% A-share insurers Ping A n - A 601318 CH 64. 1 173,987 3.1 2.6 2.3 18.3 16.0 13.8 1.2% 1.3% 1.6% 17.4% 17.8% 17.8% 15.3% C hina Life Insurance - A 601628 CH 31. 0 128,928 2.9 2.7 2.5 46.7 29.1 25.8 0. 8% 1. 2% 1.4% 6.0% 9.6% 10.1% 34.6% China Pacific Insurance - A 601601 CH 42.1 55,403 2.9 2.7 2.5 31.6 25.1 20.6 1.7% 2.1% 2.6% 9.1% 11.1% 12.7% 23.9% Average 3. 1 2. 8 2. 5 24.5 17.9 15. 3 1.1% 1.4% 1. 7% 10. 2% 12. 6% 13. 5% 22.3% Regional insurers A IA 1299 HK 59. 4 91,542 2.6 2.4 2.2 21.9 17.0 16.7 1.4% 1.9% 2.3% 12.7% 14.7% 13.7% 14.6% Manulife 945 H K 157. 2 39,816 1.2 1.0 1.0 14.2 8.2 7.9 3.0% 4. 8% 4.2% 7.6% 9.9% 7.7% 34.3% Prudential 2378 HK 190. 8 62,610 3.1 2.9 2.6 24.6 12.9 12.2 2.4% 2.6% 2.8% 18.2% 21.6% 20.9% 42.1% AXA CS FP 25.7 73,189 1.0 0.9 0.9 11.2 10.4 9.9 4. 5% 4. 8% 5.1% 8.8% 8.8% 9.0% 6.3% MetLife MET US 54.0 56,851 0.9 1.1 1.0 85.7 12.0 11.3 2.9% 3.0% 3.0% 0.1% 9.1% 10.3% 175.8% Ageas AGS BB 41 .5 10 ,147 0.9 0.9 0.9 319.6 12.7 10.5 5.1% 4.4% 4.6% 3.9% 7.2% 8.7% 450.7% MetLife SLF CN 50 .0 23 ,834 1.5 1.5 1.4 12.3 12.5 11.6 3.2% 3.5% 3.7% 13.4% 12.3% 12.3% 3.2% Allianz SE ALV GY 199 .4 103 ,479 1.4 1.3 1.2 13.2 12.4 11.8 3.8% 4.0% 4.3% 11.2% 10.8% 10.9% 5.8% Ave ra ge 1.6 1.5 1.4 62.8 12.3 11.5 3.3% 3.6% 3.8% 9.5% 11.8% 11.7% 91.6%

Japan & Korea insurers Samsung Life Ins urance C o Ltd 032830 KS 129,500. 0 24,163 0.8 0.8 0.7 11.4 16.3 15.2 0.9% 1.4% 1.4% 5.0% 5.1% 5.1% -13.5% H anwha Life Insurance Co Ltd 088350 KS 7,760. 0 6,024 0.6 0.6 0.6 7.3 9.2 9.0 1.0% 2.0% 2.0% 5.9% 5.9% 5.4% -9.7% Tongyang Life Insurance Co Ltd 082640 KS 8,650. 0 1,284 0.5 0.6 0.5 73.3 9.0 7.5 2.3% 5.2% 4.9% 1.6% 9.2% 7.2% 213.5% Japan Post Insurance Co Ltd 7181 JP 2,494. 0 12,990 0.8 0.8 0.8 16.9 16.0 16.6 2.4% 2.6% 2.7% 5.1% 5.0% 5.0% 1.0% D ai-ichi Life Holdings Inc 8750 JP 2,183. 0 22,917 0.8 0.8 0.7 11.1 13.1 12.6 2.0% 2.1% 2.3% 8.2% 5.7% 6.2% -6.3% T& D H oldings Inc 8795 JP 1,764. 0 10,194 1.0 0.9 0.9 15.0 14.5 13.6 1.8% 2. 0% 2.1% 6.1% 6.6% 6.2% 4.9% Average 0. 7 0. 7 0. 7 22.5 13.0 12. 4 1.7% 2.5% 2. 6% 5. 3% 6. 3% 5. 8% 31.6%

ASEAN insurers Bangkok Life BLA TB 37 .3 1 ,904 1.8 1.7 1.6 12.4 14.3 13.4 2.0% 1.9% 2.1% 14.1% 12.7% 12.0% -3.6%

Note: BBG consensus used for non-rated (NR) stocks Source: Bloomberg Finance L.P., DBS Vickers

Page 60

China / Hong Kong Company Guide

Ping An Insurance Version 1 | Bloomberg: 2318 HK EQUITY | 601318 CH Equity | Reuters: 2318.HK | 601318.SS Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

H: BUY (Initiating coverage) Solid all-round leader Quality Life insurance business drives growth: Ping An Insurance (Ping An) is Last Traded Price (H) ( 30 Oct 2017): HK$68.05 (HSI : 28,336) Price Target 12-mth (H): HK$86.00 (26% upside) positioned to become the world’s leading personal financial service provider. Its business footprint spans across life/P&C insurance, banking, trust services, A: BUY (Initiating coverage) asset management, and internet finance. Ping An Life is the flagship entity within the group, and accounted for 33%/48% of equity/profit in 1H17. Last Traded Price (A) ( 30 Oct 2017): RMB64.06 (CSI300 Index : 4,010) Given its retail focused strategy, concentrating on protection and regular- Price Target 12-mth (A): RMB75.44 (18% upside) Analyst paid policies, we believe Ping An Life should be able to deliver 29%/25% Ken SHIH +852 2820 4920 [email protected] CAGR in New Business Value (VNB) and Embedded Value (EV) respectively in Keith TSANG CFA, +852 2971 1935 [email protected] the coming 2 years. Strong agent productivity, high operating efficiency and an experienced management team are Ping An’s strengths. What’s New Focus is on creating value: In addition to Ping An Life, its “value focus” • Leading personal financial services provider in strategy has also extended to Ping An P&C and Ping An Bank, which China, with life business driving growth collectively accounted for 45%/39% of Ping An’s equity/profit in 1H17. We note that Ping An P&C may temporarily suffer from a higher loss ratio as a • Retail-focused strategy at P&C and Bank to create result of the second phase of China’s auto insurance price reform. But, with better value and synergies stringent cost controls and improving operating efficiency, we expect its • Technology innovations provide additional upside to expense ratio to come down, thus resulting in a stabilising combined ratio in Ping An, with spotlight on Lufax in the near term the coming years. While the retail-focused transformation will continue at Ping An Bank, this may lead to higher NPLs and credit cost. Nonetheless, • Initiating coverage with BUY and H-share target the group is on the right track to create better shareholder value and price of HKD86, for 26% potential share price upside synergies.

Technology innovations provide additional upside: We believe Ping An’s Price Relative various technological innovations, such as world leading facial recognition, HK$ Relative Index RMB Relative Index

105.3 86.2 269 Ping An FinCloud, and its self-created four ecosystems (financial services, 95.3 249 284 76.2 healthcare, real estate, and auto) will serve as additional upside for Ping An. 85.3 229 66.2 209 75.3 234 Moreover, with continuous growth in the number of active users and 56.2 189 65.3 184 46.2 169 trading volume (at 7.7m/Rmb4.9tn in 1H17), its internet finance business, 55.3 149 45.3 36.2 134 129 namely Lufax, reached break-even in 1H17. We also see good prospects for 35.3 26.2 109 Lufax ahead. 25.3 84 16.2 89 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Initiating coverage with BUY and H-share TP of HK$86: We initiate coverage Ping An Insurance Group Co-A (LHS) Ping An Insurance (LHS) Relative HSI (RHS) Relative CSI300 Index (RHS) on Ping An Insurance with a BUY rating and H-share/A-share TP of HK$86/Rmb75.4, which offers 26%/18% share price upside. With its leading market position and strong innovative capability, we expect Ping An Forecasts and Valuation (H Shares) to continue to be a solid leader in China’s insurance sector. FY Dec (RMB m) 2016A 2017F 2018F 2019F Net earned premiums 441,620 570,488 733,861 933,438 Valuation: Net investment income 116,675 125,737 151,533 175,778 Our valuation is based on SOTP valuation, where we assume 2.2x FY18F Net Profit 62,394 73,394 85,033 100,408 P/EV for Ping An Life, 1.0x FY18F P/B for Ping An P&C, Ping An Bank and all EPS (RMB) 3.50 4.01 4.65 5.49 other businesses, and a 15% conglomerate discount. Our TP implies 3.1x EPS (HK$) 4.11 4.72 5.47 6.46 EPS Gth (%) 17.1 14.8 15.9 18.1 FY18F P/B and 1.7x FY18F P/EV (group), which is at the high end of its PE (X) 16.6 14.4 12.4 10.5 historical 5-year trading band. DPS (HK$) 0.88 1.01 1.17 1.39 Key Risks to Our View: Net Div Yield (%) 1.3 1.5 1.7 2.0 Increasing market competition, reversal in interest rate up-cycle, rising BV Per Share (HK$) 24.68 28.52 32.98 38.27 volatility in both China’s bond and equity markets, policy risks, and slower P/Book Value (X) 2.8 2.4 2.1 1.8 than expected China economy. P/EV (X) 1.7 1.4 1.1 0.9 At A Glance ROAE (%) 17.4 17.8 17.8 18.1 Issued Capital - H shares (m shs) 7,448

- Non H shares (m shs) 10,833 Earnings Rev (%): New New New H shs as a % of Total 41 Consensus EPS (RMB) 4.025 4.741 5.532 Total Mkt. Cap (HK$m/US$m) 1,243,969 / 159,583 Other Broker Recs: B: 25 S: 0 H: 3 Major Shareholders Shenzhen Investment Holdings Limited (%) 5.3 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Major H Shareholders (%) Charoen Pokphand Group Co. Ltd (%) 33.0 UBS Group AG (%) 18.6 JPMorgan Chase & Co. (%) 16.6 H Shares-Free Float (%) 31.8 3m Avg. Daily Val. (US$m) 328.5 ICB Industry : Financials / Life Insurance

ed-JS/ sa- AH

Company Guide

Ping An Insurance

CRITICAL FACTORS TO WATCH Gross written premiums RMB m 40% Critical Factors 900,000 Sensitive to china government bond yield: 800,000 35% 700,000 30% Increase in 750-day moving average would lower the insurance 600,000 500,000 25% reserve assessment. This is also positive to insurer's reinvestment 400,000 300,000 20% yield under a rising yield environment. We believe China's 200,000 15% tightening stance is favourable to life insurers like Ping An. 100,000 0 10% 2015A 2016A 2017F 2018F 2019F First-year premium(FYP) / Value of New Business (VoNB) Gross written premium (LHS) yoy growht (%) (RHS) Ping An’s first-year premium, reaching RMB 112,147m or +34% Value of new business y-o-y, composed of agency channel (75%), bancassurance (5%), RMB m 120,000 tele and Internet (6%) and group (14%) in FY17H1. Ping An is 47.6% 100,000 shifting to value focus with agency channel increasing by 49% to 45.6% 80,000 RMB 84,596m and bancassurance decreasing by 40% to RMB 43.6% 60,000 5,792m given more lucrative new business margin from agency 41.6% 40,000 channel (41.5%) than bancassurance channel (7.6%). 39.6% 20,000 37.6% 0 35.6% Value of new business reached RMB 38,551m, increasing by 46% 2015A 2016A 2017F 2018F 2019F yoy in FY17H1. Agency, Tele and Internet and bancassurance Value of new business Value of new business margin channel contributed 91%, 8% and 1% respectively. Steering Agency growth away from bancassurance to agency is positive to its new business value. The group’s embedded value reached RMB 739,144m, 35.0% 30.0% increasing by 16% compared with end of 2016. 25.0% 20.0% 15.0% Agency growth and productivity 10.0% In the first half of 2017, the group’s exclusive individual agency 5.0% sales force reached 1.325million, increasing by 19.3% HoH. The 0.0% -5.0% 2015A 2016A 2017F 2018F 2019F agency productivity, measured in first-year-premium per agent, reached RMB 75,648, increasing by 16% YoY. This is an Agency growth Agency productivity growth improvement with 13 / 25 months’ persistency rate increasing by 0.6% / 2% HoH to 93.7% / 90.1%. Net Investment return 9.0% 8.5% Investment Performance 8.0% Ping An achieved net investment yield of 4.9% in the first half of 7.5% 2017, 0.8% lower than the corresponding of 2016. Fixed income 7.0% investments (Term deposits, Bonds and other fixed income 6.5% 6.0% investments) represented 73% of its investment portfolio. Thus, 5.5% with sizable fixed income portfolio, we believe the group’s re- 5.0% investment yield will benefit under rising interest rate 2015A 2016A 2017F 2018F 2019F environment. Net investment return Total investment return Group embedded value Income from Associate (Ping An Bank) RMB m 30% Ping An Bank continued its transformation into a smart retail bank 1,000,000 25% centering on social media + app + tele. The Bank, 58% owned by 800,000

Ping An, is a consolidated banking subsidiary. Profit attributable to 600,000 20% Ping An was RMB 7,281m (+2% yoy), equivalent to 17% of the 400,000 15% group’s net profit in the first half of 2017. 200,000 0 10% 2015A 2016A 2017F 2018F 2019F Group embedded value (mn) (LHS) yoy growht (%) (RHS) Source: Company, DBS Vickers

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Company Guide Ping An Insurance

Balance Sheet: Expense/Loss/Combined ratio Ping An’s core and comprehensive solvency ratios stood at 205% 120% and 211% in the first half of 2017, 4ppts and 1ppt higher than 100% end of 2016. The leverage (Total Asset / Total Equity) stood at 80% 11.2x in the first half of 2017, decreasing marginally from 11.5x in 60% FY16. 40%

20%

Share Price Drivers: 0% Sensitive to China government bond yield: 2015A 2016A 2017F 2018F 2019F Increase in 750-day moving average would lower the insurance Expense ratio Loss ratio reserve assessment. This is also positive to insurer's reinvestment Solvency ratio yield under a rising yield environment. We believe China's tightening stance is favourable to life insurers. 250.0% 230.0% Value of New Business: 210.0% 190.0% The share price performance is linked to the group’s ability to 170.0% deliver value of new business growth. Change in product mix or 150.0% 130.0% channel that is favorable to value of new business is positive to 110.0% value of new business growth. 90.0% 2015A 2016A 2017F 2018F 2019F

Key Risks: Substantial decline in China's government bond yields would ROE require higher reserves. Increase in pricing competition would 18.0% 16.0% affect new business margins. Asset quality deterioration in banking 14.0% operations. Rising A/H share volatility. Slower than expected China 12.0% economy. 10.0% 8.0%

6.0%

4.0%

Company Background 2.0%

Ping An Insurance was established in May 1988 as the first joint- 0.0% stock insurance company in China. It was listed on the HKEX and 2015A 2016A 2017F 2018F 2019F SHEX in June 2004 and March 2007 respectively. Ping An is a conglomerate involved in life insurance, P&C, banks, trust and PE Band securities. At end-16, its total assets and equity reached RMB 5.6tr and RMB 383bn respectively.

PB Band

Source: Company, DBS Vickers

Page 63

Company Guide

Ping An Insurance

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ Pi n g An s o l d n ew Ping An bank's New rules from CIRC to curb 70 3.4% shares preference low-margin investment type 45,000 (enlargeed basis) issuance products Unveiling in- 40,000 60 house Fin-tech 35,000 50 30,000 40 25,000 Ping An bank's 20,000 30 non public A share issuance Proposed 15,000 20 listing of Subscribed PingAn 10,000 Shenzhen Issuance of 7% new CIRC warned aggressive 10 shares (enlargest basis) equity investment and Securities Development 5,000 Bank universal life insurance 0 0 3 r-13 ct-13 p Jul-10 Jul-11 Jul-12 Jul-1 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-10 Oct-11 Oct-12 O Oct-14 Oct-15 Oct-16 Apr-10 Apr-11 Apr-12 A Apr-14 Apr-15 Apr-16 Apr-17

Ping An share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs China 10-year government bond yield Remarks

Strong correlation of 0.78 between HK$ China 10-year government bond 70 5.0 yield and share price since Jan16. 4.5 60 4.0 This is attributed to benefits from 50 3.5 lower reserve requirements from 40 3.0 increasing government bond yields 2.5 and higher new money yields in its 30 2.0 investment portfolio. The insurer 20 1.5 Ping An is set to benefit from 1.0 10 tightening. 0.5 0 0.0 -13 -17 -12 y p p Jan-17 Jan-16 Jan-12 Jan-15 Jan-11 Jan-14 Jan-10 Jan-13 Se Sep-16 Se Sep-15 Sep-11 Sep-14 Sep-10 Sep-13 May-17 May-16 May-12 May-15 May-11 May-14 May-10 Ma Ping An share price (LHS) 10-yr China govt bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Company Guide Ping An Insurance

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 18.3 21.6 28.7 27.7 26.5 Agency growth 36.9 27.7 35.0 15.0 15.0 Agency productivity growth 19.6 (4.0) 10.0 6.0 6.0 Expense ratio 39.1 41.6 40.8 40.6 40.4 Loss ratio 56.7 54.4 56.2 56.4 56.4 Combined ratio 95.9 96.0 97.0 97.1 96.9 VNB margin 38.8 37.4 39.2 42.5 44.9 Net investment return 5.6 6.3 5.8 5.9 5.9 Total investment return 8.4 6.2 5.8 5.9 5.9 EV growth 20.5 15.3 20.8 22.2 22.6 Solvency ratio 219.7 225.9 233.6 237.9 237.1

Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 386,012 469,555 604,458 771,970 976,183 Net earned premium 349,846 441,620 570,488 733,861 933,438 Investment income 90,512 116,675 125,737 151,533 175,778 Other operating income 184,658 158,864 137,092 151,868 169,822 Total income 625,016 717,159 833,317 1,037,262 1,279,039

Benefits and claims (289,510) (324,814) (409,434) (531,979) (674,310) Underwriting and policy acquisition costs (50,644) (78,684) (80,776) (106,593) (137,802) Finance cost (7,539) (12,144) (14,119) (14,119) (14,119) Other expenses (808,555) (922,895) (1,054,568) (1,297,542) (1,585,595) Total expenses (1,156,248) (1,338,537) (1,558,898) (1,950,233) (2,411,826)

Share of profit of associated and JVs (281) (1,370) 0 0 0 Profit before tax 93,503 94,411 107,736 124,292 146,251 Income tax expense (28,235) (22,043) (24,852) (28,614) (33,698) Minority interest (10,975) (9,974) (9,490) (10,644) (12,145) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 54,293 62,394 73,394 85,033 100,408

Source: Company, DBS Vickers

Page 65

Company Guide

Ping An Insurance

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 1,731,619 1,971,798 2,366,158 2,744,743 3,183,902 Property, plant and equipment 35,158 40,143 44,157 44,157 44,157 Other assets 2,998,382 3,564,962 3,867,274 4,104,948 4,424,076 Total assets 4,765,159 5,576,903 6,277,588 6,893,848 7,652,135

Net life reserves - traditional 1,419,958 1,625,473 1,888,093 2,255,104 2,734,661 Net life reserves - investment contracts 42,690 44,930 49,508 55,851 64,258 Other Liabilities 2,888,940 3,420,039 3,784,353 3,947,325 4,123,334 Total liabilities 4,351,588 5,090,442 5,721,954 6,258,279 6,922,252

Shareholder's equity 334,248 383,449 443,133 512,423 594,591 Minority interest 79,323 103,012 112,502 123,146 135,291 Total equity 413,571 486,461 555,635 635,569 729,882

Source: Company, DBS Vickers

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 15.0 13.8 12.5 11.3 10.5 Premium income / total asset 7.6 8.1 9.3 10.9 12.5 Total asset / total equity 12 11 11 11 10 Return on equity 17.4 17.4 17.8 17.8 18.1

Embedded value (RMB m) Book value 334,248 383,449 443,133 512,423 594,591 Adjusted items (6,322) 23,891 24,020 24,169 24,348 Adjusted book value 327,926 407,340 467,153 536,592 618,939 Value-in-force 224,926 230,362 303,212 404,677 535,025 Adjustment (if any) 0 0 0 0 0 Group embedded value 552,852 637,702 770,365 941,269 1,153,965

Per share analysis (RMB) EPS 2.99 3.50 4.01 4.65 5.49 BPS 18.28 20.98 24.24 28.03 32.53 DPS 0.53 0.75 0.86 1.00 1.18 EVPS 30.24 34.88 42.14 51.49 63.13

Capital Strength (%) 12 11 11 11 10 Leverage ratio Solvency ratio 219.7 225.9 233.6 237.9 237.1

Source: Company, DBS Vickers

Page 66

China / Hong Kong Company Guide

China Life Insurance Version 1 | Bloomberg: 2628 HK EQUITY | 601628 CH Equity | Reuters: 2628.HK | 601628.SS Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

H: BUY (Initiating coverage) Slowly but surely

Last Traded Price (H) ( 30 Oct 2017): HK$25.80 (HSI : 28,336) Slower progress but heading in the right direction: China Life is the largest life Price Target 12-mth (H): HK$32.00 (24% upside) insurance company in China, in terms of both premium and asset scale. While A: HOLD (Initiating coverage) the majority of China insurers are adopting a similar value growth strategy, Last Traded Price (A) ( 30 Oct 2017): RMB30.97 (CSI300 Index : 4,010) given China Life’s sizeable existing underwriting portfolio, we believe the speed Price Target 12-mth (A): RMB28.07 (-9% downside) of its progress will be slower than peers, but it is heading in the right direction. Analyst Its VNB/EV rose 32%/7% y-o-y in 1H17, albeit slower than peers but remains Ken SHIH +852 2820 4920 [email protected] on an upward trend. We forecast a 19%/16% CAGR in VNB/EV in FY17-19F. Keith TSANG CFA, +852 2971 1935 [email protected] Product/channel adjustments to continue: With single-payment premiums What’s New (lower margin) still accounting for 44% of its FYP in 1H17, we expect • Slower “value growth” progress due to large scale continued efforts to be made for its product and channel adjustment. In but heading in the right direction particular, as China Life has sold 1-2 year high cash value products through its • Higher single-payment policy exposure will result bancassurance channel in the past two years, these products have started to reach termination, which has resulted in a temporary rise in surrender rate and in a continuous product and channel adjustment decline in its single-payment premiums. Nonetheless, we believe this will speed • Rising credit and market risk appetite are expected up its low-margin product adjustment and is positive to its VNB growth outlook

to help support its investment yield Increasing credit and market risk appetite to support yield: China Life started to • Initiate coverage with BUY and H-share target lengthen its asset duration by allocating more assets to debt-type financial

price of HK$32, implying 24% upside products and equity (H-share), and increase its scale by cash and term deposits, to capture the benefit from rising bond and dividend yield. On the back of its Price Relative past prudent investment culture, we believe the rise in its credit and risk HK$ Relative Index RMB Relative Index 222 appetite will help to support investment yield. 41.8 210 39.7 202

182 36.8 190 34.7 Initiate with BUY and H-share target price of HK$32: We initiate coverage on 162 31.8 170 29.7 China Life with a BUY/HOLD rating on its H-shares/A-shares and a target price 142 26.8 150 24.7 122 21.8 130 of HK$32/Rmb28.1. Our H-share target price offers a 24% upside. Although 19.7 102 16.8 110 China Life is progressing slower than peers due to its greater scale, with its right 14.7 82 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 11.8 90 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 value growth direction and the favourable interest rate trend in China, we see

China Life Insurance (LHS) Relative HSI (RHS) China Life Insurance Co-A (LHS) Relative CSI300 Index (RHS) these as a positive catalyst to its share price.

Valuation: Forecasts and Valuation (H Shares) Our target price is based on 0.9x FY18F P/EV, where we forecast its FY18F EV FY Dec (RMB m) 2016A 2017F 2018F 2019F per share of Rmb34.9 with EV multiple largely in line with its past 5-year Net earned premiums 426,230 504,267 591,755 694,685 average. Our target price implies 2.3x FY18F P/BV. Net investment income 109,147 122,535 134,855 148,388 Net Profit 18,741 30,079 33,968 38,008 Key Risks to Our View: EPS (RMB) 0.69 1.10 1.24 1.39 Increasing market competition, a downward interest rate trend, rising bond and EPS (HK$) 0.81 1.30 1.46 1.63 EPS Gth (%) (44.3) 59.3 12.8 11.8 A/H-share market volatility and China's slower-than-expected economic PE (X) 31.7 19.9 17.6 15.8 growth. DPS (HK$) 0.28 0.45 0.51 0.57 Net Div Yield (%) 1.1 1.7 2.0 2.2 At A Glance BV Per Share (HK$) 12.62 13.50 14.38 15.46 Issued Capital - H shares (m shs) 7,441 P/Book Value (X) 2.0 1.9 1.8 1.7 - Non H shares (m shs) 20,824 P/EV (X) 1.0 0.8 0.7 0.6 H shs as a % of Total 26 ROAE (%) 6.0 9.6 10.1 10.6 Total Mkt. Cap (HK$m/US$m) 729,229 / 93,462 Major Shareholders Earnings Rev (%): New New New China Insurance (%) 68.4 Consensus EPS (RMB) 1.049 1.202 1.461 Major H Shareholders (%) Other Broker Recs: B: 19 S: 1 H: 9 JPMorgan Chase & Co. (%) 8.3 BlackRock, Inc. (%) 6.6 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX H Shares-Free Float (%) 85.2 3m Avg. Daily Val. (US$m) 149.3 ICB Industry : Financials / Life Insurance

ed-TH / sa- AH

Company Guide

China Life Insurance

Gross written premiums CRITICAL FACTORS TO WATCH RMB m 700,000 30% Sensitive to China government bond yield: 600,000 25% 500,000 Increase in 750-day moving average would lower the insurance 20% 400,000 15% reserve assessment. This is also positive to insurer's reinvestment 300,000 10% yield under a rising yield environment. We believe China's 200,000 tightening stance is favourable to life insurer like China Life. 100,000 5% 0 0% 2015A 2016A 2017F 2018F 2019F First-year premium(FYP) / Value of New Business (VoNB) Gross written premium (LHS) yoy growht (%) (RHS) China’s life first-year premium, reaching RMB 139,061m and flat y-o-y, composed of agency channel (45%), bancassurance (53%) Value of new business and group (1%) in 1H17. China Life is shifting to value focus with RMB m agency channel increasing by 10% to RMB 63,271m and 90,000 35.4% 80,000 33.4% bancassurance decreasing by 6% to RMB 73,055m given more 70,000 31.4% 60,000 29.4% lucrative new business margin from agency channel (44.1%) than 50,000 27.4% bancassurance channel (4%). 40,000 25.4% 30,000 23.4% 20,000 21.4% Value of new business reached RMB 36,895m, increasing by 32% 10,000 19.4% 0 17.4% yoy in 1H17. Agency, bancassurance and group channel 2015A 2016A 2017F 2018F 2019F contributed 91% and 8% and 1% respectively. Steering away Value of new business Value of new business margin from bancassurance to agency is positive to the value of new business growth. The embedded value reached RMB 697,520m, Agency growth increasing by 7% compared with the end of 2016. 54.0% 44.0%

Agency growth and productivity 34.0%

Agency growth is one of the key drivers for driving premium 24.0% growth. In the first half of 2017, the group’s exclusive individual 14.0% agency sales force reached 1.578million, increasing by 5.6% HoH. 4.0% Its exclusive average productive agents increased by 39.4% from -6.0% 2015A 2016A 2017F 2018F 2019F the end of 2016; and the average active insurance planners Agency growth Agency productivity growth (monthly basis) in the bancassurance channel increased by 26.5% year-on-year, which further enhanced the hard power of the sales Net Investment return force 7.0%

6.5% Investment Performance 6.0% China Life achieved net investment yield of 4.71% in the first half of 2017, remaining at the same level as the corresponding of 5.5% 2016. Fixed income investments (Term deposits, Bonds and other 5.0% fixed income investments) represented 78% of its investment 4.5% portfolio. Thus, with sizable investment portfolio, we believe the 4.0% 2015A 2016A 2017F 2018F 2019F group’s re-investment yield will benefit under rising interest rate Net investment return Total investment return environment. Group embedded value RMB m Income from Associate (China Guangfa Bank) 1,000,000 30% China Guangfa Bank(CGB), 43.69% owned by China Life, is an 800,000 associate accounted for under the equity method. Profit 25% 600,000 attributable to China Life was RMB 2,217m, equivalent to 14% of 20% the group’s pre-tax profit. China Life has proposed to participate 400,000 15% in additional offering of China Guangfa Bank (at no more than 200,000 RMB 7.01 per share) with a total consideration of RMB 13.2bn 0 10% 2015A 2016A 2017F 2018F 2019F resulting in no change in shareholding. Group embedded value (mn) (LHS)

yoy growht (%) (RHS)

Source: Company, DBS Vickers

Page 68

Company Guide China Life Insurance

Balance Sheet: Expense/Loss/Combined ratio China Life's core and comprehensive solvency ratios stood at 20% 276% and 280% in the first half of 2017, 4.5% and 17.2% lower 20% than end of 2016. The leverage (Total Asset / Total Equity) stood at 19% 9.2x in the first half of 2017, increasing marginally from 8.8x in 19% 18% FY16. 18% 17% 17% Share Price Drivers: 16% Sensitive to China government bond yield: 2015A 2016A 2017F 2018F 2019F Increase in 750-day moving average would lower the insurance Expense ratio Loss ratio reserve assessment. At the same time, this is also positive to Solvency ratio insurers' reinvestment yield. We believe pure life insurer China Life can be the prime beneficiary under rising rate environment. 310.0%

Value of New Business 260.0%

The share price performance is linked to the group’s ability to 210.0% deliver value of new business growth. Change in product mix or channel that is favorable to value of new business is positive to 160.0% value of new business growth. 110.0% 2015A 2016A 2017F 2018F 2019F

Key Risks: Substantial decline in China's government bond yield would ROE require a higher reserve. Increase in pricing competition would 10.0% affect the new business margin. Rising A/H share volatility. Slower than expected China economic growth. 8.0% 6.0% Company Background 4.0% China Life Insurance, former domestic life insurance arm of PICC, 2.0% was established in June 2003. It was listed on the HKEX and SHEX 0.0% in December 2003 and January 2007 respectively. China Life 2015A 2016A 2017F 2018F 2019F focuses on providing life insurance products with largest market share in China. At end-2016, its total assets and equity were PEV Band Rmb2.7bn and Rmb304bn respectively.

PB Band

Source: Company, DBS Vickers

Page 69

Company Guide

China Life Insurance

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ invested in Postal saving bank CIRC warned aggressive 45 equity investment and 45,000 universal life insurance 40 40,000

35 35,000

30 30,000

25 25,000 acquired 20 24% stake 20,000 of CGB 15 15,000

10 New rules from CIRC to capital 10,000 capital injection into 40% curb low-margin owned P&C subsidiary injection 5 investment type into GCB 5,000 CLIC products 0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 China Life share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs China 10-year government bond yield Remarks

Strong correlation of 0.80 between HK$ 45 5.0 China 10-year government bond yield 40 4.5 and share price since January 2016. 4.0 35 This is attributed to benefit from 3.5 30 lower reserve required from 3.0 25 increasing government bond yield 2.5 20 and higher new money yield in its 2.0 investment portfolio. The company is 15 1.5 set to benefit from tightening. 10 1.0 5 0.5 0 0.0 6 5 -16 -15 y y an-16 an-17 J Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 J Sep-1 Sep-17 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-1 Ma May-17 May-10 May-11 May-12 May-13 May-14 Ma China Life share price (LHS) 10-yr China govt bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

Page 70

Company Guide China Life Insurance

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 10.0 18.3 18.3 17.3 17.4 Agency growth 31.8 52.7 10.0 10.0 12.0 Agency productivity growth 12.9 8.5 (5.0) 8.0 5.0 Expense ratio 17.3 19.5 17.5 17.5 17.5 Loss ratio N/A N/A N/A N/A N/A Combined ratio N/A N/A N/A N/A N/A VNB margin 18.3 23.8 28.7 30.8 32.8 Net investment return 4.4 4.6 4.8 4.8 4.8 Total investment return 6.4 4.6 4.8 4.8 4.8 EV growth 23.2 16.4 15.1 15.4 16.3 Solvency ratio 359.0 297.2 282.5 277.1 271.9

Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 363,971 430,498 509,316 597,680 701,641 Net earned premium 362,301 426,230 504,267 591,755 694,685 Investment income 97,582 109,147 122,535 134,855 148,388 Other operating income 47,566 5,404 8,682 14,915 16,393 Total income 507,449 540,781 635,484 741,525 859,466

Benefits and claims (352,219) (407,045) (481,622) (564,398) (656,520) Underwriting and policy acquisition costs (35,569) (52,022) (53,478) (62,756) (73,672) Finance cost (4,320) (4,767) (4,930) (4,930) (4,930) Other expenses (71,384) (58,960) (67,266) (77,287) (88,084) Total expenses (463,492) (522,794) (607,296) (709,372) (823,206)

Share of profit of associated and JVs 1,974 5,855 9,787 10,670 11,599 Profit before tax 45,931 23,842 37,975 42,823 47,859 Income tax expense (10,744) (4,257) (6,780) (7,646) (8,545) Minority interest (488) (458) (729) (823) (919) Preferred dividend (185) (386) (386) (386) (386) Net income attributable to shareholders 34,514 18,741 30,079 33,968 38,008

Source: Company, DBS Vickers

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Company Guide

China Life Insurance

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 2,287,639 2,453,283 2,686,345 2,941,548 3,235,702 Property, plant and equipment 26,974 30,389 30,389 30,389 30,389 Other assets 133,702 213,279 202,143 209,195 232,442 Total assets 2,448,315 2,696,951 2,918,877 3,181,131 3,498,533

Net life reserves - traditional 1,715,985 1,847,986 2,023,454 2,247,853 2,521,849 Net life reserves - investment contracts 84,106 195,706 215,277 226,040 237,342 Other Liabilities 322,010 345,611 350,474 355,580 360,941 Total liabilities 2,122,101 2,389,303 2,589,205 2,829,474 3,120,132

Shareholder's equity 322,492 303,621 324,916 346,079 371,902 Minority interest 3,722 4,027 4,756 5,579 6,498 Total equity 326,214 307,648 329,672 351,658 378,401

Source: Company, DBS Vickers

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 9.5 4.4 6.0 5.7 5.5 Premium income / total asset 14.8 15.8 17.3 18.6 19.9 Total asset / total equity 8 9 9 9 9 Return on equity 11.4 6.0 9.6 10.1 10.6

Embedded value (RMB m) Book value 322,492 303,621 324,916 346,079 371,902 Adjusted items (53,763) 45,907 52,793 26,397 13,198 Adjusted book value 268,729 349,528 377,709 372,475 385,101 Value-in-force 291,549 302,530 372,825 493,327 621,449 Adjustment (if any) 0 0 0 0 0 Group embedded value 560,278 652,058 750,534 865,802 1,006,549

Per share analysis (RMB) EPS 1.24 0.69 1.10 1.24 1.39 BPS 11.41 10.74 11.50 12.24 13.16 DPS 0.42 0.24 0.38 0.43 0.48 EVPS 19.82 23.07 26.55 30.63 35.61

Capital Strength (%) 8 9 9 9 9 Leverage ratio Solvency ratio 359.0 297.2 282.5 277.1 271.9

Source: Company, DBS Vickers

Page 72

China / Hong Kong Company Guide

China Taiping Ins Version 1 | Bloomberg: 966 HK EQUITY | Reuters: 0966.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

BUY (Initiating coverage) Main beneficiary of duration mismatch

Last Traded Price ( 30 Oct 2017): HK$25.10 (HSI : 28,336) Has best duration mismatch position: China Taiping has the best duration Price Target 12-mth: HK$38.00 (51% upside) mismatch position among China insurers, with asset/liability duration of 9 Analyst and 30 years, respectively, or a 21-year duration gap. The wide duration Ken SHIH +852 2820 4920 gap is driven by its focus on regular-premium policies, and [email protected] endowment/annuity products. Amid a rising interest rate environment, Keith TSANG CFA, +852 2971 1935 this bodes well for China Taiping and should enhance its book value. [email protected] China Taiping is our top pick among China insurers. Substantial VNB and EV growth potential: It is benefitting from its early What’s New focus on regular premium polices, and the fast growing traditional • Longer liability duration provides best mismatch life/long term health insurance segment, which respectively accounted for 96% and 29% of its First-year premium (FYP) in 1H17. China Taiping’s position to benefit from rising interest rates Taiping Life has recorded strong Value of New Business (VNB) growth of • Substantial VNB/EV growth upside driven by 55% y-o-y (based on annual premium equivalent basis) during the

regular premiums, and life/health insurance focus period. This has also led to a 13.6% h-o-h in its Embedded Value (EV). As the insurer continues to focus on “value” growth with rising contribution Lengthening duration with more streamlined • from life/health products, we expect growth from VNB (APE basis) to portfolio, provides upside to future investment reach 43%/27% y-o-y, and EV by 19%+ y-o-y in FY17/18F. yield Lengthening duration to provide upside to yield: With China Taiping’s • Initiating coverage with BUY and target price of longer liability duration, the insurer has been proactively lengthening its asset duration by allocating more investment assets to bond investments HKD38, offers 51% share price upside (+6.1ppt h-o-h) in 1H17, in order to benefit from China’s rising bond

yield. In addition, the insurer has streamlined its investment book by

Price Relative recognising HKD1.3bn disposal loss mainly in equity securities. We believe this move will help the insurer to deliver more upside in its recurring yield, which was 4.6%/4.2% in FY16/1H17, despite near-term negative impact on earnings growth. China Taiping also possess the least mark-to-market and reinvestment risk among peers. Initiate with BUY and target price of HKD38: We initiate coverage on China Taiping with a BUY rating, and target price of HKD38 based on SOTP valuation, which implies 51% share price upside. Our TP implies for 1.9x FY18F P/B. China Taiping is trading at 1.3x FY18F P/B and 0.6x FY18F P/EV, in line with its historical 5-year mean. With the insurer’s

favourable negative duration position and great VNB/EV growth

Forecasts and Valuation potential, we see opportunity for its share price to further re-rate. FY Dec (HK$ m) 2016A 2017F 2018F 2019F Net earned premiums 143,439 172,366 207,546 248,828 Valuation: Net investment income 17,656 17,746 22,133 26,512 Our target price is based on SOTP valuation, pegged at 1.2x FY18F P/EV Net Profit 4,774 5,345 6,683 8,037 EPS (HK$) 1.33 1.49 1.86 2.24 for Taiping Life (peers average), 1x FY18F P/B for Taiping Insurance EPS (HK$) 1.33 1.49 1.86 2.24 (P&C), 0.8x/1.0x FY18F P/B for Taiping Reinsurance/others, and EPS Gth (%) (29.8) 11.9 25.0 20.3 imputing a 15% discount due to its holding company structure. PE (X) 18.9 16.9 13.5 11.2 DPS (HK$) 0.10 0.22 0.28 0.34 Key Risks to Our View: Net Div Yield (%) 0.4 0.9 1.1 1.3 Increasing competition from peers, downward interest rate trend, BV Per Share (HK$) 15.63 17.89 19.75 21.99 P/Book Value (X) 1.6 1.4 1.3 1.1 declining bond yields, A/H-share market volatility, and slower than expected economic growth in China. P/EV (X) 0.9 0.7 0.6 0.5 ROAE (%) 8.2 8.9 9.9 10.7 At A Glance Issued Capital (m shrs) 3,594 Earnings Rev (%): New New New Consensus EPS (HK$) 1.454 1.769 2.041 Mkt. Cap (HK$m/US$m) 90,210 / 11,567 Other Broker Recs: B: 12 S: 1 H: 7 Major Shareholders China Taiping Insurance Group Ltd. (%) 59.6 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Free Float (%) 40.4 3m Avg. Daily Val. (US$m) 32.4 ICB Industry : Financials / Life Insurance

ed-JS/ sa- AH

Company Guide

China Taiping Ins

CRITICAL FACTORS TO WATCH Gross written premiums

Critical Factors Sensitive to China government bond yields: Increase in 750-day moving average would lower the insurance reserve assessment. This is also positive to insurer's reinvestment yield under a rising yield environment. We believe China's tightening stance is favourable to life insurers.

First-year premium / Value of New Business

Taiping’s first-year premium, reaching HKD 44,002m and up 6% y-o-y, composed of agency channel (51%), bancassurance (48%) Value of new business and others (1%) in 1H17. Taiping is shifting to value focus with agency channel increasing by 32% to HKD 22,414m and bancassurance decreasing by 12% to HKD 21,241m given more lucrative new business margin from agency channel (35.1%) than bancassurance channel (18.6%).

Value of new business reached HKD 8,155m, increasing by 55% yoy in FY17H1. Agency, bancassurance and group channel contributed 97% and 10% and -7% respectively. Steering away from bancassurance to agency is positive to its new business value. The group’s embedded value reached HKD 115bn, up 12% Agency growth HoH from HKD 102bn. Affected by RMB depreciation (down 6%) in 2016, Taiping’s embedded value only grew by 5% yoy in 2016

Agency growth and productivity In the first half of 2017, the group’s individual agency sales force reached 391K, increasing by 49% HoH. The agency productivity, measured in new premium per average agency, reached RMB 68,692 decreased slightly by 3% yoy. The agency persistency ratio for 13/25 months are solid, standing at 95.6% / 92.4% in 1H17, 1.3%/4.2% higher than 1H16. Its persistency ratio was higher Net Investment return than industry standard owing to product mix tilted towards annuity products.

Investment Performance Taiping achieved disappointing annualized investment yield of 4.01% in the first half of 2017, 67bps lower than the second half of 2016, as the insurer streamlined its equity investment and disposed positioned which does not falls into their long-term investment strategy. Fixed income investments (Term deposits, Bonds and other fixed income investments) represented 79% of its investment portfolio. Thus, we believe the group’s re- Group embedded value investment yield will benefit under rising interest rate environment.

Source: Company, DBS Vickers

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Company Guide China Taiping Ins

Balance Sheet: Expense/Loss/Combined ratio Taiping Life’s comprehensive solvency ratio reached 244%, declining by 7% compared with end of 2016 but still higher than the 150% regulatory requirement. For its P&C business, TPI’s comprehensive solvency ratio increased by 10% to 216% in 1H17. The leverage, measured in total asset / total equity, increased from 7.5x in 2H16 to 8.1x in 1H17.

Share Price Drivers: Sensitive to China government bond yields:

Increase in 750-day moving average would lower the insurance Solvency ratio reserve assessment. This is also positive to insurer's reinvestment yield under a rising yield environment. We believe China's tightening stance is favorable to life insurers.

Value of New Business: The share price performance is linked to the group’s ability to deliver value of new business growth. Change in product mix or channel that is favorable to value of new business is positive to value of new business growth.

Key Risks: ROE Substantial decline in China government bond yields would require higher reserve. Increase in pricing competition would affect new business margins. Rising A/H share volatility. Slower China economic growth.

Company Background China Taiping Ins, the former overseas insurance arm of PICC and the only China life insurance company set up outside China, was established in July 2003. It was listed on HKEX in November 2003. Its insurance products include life (individual and group life PEV Band insurance, health and accident insurance and annuity) and P&C (motor vehicle, commercial property, cargo and liability etc). At end-16, its total assets and equity reached HK$ 505bn and HK$ 51bn respectively.

PB Band

Source: Company, DBS Vickers

Page 75

Company Guide

China Taiping Ins

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ New rules from CIRC to curb CIRC warned aggressive 35 Formation of leasing JV low-margin investment type equity investment and 45,000 with Sinopec products universal life insurance 40,000 30 35,000 25 30,000 20 Riasing HK$ 25,000 13.5bn from Disposed Ming 20,000 15 placing An China at 13.5% shares RMB 1.5bn 15,000 10 (enlarged First time to Raised HK$ 6.4bn from basis) pay dividend 10,000 Asset injections to rights issuances (21 5 Taiping from parent rights share for every 5,000 TPG 100 shares) 0 0 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Oct-16 Oct-15 Oct-14 Oct-13 Oct-12 Oct-11 Oct-10 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13 Apr-12 Apr-11 Apr-10 Taiping share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs China 10-year government bond yield Remarks

Correlation of 0.77 between China HK$ 10-year government bond yield and 35 5.0 share price since Jan16. 4.5 30 4.0 This is attributed to benefits from 25 3.5 lower reserve requirement from 20 3.0 increasing government bond yields 2.5 and higher new money yields in its 15 2.0 investment portfolio. The company is 10 1.5 set to benefit from tightening. 1.0 5 0.5 0 0.0 5 -15 y an-16 Jan-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 J Sep-16 Sep-17 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-1 May-16 May-17 May-10 May-11 May-12 May-13 May-14 Ma Taiping share price (LHS) 10-yr China govt bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

Page 76

Company Guide China Taiping Ins

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 24.1 7.8 20.1 20.1 19.7 Agency growth 73.3 13.0 55.0 10.0 15.0 Agency productivity growth (21.8) (0.9) 2.0 (12.0) 5.0 Expense ratio 46.8 48.0 48.0 48.0 48.0 Loss ratio 54.2 53.1 52.1 52.1 52.1 Combined ratio 101.1 101.0 100.0 100.0 100.0 VNB margin 13.7 18.4 23.5 29.7 35.3 Net investment return 4.7 4.7 4.1 4.3 4.7 Total investment return 8.0 5.3 4.1 4.3 4.7 EV growth 56.9 4.6 18.6 16.0 17.4 Solvency ratio 271.0 250.5 217.2 208.1 204.8

Source: Company, DBS Vickers

Income Statement (HK$ m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 138,356 149,136 179,044 215,092 257,367 Net earned premium 130,581 143,439 172,366 207,546 248,828 Investment income 16,525 17,656 17,746 22,133 26,512 Other operating income 13,562 5,403 3,841 3,841 3,841 Total income 160,668 166,499 193,953 233,520 279,181

Benefits and claims (50,824) (83,643) (77,968) (94,940) (115,057) Underwriting and policy acquisition costs (36,264) (39,385) (46,056) (55,520) (66,032) Finance cost (1,049) (1,377) (1,337) (1,317) (1,307) Other expenses (61,520) (32,833) (59,173) (69,886) (82,466) Total expenses (149,658) (157,238) (184,533) (221,663) (264,862)

Share of profit of associated and JVs (2) (10) 365 321 274 Profit before tax 11,008 9,250 9,785 12,179 14,593 Income tax expense (2,840) (2,948) (2,910) (3,601) (4,302) Minority interest (1,827) (1,528) (1,530) (1,895) (2,255) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 6,341 4,774 5,345 6,683 8,037

Source: Company, DBS Vickers

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Company Guide

China Taiping Ins

Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 364,188 392,572 471,957 564,533 566,073 Property, plant and equipment 7,617 8,321 10,009 11,612 13,504 Other assets 116,226 104,512 125,935 129,169 240,622 Total assets 488,031 505,406 607,901 705,315 820,199

Net life reserves - traditional 254,021 291,844 347,713 445,593 543,117 Net life reserves - investment contracts 18,763 22,437 23,171 24,794 25,038 Other Liabilities 143,449 124,122 160,356 149,689 156,515 Total liabilities 416,233 438,403 531,240 620,076 724,669

Shareholder's equity 59,728 56,169 64,297 70,980 79,017 Minority interest 12,071 10,834 12,364 14,258 16,513 Total equity 71,799 67,003 76,661 85,239 95,530

Source: Company, DBS Vickers

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 4.9 3.3 3.1 3.2 3.2 Premium income / total asset 26.8 28.4 28.4 29.4 30.3 Total asset / total equity 7 8 8 8 9 Return on equity 12.6 8.2 8.9 9.9 10.7

Embedded value (HK$ m) Book value 59,728 56,169 64,297 70,980 79,017 Adjusted items 21,334 24,759 28,132 36,174 46,081 Adjusted book value 81,062 80,928 92,429 107,154 125,098 Value-in-force 41,911 47,919 56,719 67,400 81,406 Adjustment (if any) (24,993) (26,373) (27,603) (33,507) (40,981) Group embedded value 97,980 102,474 121,544 141,047 165,522

Per share analysis (HK$) EPS 1.89 1.33 1.49 1.86 2.24 BPS 16.62 15.63 17.89 19.75 21.99 DPS 0.00 0.10 0.22 0.28 0.34 EVPS 27.26 28.51 33.82 39.24 46.05

Capital Strength (%) 7 8 8 8 9 Leverage ratio Solvency ratio 271.0 250.5 217.2 208.1 204.8

Source: Company, DBS Vickers

Page 78

China / Hong Kong Company Guide

China Pacific Insurance Group Version 1 | Bloomberg: 2601 HK EQUITY | 601601 CH Equity | Reuters: 2601.HK | 601601.SS Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

H: BUY (Initiating coverage) Value-focus strategy paying off “Long-term protection” product focus drives growth China Pacific Insurance Last Traded Price (H) ( 30 Oct 2017): HK$37.65 (HSI : 28,336) : Price Target 12-mth (H): HK$54.00 (43% upside) (CPI) is considered as an early mover in adopting “value” growth strategy among China insurers. With its effort in channel adjustment completed where A: BUY (Initiating coverage) nearly 90% of CPI Life’s underwriting business is driven by agent sales, accompanied by its continuous product mix shift towards long-term protection Last Traded Price (A) ( 30 Oct 2017): RMB42.06 (CSI300 Index : 4010) policies, CPI posted strong VNB and EV growth of 59% y-o-y and 10% h-o-h in Price Target 12-mth (A): RMB47.37 (13% upside) Analyst 1H17, respectively. With the strong momentum expected to continue, we Ken SHIH +852 2820 4920 [email protected] forecast its VNB/EV to grow at 32%/21% CAGR in FY17-19F.

Keith TSANG CFA, +852 2971 1935 [email protected] Strong agency growth provides future premium upside: As agency force has become CPI’s main sales channel for life business, the insurer has aggressively What’s New built up its agency force to increase by 36% y-o-y in 2016. With total agent • Benefitting from its long-dated strategy of number expected to reach 1m by FY17F which implies another 53% y-o-y

focusing on “long-term” protection products growth, we expect this to help transform into strong premium growth of 24%+ y-o-y in the next two years. Per agent productivity may decline slightly • Significant agency force growth of 36%/53% y-o-y due to its consistent focus on value product adjustment. We also expect CPI in FY16/FY17F serve as future premium driver P&C’s combined ratio to steadily improve by 0.7/0.3ppt to 98.9%/98.6% in FY17-18F, driven by its profit focus, despite policy headwinds. • Lengthy duration gap and protection product Lengthy negative duration gap a positive: With high long-term protection focus positive to BV and solvency enhancement product focus, CPI also holds a relatively lengthy liability duration of 20 years • Initiate coverage with BUY and H-share target with negative duration gap reaching 13-14 years. We see this as a positive to

price of HK$54, implying 43% share price upside CPI’s long-term book value enhancement given the rise in interest rates. The insurer also bears less reinvestment/MTM risk. Its higher protection-type product

Price Relative focus is also positive to its solvency ratio under C-ROSS regime, which stood at HK$ Relative Ind RMB Relative Ind 257% for CPI Life. 21 21 46.4 43.6 19 19 Initiate BUY with H-share TP of HK$54: We initiative coverage on CPI, with a 38.6 41.4 17 17 BUY rating and H-share target price of HK$54, and A-share target price of 33.6 36.4 15 15 Rmb47.4, which offers 43% and 13% share price upside. Our target price 28.6 13 13 31.4 implies 3.2x FY18F P/BV and 1.4x group P/EV. We believe CPI’s early move to 23.6 11 11 adopt value growth will increasingly pay off hereon, with prudent investment 26.4 98 18.6 96 strategy and good management team. 21.4 78 13.6 76 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Valuation: China Pacific Insurance Group (LHS) Relative HSI (RHS) China Pacific Insurance-A (LHS) Relative CSI300 Index (RHS) Our target price is based on SOTP valuation, where we apply 1.2x FY18F P/EV (upper mid-level of peers’ average) to CPI Life, and 1x FY18F P/BV to both CPI P&C and other entities.

Forecasts and Valuation (H Shares) FY Dec (RMB m) 2016A 2017F 2018F 2019F Key Risks to Our View: Net earned premiums 219,573 264,073 323,609 393,796 Increasing market competition, a downward interest rate trend, rising market Net investment income 46,472 49,914 56,820 65,464 Net Profit 12,057 15,178 18,508 21,178 volatility in A/H-share and China bond market, and slower-than-expected China EPS (RMB) 1.33 1.67 2.04 2.34 economic growth. EPS (HK$) 1.57 1.97 2.40 2.75 EPS Gth (%) (32.0) 25.9 21.9 14.4 At A Glance PE (X) 24.1 19.1 15.7 13.7 Issued Capital - H shares (m shs) 2,775 DPS (HK$) 0.82 1.04 1.26 1.45 - Non H shares (m shs) 6,287 Net Div Yield (%) 2.2 2.8 3.4 3.8 H shs as a % of Total 31 BV Per Share (HK$) 17.11 18.25 19.62 21.11 Total Mkt. Cap (HK$m/US$m) 341,184 / 43,769 P/Book Value (X) 2.2 2.1 1.9 1.8 Major Shareholders P/EV (X) 1.2 1.0 0.8 0.7 Baosteel Group Co., Ltd (%) 14.9 ROAE (%) 12.9 15.4 18.1 19.5 Shenneng (Group) Co., Ltd. (%) 13.5 Shanghai Haiyan Inv. Management Co., Ltd. (%) 5.2 Earnings Rev (%): New New New Major H Shareholders (%) Consensus EPS (RMB) 1.597 1.947 2.305 Schroders Plc (%) 11.1 Other Broker Recs: B: 21 S: 1 H: 4 Norges Bank (%) 8.2 BlackRock, Inc. (%) 8.1 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX GIC Private Limited (%) 7.1 Citigroup Inc. (%) 6.0 H Shares-Free Float (%) 59.6 3m Avg. Daily Val. (US$m) 66.9 ICB Industry : Financials / Nonlife Insurance

ed-TH / sa- AH

Company Guide

China Pacific Insurance Group

CRITICAL FACTORS TO WATCH Gross written premiums RMB m 30% Critical Factors 400,000 Sensitive to China government bond yield: 350,000 25% 300,000 20% Increase in 750-day moving average would lower the insurance 250,000 reserve assessment. This is also positive to insurers' reinvestment 200,000 15% 150,000 10% yield under a rising yield environment. We believe China's 100,000 5% tightening stance is favourable to CPI. 50,000 0 0% 2015A 2016A 2017F 2018F 2019F First-year premium / Value of New Business Gross written premium (LHS) yoy growht (%) (RHS) CPI’s first-year premium, reaching RMB 36,440m and up 51% y- Value of new business o-y in 1H17, with most FYP being contributed from agency RMB m channel. CPI enjoying high-quality and fast business growth, 50,000 43.7% 41.7% realizing value of new business of RMB19,746 mil in the first half 40,000 39.7% of 2017, up 59.0% y-o-y (New business margin reaching 40.6%, 30,000 37.7% up by 7.6%). 35.7% 20,000 33.7% 31.7% 10,000 Value of new business reached RMB 19,746m, increasing by 59% 29.7% 0 27.7% yoy in 1H17, which is mostly contributed by individual agency. 2015A 2016A 2017F 2018F 2019F

The group’s embedded value reached RMB 271,454m, increasing Value of new business Value of new business margin by 10% compared with end of 2016. Agency growth

57.0% Agency growth and productivity 47.0% In the first half of 2017, the group’s average agency number 37.0% reached 870K, increasing by 50% HoH. The agency productivity, measured in first-year-premium per agent, reached RMB 41,885, 27.0% decreased slightly by 3% YoY. Big improvement is seen in its 13- 17.0% /25-persistency ratio, increasing to 94.1% / 88.9%, up 2.3% / 7.0%

1.4%. -3.0% 2015A 2016A 2017F 2018F 2019F

Agency growth Agency productivity growth Investment Performance CPI achieved improvement in annualized investment yield of 5.1% Net Investment return 7.0% in the first half of 2017, 50bps higher than the first half of 2016. Fixed income investments (Term deposits, Bonds and other fixed 6.5% income investments) represented 81% of its investment portfolio. 6.0% Thus, with its sizable fixed income portfolio, we believe the 5.5% group’s re-investment yield will benefit under rising interest rate 5.0% environment. 4.5% 4.0% 2015A 2016A 2017F 2018F 2019F Net investment return Total investment return

Group embedded value RMB m 30% 400,000 350,000 25% 300,000 250,000 20% 200,000 150,000 100,000 15% 50,000 0 10% 2015A 2016A 2017F 2018F 2019F

Group embedded value (mn) (LHS) yoy growht (%) (RHS) Source: Company, DBS Vickers

Page 80

Company Guide China Pacific Insurance Group

Balance Sheet: Expense/Loss/Combined ratio In the first half of 2017, CPI group’s core and comprehensive 120% solvency margin reached 292% and 297%, up 4% and 3% 100% respectively compared with end of 2016. The leverage (Total asset / 80% total equity) increased from 7.6x in the end of 2016 to 8.3x. 60%

40%

Share Price Drivers: 20% Sensitive to China government bond yield: 0% Increase in 750-day moving average would lower the insurance 2015A 2016A 2017F 2018F 2019F reserve assessment. This is also positive to insurer's reinvestment Expense ratio Loss ratio yield under a rising yield environment. We believe China's Solvency ratio tightening stance is favourable to insurers.

280.0% 260.0% Value of New Business 240.0% The share price performance is linked to the group’s ability to 220.0% 200.0% deliver value of new business growth. Change in product mix or 180.0% 160.0% channel that is favorable to value of new business is positive to 140.0% value of new business growth. 120.0% 100.0% 80.0% 2015A 2016A 2017F 2018F 2019F Key Risks: Substantial decline in China's government bond yield would require a higher reserve. Increase in pricing competition would ROE affect the new business margin. Rising A/H share volatility. Slower 18.0% China economic growth. 16.0% 14.0% 12.0% 10.0% Company Background 8.0% China Pacific Insurance was established in April 1994. It was listed 6.0% on HKEX in December 2009. The company mainly provides life, 4.0% 2.0% P&C and health insurance products through CPIC Life, CPIC P&C, 0.0% CPIC HK and CPIC Allianz Health respectively. At end-2016, its 2015A 2016A 2017F 2018F 2019F total assets and equity stood at Rmb1,021bn and Rmb135bn respectively. PEV Band

PB Band

Source: Company, DBS Vickers

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Company Guide

China Pacific Insurance Group

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ Subscribed 32 bn New rules from CIRC to 50 preference shares from curb low-margin 45,000 45 Alloted 462 mn H China Railway investment type products 40,000 shares 40 35,000 35 30,000 30 25,000 25 20,000 20 Issued exhangeable bonds by Shanghai State-owned Assets Operations into CPIC acquired 15,000 15 CPIC A shares GTJA Allianz 10 Fund 10,000 Issued subordinated term CPIC proposed to set up JV (51%) with debts with no less than Management 5,000 5 Ningbo Industrial Investment Group and 2 (51%) RMB8 bn other companies 0 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 CPIC share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs China 10-year government bond yield Remarks

Moderate correlation of 0.72 HK$ 50 5.0 between China 10-year government 45 4.5 bond yield and share price since 40 4.0 January 2017. 35 3.5 This is attributed to benefits from 30 3.0 lower reserve required from 25 2.5 increasing government bond yield 20 2.0 and higher new money yield in its 15 1.5 investment portfolio. The company's 10 1.0 life insurance business is set to benefit 5 0.5 from tightening. 0 0.0 -13 -14 y n Ja Jan-15 Jan-16 Jan-17 Jan-10 Jan-11 Jan-12 Jan-13 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-10 Sep-11 Sep-12 May-14 May-15 May-16 May-17 May-10 May-11 May-12 Ma CPIC share price (LHS) 10-yr China govt bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Company Guide China Pacific Insurance Group

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 6.0 15.2 20.9 22.5 21.0 Agency growth 40.1 35.5 55.0 20.0 25.0 Agency productivity growth 15.1 (0.9) 15.0 (2.0) (2.0) Expense ratio 35.5 38.4 37.9 37.4 37.4 Loss ratio 64.8 61.3 61.1 61.3 61.3 Combined ratio 100.3 99.6 98.9 98.6 98.6 VNB margin 29.2 32.9 36.9 38.9 40.9 Net investment return 4.9 5.2 5.3 5.4 5.4 Total investment return 6.8 4.9 5.3 5.4 5.4 EV growth 20.0 19.6 19.6 21.8 22.7 Solvency ratio 262.2 253.4 230.6 208.6 189.5

Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 203,243 234,063 282,973 346,613 419,529 Net earned premium 189,376 219,573 264,073 323,609 393,796 Investment income 39,611 46,472 49,914 56,820 65,464 Other operating income 17,976 36 2,996 2,996 2,996 Total income 244,663 263,452 313,987 380,428 459,260

Benefits and claims (150,145) (168,691) (205,265) (256,109) (317,804) Underwriting and policy acquisition costs (58,710) (69,973) (74,379) (81,647) (91,914) Finance cost (2,640) (2,444) (2,444) (2,444) (2,444) Other expenses (11,192) (8,906) (14,265) (18,071) (21,313) Total expenses (222,687) (250,014) (296,353) (358,270) (433,475)

Share of profit of associated and JVs 35 18 (11) (11) (11) Profit before tax 24,311 16,085 20,619 25,143 28,770 Income tax expense (6,273) (3,801) (5,155) (6,286) (7,193) Minority interest (310) (227) (286) (348) (399) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 17,728 12,057 15,178 18,508 21,178

Source: Company, DBS Vickers

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China Pacific Insurance Group

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 854,495 941,776 1,062,055 1,219,070 1,415,841 Property, plant and equipment 14,254 16,664 16,664 16,664 16,664 Other assets 55,094 62,252 62,252 62,252 62,252 Total assets 923,843 1,020,692 1,140,971 1,297,986 1,494,757

Net life reserves - traditional 621,079 693,826 796,221 933,602 1,109,770 Net life reserves - investment contracts 40,033 48,796 57,559 66,322 75,085 Other Liabilities 127,049 143,307 143,307 143,307 143,307 Total liabilities 788,161 885,929 997,087 1,143,231 1,328,162

Shareholder's equity 133,336 131,764 140,599 151,122 162,563 Minority interest 2,346 2,999 3,285 3,633 4,032 Total equity 135,682 134,763 143,884 154,755 166,595

Source: Company, DBS Vickers

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 9.4 5.5 5.7 5.7 5.4 Premium income / total asset 20.5 21.5 23.1 24.9 26.3 Total asset / total equity 7 8 8 8 9 Return on equity 16.6 12.9 15.4 18.1 19.5

Embedded value (RMB m) Book value 37,728 38,772 47,607 58,130 69,571 Adjusted items 22,057 39,784 35,598 30,783 25,163 Adjusted book value 59,785 78,556 83,205 88,913 94,734 Value-in-force 92,132 103,047 142,152 195,690 265,609 Adjustment (if any) 53,707 64,333 68,714 73,643 79,186 Group embedded value 205,624 245,936 294,071 358,246 439,529

Per share analysis (RMB) EPS 1.96 1.33 1.67 2.04 2.34 BPS 14.71 14.54 15.52 16.68 17.94 DPS 1.00 0.70 0.88 1.07 1.23 EVPS 22.69 27.14 32.45 39.53 48.50

Capital Strength (%) 7 8 8 8 9 Leverage ratio Solvency ratio 262.2 253.4 230.6 208.6 189.5

Source: Company, DBS Vickers

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China / Hong Kong Company Guide

AIA Group Version 1 | Bloomberg: 1299 HK Equity | Reuters: 1299.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

BUY (Initiating coverage) 3X since IPO…but still far from ceiling Last Traded Price ( 30 Oct 2017): HK$59.40 (HSI : 28,336) Initiate with BUY; Unique pure Asia focus offers the best opportunity Price Target 12-mth: HK$75.00 (26% upside) AIA's share price has tripled since its IPO in October 2010. Yet we

Analyst believe AIA is still at the beginning of a multi-year growth story across Keith TSANG CFA, +852 2971 1935 different regions in Asia owing to comparatively low insurance [email protected] penetration. In fact, there is no another listco that can offer 100% Asia Ken SHIH +852 2820 4920 focus, the highest growth region in the world. Given its pure Asia focus, [email protected] the growth potential can be fully realized via its extensive presence (18 markets) in Asia Pacific. Particularly, China is set to be the core Value of What’s New New Business (VONB) growth driver. Plus, its strong track record of • China arising to be strongest VONB driver from increasing Return of embedded value (ROEV), rising from 12.5% in

early stage development FY11 to 15.4% in FY16 and expected to reach 17.5% in FY18E, can • Potential to accelerate dividend payout hike from support its premium valuation. Buying opportunities may arise from

strong free surplus generation short-term poor investor sentiment towards its HK sales normalization.

• Strong ROEV improvement supporting its Where we differ:

premium valuation Our sensitivity analysis indicates AIA’s ability for dividend payout hike • Initiate coverage with BUY and TP of HK$75 AIA has demonstrated very strong free surplus(FS) generation in recent

(+26%upside) years, thanks to strong VONB growth and lower new business strain (less cost generated from new business value) due to efficiency

enhancement. Thus, AIA has accumulated an abundant FS balance to

Price Relative increase dividend payout. Our sensitivity analysis indicates that the HK$ Relative Index increase in payout has limited impact on AIA’s solvency and its strong 221 64.6 201 free surplus balance. 59.6 181 54.6 161 49.6 Valuation: 141 Our target price of HK$75 is based on price to embedded value P/EV of 44.6

39.6 121 2.2x, the high-end compared with 5-year historical trend, supported by 34.6 101 its strong ROEV generation (12.5% in FY11 to 15.4% in FY16). The TP 29.6 81 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 implies FY18F PB of 2.8x.

AIA Group (LHS) Relative HSI (RHS) Key Risks to Our View: Forecasts and Valuation Slower-than-expected value of new business growth, sharp FY Nov (US$ m) 2016A 2017F 2018F 2019F Net earned premiums 20,641 23,070 26,707 31,549 deterioration of investment performance, slower-than-expected China Net investment income 6,424 6,874 7,770 8,792 economic growth, weaker-than-expected contribution from MCV to Operating Profit After HK 3,933 4,677 5,469 6,259 Tax EPS (US$) 0.35 0.45 0.46 0.52

EPS (HK$) 2.71 3.49 3.56 4.08 EPS Gth (%) 53 28.7 2.0 14.5

PE (X) 21.9 17.0 16.7 14.6 At A Glance DPS (HK$) 0.86 1.10 1.39 1.72 Issued Capital (m shrs) 12,074 Net Div Yield (%) 1.4 1.9 2.3 2.9 Mkt. Cap (HK$m/US$m) 717,210 / 91,922 BV Per Share (HK$) 22.64 24.98 27.12 29.46 Major Shareholders P/Book Value (X) 2.6 2.4 2.2 2.0 JPMorgan Chase & Co. (%) 9.0 P/EV (X) 2.2 2.0 1.7 1.5 The Capital Group Companies, Inc. (%) 8.2 ROAE (%) 12.6 14.6 13.6 14.3 BlackRock, Inc. (%) 5.0

77.8 Earnings Rev (%): New New New Free Float (%) Consensus EPS (US$) 0.426 0.443 0.493 3m Avg. Daily Val. (US$m) 136.9 Other Broker Recs: B: 17 S: 2 H: 4 ICB Industry : Financials / Life Insurance

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

ed-TH / sa- AH

Company Guide

AIA Group

ASIA INSURANCE INDUSTRY OFFERS MULTI-YEAR GROWTH

Crown jewel spin-off caused by liquidity strain in AIG but Fig 1: Strong GDP growth in Asia ex-Japan offered a good buying opportunity for public investors

During the second half of 2008, AIG experienced liquidity strain caused by demand for the return of cash collateral under AIG’s US securities lending programme and collateral calls on AIG Financial Product super senior multisector CDO credit default swap portfolio. The downgrades by S&P, Moody’s and Fitch also further deteriorated the credit and liquidity situation. As a result, the public offering of AIA came about as a last resort for recapitalising AIG’s troubled financial structure.

Pure Asia focus => Right place at the right time Source: IMF, World Bank, Government websites, Company Data, DBS AIA is a leading life insurance organisation in Asia ex-Japan Vickers providing insurance, protection, savings, investment and retirement needs in 18 geographical markets in the region. The cumulative GDP growth in 2015-2020E Asia ex-Japan is Fig 2: Low penetration means huge growth potential 5x that of the US (Figure 1). The wealth effect driven by strong GDP growth in Asia in turn raises the importance of protection needs against unexpected accidents or even death. Thus, we can see the demand for insurance products is simply a natural consequence of Asia’s wealth effect.

As a pure Asia-focused insurer, AIA can fully capture the unprecedented growth opportunity. The currently low penetration compared with developed countries means that Asia life insurance presents a US$ 10tr opportunity, 7x that of developed G7 countries (Figure 2). We believe improving livelihood, therefore increasing GDP/capita, is the core driver for the penetration ratio, along with large and growing Source: IMF, World Bank, ACLI, A.M. Best, McKinsey, Swiss Re, mortality protection gap (figure 3). Company Data, DBS Vickers

Asia ex-Japan becoming the biggest market in 2025 Fig 3: Growing Mortality Protection Gap in Asia According to McKinsey and company's estimate, with ongoing penetration catch-up, Asia-ex Japan is set to exceed $trn Large and Growing Mortality Protection Gap Europe (currently highest gross premium in the world) and 120 Asia ex-J apan become the world’s largest, posting gross premium of 100 US$1,555bn. And the annualised new premium (ANP) contributed from Asia will make up more than half of the 80 2.2x world’s ANP. 60

40

20

0 2010 2020 Total sum assured Total savings

Source: IMF, World Bank, ACLI, A.M. Best, McKinsey, Swiss Re, Company Data, DBS Vickers

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Company Guide AIA Group

EMBEDDED VALUE (EV) AND VALUE OF NEW BUSINESS first half of 2017. Hong Kong is the largest VONB driver, (VONB) contributing 45% of the group’s VONB followed by China with 23% of group’s total VONB. The importance of these As a pure life insurer, AIA’s business can be analysed by two regions have increased significantly since 1H12, rising looking at two components: 1) Embedded Value (mix) and 2) from 12% in China and 27% in Hong Kong to 23% in China Value of New Business (mix and growth). AIA’s embedded and 45% in Hong Kong. Hong Kong’s sales normalisation is value is tilted to four main countries (79% of group’s total EV), expected to take place in the second half of 2017 in view of namely Hong Kong (36% of EV) followed by Thailand (17% tightening measures towards offshore customers, especially of EV), China (14% of EV), and Singapore (12% of EV) in towards demand from Mainland Chinese Visitors (MCV). figure 4. We expect the embedded value to grow at However, strong growth in China (VONB growth at 56%/44% 11%/12%/13% in FY17F/18F/19F (Figure 5). in FY17F/18F (Figure 8)) is able to be offset the sales normalization in HK, resulting in group VONB CAGR of FY16- However, what also matters to AIA’s share price/embedded 19F CAGR of 25%. Going forward, we believe China is set to value is the value of new business (VONB) growth. Looking at become the biggest VONB growth driver owing to very low the VONB mix (Figure 6), Hong Kong and China together penetration and small presence. contributed 68% of the group’s value of new business in the

Fig 4: Embedded value breakdown Fig 5: Embedded value growth

70,000 18% 16% Other 60,000 14% Markets 50,000 12% 16% Hong 40,000 10% Malaysia Kong 8% 5% 36% 30,000 6% 20,000 China 4% 14% 10,000 2% 0 0%

Singapore 12% Thailand 17% Embedded Value (EV US$ Mil) EV growth

Source: Company Data, DBS Vickers Source: Company Data, DBS Vickers

Fig 7: Value of New Business (VONB) growth in major Fig 6: Value of New Business (VONB) breakdown markets

70% Other 60% Markets Malaysia 50% 10% 6% 40% Hong 30% Kong 20% China 45% 10% 23% 0% -10%

Singapore -20% FY14 FY15 FY16 FY17E FY18E FY19E 7% Thailand 9% HK Thailand Singapore China

Source: Company Data, DBS Vickers Source: Company Data, DBS Vickers

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AIA Group

Figure 8: Annualised New Premium (ANP) and Value of New Business (VONB) trend

ANP (US Mil) FY13 FY14 FY15 FY16 FY17E FY18E HK 781 952 1263 2294 2824 3097 y-o-y growth 22% 33% 82% 23% 10% Thailand 565 572 520 471 492 519 y-o-y growth 1% -9% -9% 4% 5% Singapore 400 489 471 427 418 440 y-o-y growth 22% -4% -9% -2% 5% China 249 311 438 621 938 1368 y-o-y growth 25% 41% 42% 51% 46% Group 3341 3700 3991 5123 5954 6766 y-o-y growth 11% 8% 28% 16% 14%

VONB (US Mil) FY13 FY14 FY15 FY16 FY17E FY18E HK 468 619 820 1161 1531 1936 y-o-y growth 32% 32% 42% 32% 26% Thailand 319 361 395 384 369 384 y-o-y growth 13% 9% -3% -4% 4% Singapore 269 299 341 316 305 323 y-o-y growth 11% 14% -7% -3% 6% China 166 258 366 536 835 1203 y-o-y growth 55% 42% 46% 56% 44% Group 1490 1845 2198 2750 3455 4262 y-o-y growth 24% 19% 25% 26% 23%

VONB Mix FY13 FY14 FY15 FY16 FY17E FY18E HK 31% 34% 37% 42% 44% 45% Thailand 21% 20% 18% 14% 11% 9% Singapore 18% 16% 16% 11% 9% 8% China 11% 14% 17% 19% 24% 28%

New business margin FY13 FY14 FY15 FY16 FY17E FY18E HK 60% 65% 65% 51% 54% 63% Thailand 56% 63% 76% 82% 75% 74% Singapore 67% 61% 72% 74% 73% 74% China 67% 83% 84% 86% 89% 88%

Source: Company Data, DBS Vickers

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Company Guide AIA Group

BUSINESS SEGMENT AT A GLANCE Fig 9: Premium growth from the cities that AIA operates

AIA CHINA (12% OF EV, 23% OF VONB) – LOW MARKET 60% SHARE REPRESENTS HUGE GROWTH POTENTIAL 50%

40% Unlike most foreign peers required to form a joint venture with local partners, AIA fully owns its China subsidiary, thanks 30% to its early presence. In fact, the company was the first wholly- 20% owned non-mainland Chinese life insurer to receive an 10% operating licence in China. 0%

AIA China currently holds nine insurance business permits and -10% nine business licences in different regions of China. AIA has a -20% branch each in Beijing, Guangdong, Shanghai, Shenzhen and 2012 2013 2014 2015 2016 Jiangsu. These cities alone that AIA China is operating in Beijing Guangdong Jiangsu generated life premium of Rmb556bn in 2016, representing Shanghai Shenzhen Industry one-third of China’s total life premium. Source: Company Data, DBS Vickers 1/3 China market already bigger than major ASEAN markets We believe AIA’s move of shifting focus towards China is strategically correct because of 1. much sizable market and 2. Fig 10: 1/3 China > sum of major ASEAN markets robust life premium growth compared to other major markets AIA is operating in. Even China’s one-third of life premium volume (approx. the regions AIA China is operating in) is 40% bigger than the sum of major ASEAN markets (Singapore + Thailand + Indonesia + Philippines + Malaysia + Vietnam) (Figure 10). At the same time, according to Swiss Re, China has also demonstrated robust premium growth (2014-2016 CAGR 22%), higher than most ASEAN market except Vietnam (24%). In figure 11, we compare the penetration (life premium as a % of GDP) across different markets, including the five provinces in China, indicating that China penetration (2.3%) is far lower than relatively mature markets Hong Kong (16.2%), Singapore (5.5%) and Thailand (3.7%). Taking all the factors together (sizable market, strong premium growth Source: Swiss Re, DBS Vickers and low penetration), moving the focus to China is strategically correct for AIA. Fig 11: Penetration in major markets

Source: Swiss Re, Wind Data, CIRC, DBS Vickers

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Company Guide

AIA Group

China will be the multi-year driver for AIA Fig 13: VONB from agency channel in Guangdong

Despite limitations on operating regions, AIA delivered robust VONB growth (FY13-16 CAGR of 48%). The opportunity from each individual city is lucrative. For example, Jiangsu is the second largest economy in China at US$1.1tr with GDP/capita rising by 75% from 2010 to US$14,000. The rising number of middle class, along with low insurance penetration, will drive huge insurance demand going forward. Jiangsu alone has a population of 80m, roughly ten times of Hong Kong’s population. The significant VONB growth are illustrated in Figure 12 and Figure 13. Given AIA China’s current market shares in these five regions are merely 1-3% and its initiative Source: Company Data, DBS Vickers to penetrate to lower-tier cities within its existing regions, we believe the strong VONB momentum is sustainable in the long term even without the deregulation of operations in other Fig 14: Rising VONB contribution from China regions. 50% Within AIA’s value of new business(VONB) mix, Hong Kong 45% has been the largest contributor in recent years, owing to the 40% company’s aggressive expansion boosting its market share 35% from 11% in 2014 to 20% in 2017H1. We believe China will 30% be AIA’s key development focus as its presence in China 25% remains relatively small compared with the whole insurance market in China. In fact, China has emerged as the second 20% largest contributor to the group’s VONB owing to its strongest 15% VONB growth and highest VONB margin among AIA’s 10% operating countries. 5% 0% Fig 12: VONB from agency channel in Jiangsu FY13 FY14 FY15 FY16 FY17E FY18E FY19E HK Thailand Singapore China

Source: Company Data, DBS Vickers

Fig 15: China consistently offers the highest VONB margin

100% 90% 80% 70% 60% Source: Company Data, DBS Vickers 50% 40% 30% 20% 10% 0% FY13 FY14 FY15 FY16 FY17E FY18E FY19E

HK Thailand Singapore China

Source: Company Data, DBS Vickers

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Company Guide AIA Group

AIA’s solid agency force also applies to China agency channel (Note: AIA's disclosed agency channel accounts for more than 90% of VONB in China) and 30,000 AIA is well known for its strong agency force, being ranked agency headcounts in financial year 2016. No.1 in the world for Million Dollar Round Table (MDRT) members for three consecutive years. MDRT status is a global Despite the fact that VONB does not reflect the product-mix industry benchmark and members are required to among different insurers, the result is in fact quite surprising demonstrate professional knowledge and customer that its VONB / agent (RMB 109,344) is even much better than engagement. In 2017, AIA recorded 47% growth in leading insurer Ping An's (RMB 41,783). In fact, the “quality” registered members in the world. of its workforce is the one of factors that differentiates itself from peers in China, therefore justifying its valuation premium. While no official data is available for agency productivity The productivity of its workforce is still improving with the among insurers, we try to compare AIA’s one-year value of number of active agents increasing by 40% y-o-y and new business per agent with major insurance peers in China. productivity increasing 28% in the first half of 2017. We assume that 90% of AIA China’s VONB comes from its

Fig 16: AIA China vs Chinese Insurer Peers

Source: Company Data, DBS Vickers

Fig 17: Productivity comparison with major insurers environment. AIA has a high quality product mix with traditional protection representing 86% of VONB in 1H17.

120,000 109,344 C-ROSS regime is positive to AIA 100,000 What’s more with C-ROSS regime (Solvency II) introduced in 80,000 late 2016, the insurers with more protection exposure are 60,000 41,783 29,580 generally able to report higher value of new business (VoNB) 40,000 30,987 27,458 29,558 17,980 going forward. In fact, the regime encourages insurers to shift 20,000 from saving products to more protection products. We believe 0 this is one of the reasons AIA reported higher value of new business margin in 1H17 (91.6% in 1H17 vs 86.6% in 1H16).

CPIC PICC Taiping Ping An Ultimate driver – relaxation of foreign investment in China China Life AIA China In August 2017, China’s State Council published the Notice

Peers' Average on Promotion of Foreign Investment Growth (Guo Fa[2017] VoNB / agency headcounts (RMB per head) No.39) which indicates its intention to liberalize foreign investments in China, reduce entry barriers for foreign Source: Company Data, DBS Vickers investments and further opening of markets to foreign players in industry such as auto, ship design, gas station, banking and CIRC’s clamp-down on low-margin products is positive to AIA insurance etc, all of which currently have joint venture or CIRC has taken several initiatives to clamp down low-margin Chinese majority equity control requirements. Unlike majority products, for example lowering the maximum guarantee rate of foreign insurers, AIA China is 100% owned by AIA with and limiting the sales proportion of short- and medium-term operations limited to five markets (Beijing, Shanghai, products. Some insurers like Foresea Insurance and Anbang Guangdong, Shenzhen and Jiangsu). While the timing of Insurance were banned or penalised for breaching the rules relaxation is unclear, we believe geographical relaxation will via suspension of new product issuance. The tougher stance be the ultimate share price driver for AIA given that the five from CIRC is indeed positive to disciplined insurers like AIA as markets only represent 1/3 of country’s total premium. they can recover market share under a reasonable pricing

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AIA Group

Fig 18: China ANP growth trend

2,500 60% 2,000 50% 40% 1,500 30% 1,000 20%

500 10%

0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E China ANP (US$ Mil) ANP - yoy growth

Source: Company Data, DBS Vickers

Fig 19: China VONB growth trend

2,000 70% 1,800 60% 1,600 1,400 50% 1,200 40% 1,000 800 30% 600 20% 400 10% 200 0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E China VoNB (US$ Mil) VoNB - yoy growth

Source: Company Data, DBS Vickers

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Company Guide AIA Group

AIA HONG KONG (31% OF EV, 45% OF VONB) – SALES AIA’s major peer Prudential HK mentioned in their 2017 NORMALISATION AHEAD BUT BENEFIT FROM BETTER interim report that they felt the sales momentum in Hong NEW BUSINESS MARGIN Kong was slowing. With offshore customers accounting for ~50% of Hong Kong’s APE, we believe the tightening control Hong Kong performance remained solid with APE and VONB will start taking a hit in the second half of 2017. AIA growth of 72% and 54% respectively in the first half of 2017. mentioned Hong Kong business delivering strong double-digit The decline in Value of New business margin (VONBM) was VONB growth in the third quarter which is better than market caused by sales dependency on savings products (featured expectation given the high-base from Mainland Chinese with high cash value), therefore lowering new business Visitors (MCV). We factor in the moderation by assuming -14% margin (lower margin than traditional products). These y-o-y ANP and +13% y-o-y VONB growth for 2H17F in Hong products (AIA: 充裕未來, Prudential: 雋升) were particularly Kong. The slowdown in ANP will be alleviated in recovering welcomed by mainlanders in last few years because this is value of new business margin (figure 22) regarded as a way to move capital offshore, triggered by yuan depreciation. Fig 22: AIA Hong Kong new business margin trend

AIA and Pru more exposed to offshore customers Per the APE disclosure from HKOCI, we can see that AIA and Prudential were more welcome by offshore customers. In the first nine months of 2016, APE contribution from offshore customers accounted for 72% and 68% of Pru and AIAs’ APE in HK respectively (figure 20). With multiple tightening measures taken under capital control by Chinese regulators, lessening yuan depreciation (RMB/USD up 5% YTD-August) and stabilising foreign reserve in China, we believe insurance sales will normalise in 2H17 given weakening demand from offshore customers (figure 21)

Fig 20: Offshore exposure of insurers in 9M16

72% 70% Source: Company Data, DBS Vickers 68% 62% 53% 51% 45% 40% 38% 37% VONB growth of +26%/+16% for FY18F/FY19F are expected 33% 33% 31% 27% as we see strong agency expansion in Hong Kong (new recruits +17% y-o-y). We believe the value of new business margin (VONBM) will recover from slowing demand of mainlanders (VONB expected to recover from 50.6%/48.8% in FY16/FY1H17) as they usually prefer to purchase saving products which have lower new business margin than traditional products. Source: Bloomberg Finance L.P., HKOCI, DBS Vickers

Fig 21: APE moderation seen in 2Q17 (AIA and Pru)

35000 140%

120% 30000 100% 25000 80%

20000 60%

15000 40% 20% 10000 0% 5000 ‐20%

0 ‐40% 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 AIA Pru Industry AIA growth Pru growth Industry growth

Source: Company data, HKOCI, DBS Vickers

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Company Guide

AIA Group

Fig 23: AIA Hong Kong ANP growth trend Hong Kong insurance regulatory regime (HK not adopting Solvency II yet). Whether the competition is going to be fiercer 4,000 90% remains to be seen (e.g. more aggressive guarantee rate), we 3,500 80% believe AIA’s strong presence, e.g. agency force being ranked 3,000 70% #1 in MDRT, provides certain margin of safety in case of more 60% heated competition as well-trained and robust agency force is 2,500 50% not easily replicable. 2,000 40% 1,500 30% Fig 25: Recent M&A deals in HK 1,000 20% 500 10% 0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Hong Kong ANP (US$ Mil) ANP - yoy growth Source: Company Data, DBS Vickers

Source: Company Data, DBS Vickers

Fig 24: AIA Hong Kong VONB growth trend

2,500 45% 40% 2,000 35% 30% 1,500 25% 20% 1,000 15% 500 10% 5% 0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Hong Kong VoNB (US$ Mil) VoNB - yoy growth

Source: Company Data, DBS Vickers The insurance market is attracting interest from Chinese Players Hong Kong banks have long been linked as M&A targets but in fact the insurance industry is no different. From our record, the last four completed deals were all linked to Chinese background players acquiring HK based insurance companies (Ageas HK, Dah Sing Life, Hong Kong Life and MassMutual Asia). The pending sale of AXA’s wealth management unit was reported to attract interest from a number of buyers including China Taiping (966.HK, BUY) and Country Garden (2007.HK, BUY). The strong interest can be reflected in their high-end acquisition multiple (historical P/EV: 2.2x, close to what premier insurer AIA is currently trading) for Dah Sing Life Assurance (HK) which only had limited presence in HK.

We believe the strong interest could be 1) intention to hedge RMB deprecation risk (insurance assets are mostly USD/HKD), 2) strong APE growth in HK and 3) relatively more relaxed

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AIA SINGAPORE (10% OF EV, 7% OF VONB) AIA THAILAND (15% OF EV, 9% OF VONB)

AIA Singapore is top ranked for protection in terms of new Ranked by size of EV, Thailand is the second most important business sums. Its strong agency force is evidenced by its top market to AIA. AIA has put value as the top priority with ranking in Singapore MDRT. Its Singapore operations regular-premium business accounting for 96% of ANP and experienced growth in regular premium protection business protection business comprising the majority of VONB but this was offset by the weakness in continued reduction in generation. However, with moderating VONB growth in single-premium sales in the first half of 2017. This is the recent years, the value of new business contribution declined strategy for AIA to focus on more profitable and quality long- from 26% in 1H12 to merely 9% in 1H17. While insurance term growth (regular-premium products instead of single- penetration in Thailand remains low, headwinds for AIA are premium products). Not pursuing single-premium products expected with some signs of increase in single-premium however resulted in sluggish ANP and VONB in Singapore. products sales, thus putting some pressure on AIA’s business in Thailand.

In the first half of 2017, VONB contracted by 7% and we factor in slowdown moderation in 2H17 considering low base Bancassurance and agency are the major channels for insurance sales in Thailand, consistently accounting for over in 2H16 (-18% y-o-y). We conservatively factor in a relatively 90% of new business premium. AIA has the strongest agency flattish VONB trend (FY17F/18F/19F: -3%/+6%/+6%) going franchise in Thailand with its new business premium forward. accounting for 32% of the country total, being the #1 in Thailand. New business premium from agency accounted for Fig 26: AIA Singapore ANP growth trend 74% of the company’s total. However, in the last few years, AIA has been losing market share from 18% in 2012 to 14.7% in 2015 while all three major players, KrungThai (from 9% to 600 25% 20% 10.5%), Thai Life (from 10.9% to 12.6%)and Muang Thai 500 Life(from 16.5% to 23.1%) have been getting market share 15% by different degree (Figure 28). We believe this is partly 400 10% affected by more aggressively expansion in bancassurance 300 5% channel of market players (new business premium from banca in Thailand rose from 54% in 2012 to 57% in 2017 H1) 0% 200 which is however not what AIA focuses on. -5% 100 -10% In fact, we see AIA Thai reversing the trend of multi-quarters 0 -15% of ANP yoy contraction, reporting +13%/+1 yoy in Q1/Jul-Aug (figure 96). Going into second half, we believe AIA Thai is unlikely to go back to contraction due to low base effect FY12 FY13 FY14 FY15 FY16

FY17E FY18E FY19E (Note: AIA Thai recorded reduction close to FY16 year-end Singapore ANP (US$ Mil) ANP - yoy growth during the mourning period following the passing of King Bhumibol Adulyadej).

Source: Company Data, DBS Vickers Fig 28: insurance market share (%) in Thailand

Fig 27: AIA Singapore VONB growth trend AIA Krungthai‐ Thai Life Muang Thai Life

400 25% 350 20% 23.1% 18.6% 22.1% 20.9% 300 15% 16.5% 20.7% 250 10% 10.9% 10.0% 8.8% 10.3% 14.3% 12.6% 200 9.8% 5% 9.0% 11.4% 150 10.7% 9.2% 10.5% 0% 100 18.0% 18.1% 15.3% 15.3% 15.1% 14.7% 50 -5% 2012 2013 2014 2015 2016 2017 H1

0 -10% Source: Thai Life Association, DBS Vickers

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Singapore VoNB (US$ Mil) VoNB - yoy growth

Source: Company Data, DBS Vickers

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Fig 29: AIA Thai’s ANP showing sign of rebound (yoy Fig 30: AIA Thailand ANP growth trend growth) 700 15% 600 10% 500 5% 400 0% 300 -5% 200

100 -10%

0 -15% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Thailand ANP (US$ Mil) ANP - yoy growth Source: Thai Life Association, DBS Vickers

AIA is the leader in unit linked products (a better product in Source: Company Data, DBS Vickers low rate environment) Low interest rate environment is always a threat to insurer as they are exposed to negative spread risk. Unit-linked products Fig 31: AIA Thailand VONB growth trend on the other hand offer flexibility to insurer to avoid the risk as the products do not have “guarantee rate”. AIA has been 450 16% expanding its unit-linked product, increasing its number of 400 14% licensed AIA agents qualified to distribute unit-linked products 12% 350 by 43% in 2016. This represented 90% of unit-linked 10% insurance market in Thailand based on reported premium. 300 8% 250 6% Recent bancassurance agreement to reignite the growth 200 4% engine 150 2% AIA recently announced a 15-year bancassurance agreement 0% 100 with Bangkok Bank which will distribute AIA Thailand’s -2% protection and long-term savings products on an exclusive 50 -4% basis (not exclusive for certain endowment savings and credit 0 -6% life products). The payment structure, with no upfront but depends on new business, incentives Bangkok bank for FY12 FY13 FY14 FY15 FY16 driving new business sales for AIA in Thailand. We believe the FY17E FY18E FY19E deal helps AIA access the strong customer base (more than Thailand VoNB (US$ Mil) VoNB - yoy growth 16mil customer accounts and around 1200 branches) that Bangkok Bank possesses. The partnership will become Source: Company Data, DBS Vickers effective in the first half of 2018.

Bangkok Bank has deposit size of THB 2,298bn as of Jun 17. If we assume conservatively 1% penetration (USD 696mil), that would be comparable to first year premium inflow (first-year regular premium + single premium) of FY16 USD 602m for AIA Thailand business. While the profit-sharing agreement (therefore the VONB margin not easily estimated) is not disclosed, the sizable deposits implies high possibility to turn its AIA Thai business into growth trajectory.

In the first half of 2017, VONB contracted by 1% along with VONBM contracting by 6ppts. y-o-y to 75%. The sluggish performance continued in the third quarter with VONB reported to contract in yoy basis. Going forward, We forecast mild recovery in VONB growth (FY17F/18F/19F: - 4%/+4%/+9%) going forward given the bancassurance agreement with Bankgkok Bank starting in second half of 2018

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IN-DEPTH LOOK AT DIVIDEND PAYOUT UPSIDE Fig 33: AIA’s Robust Solvency Position

Dividend yield has long been regarded as one of the key 450% criteria of stock selection for many Long-only (LO) investors. 400% AIA’s dividend yield may not be particularly attractive under 350% this methodology. Free surplus (FS) is one of the most 300% important measurements for dividend payout ability. It 250% represents an insurer’s adjusted net worth in excess of the 200% required capital. AIA has accumulated abundant free surplus 150% balance from strong VONB generation. Driven by AIA’s 100% superb free surplus (FS) generation ability, we think AIA is 50% able to hike its dividend payout in the coming years. 0%

Driven by its strong underlying free surplus generation, AIA 1H17 FY17 FY12 FY13 FY14 FY15 FY16 FY18 FY19 increased its dividend payout starting from 27% in FY14 to FY11

33% in FY16. We view this a positive step from the company Regulatory requirement as dividend payment is the most direct and explicit way of returning to shareholders. Considering its strong free surplus Source: Company Data, DBS Vickers generation, we believe there are still upside to AIA’s dividend payout, therefore enabling AIA to increase dividend payout to 36%/39%/42% in FY17E/18E/19E (Figure 32). Fig 34: Adjusted net worth (ANW) composition

Plus, AIA managed to maintain a solid solvency position over 20,000 60% the past few years. The solvency position reached 18,000 58% 16,000 56% 404%/427%, much above the HKICO regulatory 14,000 requirement (150% of required minimum solvency margin). 12,000 54% We believe the strong solvency position can support AIA to 10,000 52% increase its dividend payout going forward. (Figure 33). 8,000 50% 6,000 48% 4,000 The abundant free surplus can also be reflected by its 2,000 46% composition of adjusted net worth, sum of required capital 0 44% and free surplus. In fact, AIA’s proportion of free surplus (FS) over adjusted net worth increased from its usual 50-51% in FY11 FY12 FY13 FY14 FY15 FY16 FY12-15 to 59% in FY16/17H1, reinforcing our view on FY17H1 Free-surplus Required Capital AIA’s ability to continuously increase its dividend payout. Free-surplus / ANW

We illustrate AIA’s free surplus generation flow in figure 35. Source: Company Data, DBS Vickers

Fig 32: Dividend payout on the rise

45

40

35

30

25

20 FY11 FY12 FY13 FY14 FY15 FY16

FY17E FY18E FY19E Source: Company Data, DBS Vickers

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Figure 35: Free Surplus Generation and Scenario Analysis

11,000 9,000 Strong FS generation ‐> abundant FS balance ‐> enhance ability to raise 7,000 dividend payout 5,000

3,000

1,000

(1,000)

(3,000)

(5,000) FY11 FY12 FY13 FY14 FY15 FY16 FY17H1 FY11 FY12 FY13 FY14 FY15 FY16 FY17H1

Underlying free surplus generated (1) Free surplus used to Fund New Business (2) Others (3) Dividend (4) Free surplus (end balance)

Source: Company Data, DBS Vickers

SECNARIO ANALYSIS - DIVDEND PAYOUT strong solvency position and abundant free surplus (FS) AIA has consistently managed to generate strong free position. surplus over the last few years. Driven by strong Value of new business (VONB) growth (FY11-16 CAGR of 22%) Our model factors in a progressive increase in dividend which outgrew the free surplus used to fund new business payouts (FY17F/18F/19F: 36%/39%/42%) going forward, (FY11-16 CAGR of 4%), AIA has shown strong execution by implying FY17F/18F/19F solvency ratios of reducing new business strain (New business funded/VONB) 408%/403%/393%, which are still highly sufficient over the last few years, declining from 122% in FY11 to compared to regulatory requirement of 150%. With 50% in FY16. New business strain can be described as the accelerating pace of dividend payout hikes under Case 2 initial outgoings from new policy written. AIA managed to (more bullish) and Case 3 (even more bullish), the solvency lower new business strain / VONB, an indication of its position and free surplus impact are limited. capability to achieve high efficiency. Thus, it has enhanced AIA’s ability to consider a higher dividend payout, in our Case-2: FY17F/18F/19F: Solvency: 407%/400%/389%; FS view. balance: -0%, -1%, -2% (compared with base case)

While AIA has been actively increasing its dividend payout Case-3: FY17F/18F/19F: Solvency: 406%/399%/387%; FS progressively in the past few years (from 27% in FY14 to balance: -1%, -2%, -3% (compared with base case) 33% in FY16), we believe that there is still upside given its

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Figure 36: Scenarios on Free Surplus generation and Solvency vs dividend payout

US mil - Nov end FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Free Surplus (BGN) 4,992 5,930 5,177 5,927 7,794 7,528 9,782 10,905 12,026 Underlying free surplus generated (1) 2,485 2,845 3,786 3,552 3,719 4,024 4,568 5,229 6,042 y-o-y growth 14% 33% -6% 5% 8% 14% 14% 16% Free surplus used to Fund New Business (2) (1,140) (1,412) (1,510) (1,655) (1,488) (1,374) (1,721) (1,987) (2,316) y-o-y growth 24% 7% 10% -10% -8% 25% 15% 17% Others (3) (237) (190) (131) 659 (1,683) 728 (277) (277) (277) Dividend (4) (170) (530) (595) (689) (814) (1,124) (1,447) (1,845) (2,311) Free Surplus (END) 5,930 6,643 6,727 7,794 7,528 9,782 10,905 12,026 13,163 y-o-y growth 12% 1% 16% -3% 30% 11% 10% 9% V alue of New Business (V ONB) (5) 932 1,188 1,490 1,845 2,198 2,750 3,455 4,262 5,333 y-o-y growth 27% 25% 24% 19% 25% 26% 23% 25% New business strain* (2) / (5) 122% 119% 101% 90% 68% 50% 50% 47% 43% *New business funded / V alue of new business (V ONB)

Dividend declared 510 571 658 774 1,080 1,323 1,694 2,145 2,643 y-o-y growth 12% 15% 18% 39% 22% 28% 27% 23% Dividend payout 27 26 26 27 30 33 36 39 42 y-o-y growth 0% 0% 4% 3% 3% 3% 3%

Price (HKD) as of 30-Oct, 2017 59.4

Base Case FY17E FY18E FY19E Dividend payout % 36 39 42 Dividend declared (US$) 1,694 2,145 2,643 DPS (cents HK$) 1.10 1.4 1.7 Dividend yield 1.9% 2.3% 2.9% Solv ency 408% 402% 392% Free Surplus (End Balance) 10,905 12,026 13,163

Case - 2 FY17E FY18E FY19E Dividend payout % 38 43 48 Dividend declared (US$) 1,777 2,352 3,004 DPS (cents HK$) 1.2 1.5 2.0 Dividend yield 1.9% 2.6% 3.3% Solv ency 407% 400% 389% <- Increase in dividend payout does not have severe impact on solvency position Free Surplus (End Balance) 10,878 11,901 12,905 change compared to Base Case 0% -1% -2% <- minimal impact on Fres surplus balance

Case - 3 FY17E FY18E FY19E Dividend payout % 40 46 52 Dividend declared (US$) 1,871 2,516 3,255 DPS (cents HK$) 1.2 1.6 2.1 Dividend yield 2.0% 2.8% 3.6% Solv ency 406% 399% 387% <- Increase in dividend payout does not have severe impact Free Surplus (End Balance) 10,847 11,784 12,712 change compared to Base Case -1% -2% -3% <- minimal impact on Fres surplus balance

Source: Company Data, DBS Vickers

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VALUATION ANALYSIS process in our view. We believe AIA’s abundant free surplus balance (figure 35) allows the company to explore lucrative We derive our valuation based on price to embedded value M&A going forward if not aggressively increasing dividend multiple of 2.2x, high-end of historical trend. Our target price payout. valuation is higher than the historical mean but purely looking at historical PEV would under-appreciate its strong ROEV We forecast ROEV will reach 17.5% in FY18E. At its current generation, which increased from 12.5% in FY11 to 15.4% in share price, our TP implies 26% upside (Figure 37), supported FY16 (Figure 39) and therefore justifying its ongoing re-rating by strong VoNB growth (FY17F/18F: 20% / 20%).

Figure 37: Valuation analysis

USD (mil) FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E V IF 18,238 20,356 21,802 23,009 25,569 28,004 31,679 36,255 ANW 13,170 13,462 15,351 15,189 16,544 18,878 20,995 23,298 EV 31,408 33,818 37,153 38,198 42,113 46,882 52,674 59,553 EV growth 15% 8% 10% 3% 10% 11% 12% 13% VoNB 1,188 1,490 1,845 2,198 2,750 3,455 4,262 5,333 V oNB growth 25% 24% 19% 25% 26% 23% 25% Total v aluation 49,228 56,168 64,828 71,168 83,363 98,713 115,882 139,548 Price to embedded value multiple (x) 2.2x No. of shares 12,044 12,044 12,045 12,048 12,056 12,074 12,074 USD / HKD 7.8 7.8 7.8 7.8 7.8 7.8 7.8 Target price 75 Closing price (HK$) 59 upside 26%

Source: Company Data, DBS Vickers

Figure 38: Price to Embedded Value – forward 12 months Figure 39: Return of Embedded Value (%) trend

PEV (x) 18 2.2 17

2.0 16 +2 SD 15 1.8 +1 SD 14 13 1.6 5yr avg 12 -1 SD 1.4 11 -2 SD 10 1.2 9

1.0 8 2012 2013 2014 2015 2016 2017

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Source: Bloomberg Finance L.P., DBS Vickers Source: Bloomberg Finance L.P., DBS Vickers

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Appendix:

Investment performance is a key metrics for AIA’s investment performance. We keep track of major equity index and 10- year government bond yields here:

Figure 40: Equity market movement in major markets (QoQ % change)

3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 15%

10%

5%

0%

‐5%

‐10%

‐15%

‐20% Favourable market movement ‐25%

‐30%

‐35%

HK (HSI) TH (SET) SG (STI) MY (MY Bursa) CH (SHEX) KR (KOSPI)

Source: Company Data, DBS Vickers

Figure 41: 10-year government bond yield movements in major markets

5.5 5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

US TH SG CH MY KR PH

Source: Company Data, DBS Vickers

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CRITICAL FACTORS TO WATCH Value of new business

US$ m 71.0% Critical Factors 4,000 Value of new business (VONB) 3,500 Value of new business is the major share price driver. AIA has 3,000 66.0% 2,500 shown strong track record of delivering robust VONB growth in 2,000 61.0% the past few years. Correlation between VONB and share price 1,500 1,000 56.0% has been strong, reaching 0.85 since 2012. 500 0 51.0% 2015A 2016A 2017F 2018F 2019F Hong Kong and China together contributed 68% of the group’s Value of new business Value of new business margin value of new business in the first half of 2017. Hong Kong is the largest VONB driver, contributing 45% of the group’s VONB Net Investment return followed by China with 23% of group’s total VONB. The 6.0% importance of these two regions have increased significantly since 5.5% 1H12, rising from 12% in China and 27% in Hong Kong to 23% 5.0% in China and 45% in Hong Kong. Hong Kong’s sales 4.5% normalisation is expected to take place in the second half of 2017 in view of tightening measures towards offshore customers, 4.0% especially towards demand from Mainland Chinese Visitors (MCV). 3.5% 3.0% 2015A 2016A 2017F 2018F 2019F Value of new business margin (VONBM) Net investment return Total investment return While AIA has continued to deliver robust VONB growth in the past few years, VONBM is critical as it determines the VONB Group embedded value US$ m created from any new business. We believe the growing business 20% 18% 50,000 in China is the crux for maintaining a high VONBM as its figure is 16% higher than the group's. 40,000 14% 12% 30,000 10% 8% 20,000 6% 10,000 4% 2% 0 0% 2015A 2016A 2017F 2018F 2019F Group embedded value (mn) (LHS) yoy growht (%) (RHS)

Source: Company, DBS Vickers

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Appendix 1: A look at Company's listed history – what drives its share price?

Share Price History

HK$ UnionPay capping 70 45,000 asian currency overseas insurance weakened by purcahses at US$ 5K 40,000 60 AIG sold 5% stake tapering in AIA 35,000 50 30,000

40 25,000

30 CIRC c rit iz ed the 20,000 risk in purchasing Mark Tucker to 15,000 20 Signed insurance by retire as AIA CEO. bancassurance mainlanders Mr. Ng Keng 10,000 acquired 92.3% in acquired ING agreement with Hooi becomes 10 Av iv a NDB Insurance Malay sia CIT IBA NK f or the new chirman 5,000 mark et s 0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 AIA share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs Value of New Business (VONB) Remarks

When comparing AIA’s share price HK 70 1000 and value of new business starting from 2012, a strong correlation of 900 60 0.85 is observed. 800 50 700 AIA delivered strong VONB growth over the last few years (FY13-16 40 600 500 CAGR of 23%) thanks to robust VONB growth from HK (FY13-16 30 400 CAGR of 35%) and China (FY13-16 20 300 CAGR of 48%). We believe the 200 group’s VONB growth will be 10 Correlation since 2012 = 0.85 100 supported by China going forward 0 0 given its low density and penetration into lower-tier cities. Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 AIA share price (LHS) AIA's VNB (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Share price performance vs Value of New Business Margin (VONBM) Remarks

HK$ AIA’s share price has strong 70 65% correlation of 0.88 with VONBM.

60 60% AIA managed to enhance its VONBM from 45% in FY13 to 54% in FY16, 50 55% driven by major operating countries 40 50% including Thailand, Singapore and China. With China increasing 30 45% contribution to VONB, we believe it can lift VONBM further. 20 40%

10 Correlation since 2012 = 0.88 35% 0 30% Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 AIA share price (LHS) AIA's VNB margin

Source: Bloomberg Finance L.P., DBS Vickers

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Company Guide AIA Group

Balance Sheet: Solvency ratio Solvency: AIA managed to increase its solvency ratio from 404% in FY16 to 427% in FY1H17, which is substantially higher than the minimum solvency margin of 150% required by Hong Kong 410.0% Insurance Authority (HKIA). 360.0% 310.0% Leverage: The company’s leverage level, measured in total asset/ 260.0% total equity, reached 5.2x, similar to the level in end-FY16. 210.0% 160.0% 2015A 2016A 2017F 2018F 2019F Share Price Drivers: Value of new business (VONB) is the major share price driver. AIA has shown strong track record of delivering robust VONB growth ROE in the past few years which has increased. Correlation between 14.0% VONB and share price has been strong, reaching 0.85 since 2012. 12.0% 10.0% Value of new business margin (VONBM) is critical to AIA. While 8.0% AIA continues to deliver robust VONB growth for the past few 6.0% 4.0% years, VONBM is critical as it determines the VONB created from 2.0% any new business. We believe the growing business in China is the 0.0% crux for maintaining a high VONBM as the business in China 2015A 2016A 2017F 2018F 2019F delivers higher than the group's VONBM. PEV Band Key Risks: Increase in pricing competition would affect the company’s new business margin. Severe economic slowdown in China

Company Background AIA was established in Shanghai in 1919. It was listed on HKEX in 2010 after the reorganisation caused by AIG's liquidity crisis in 2008. AIA focuses on Asia Pacific with presence in 18 markets. At end-16, its total assets and equity were at US$185bn and US$35bn respectively. PB Band

Source: Company, DBS Vickers

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Key Assumptions FY Nov 2015A 2016A 2017F 2018F 2019F

Total weighted premium growth 3.5 11.4 14.3 16.3 18.6 VNB growth 19.1 25.1 25.7 23.4 25.1 VNB margin 55.1 53.7 58.0 63.0 65.6 Net investment return 4.9 4.9 5.0 5.0 5.0 Total investment return 3.6 5.7 5.0 5.0 5.0 EV growth 2.8 10.2 11.3 13.1 12.4 Solvency ratio 428.2 403.8 408.0 402.2 392.3

Source: Company, DBS Vickers

Income Statement (US$ m) FY Nov 2015A 2016A 2017F 2018F 2019F

Total weighted premium income 19,876 22,133 25,287 29,403 34,859 Net earned premium 18,812 20,641 23,070 26,707 31,549 Investment income 6,143 6,424 6,874 7,770 8,792 Other operating income 0 0 0 0 0 Total income 24,955 27,065 29,944 34,477 40,342

Benefits and claims (16,232) (17,512) (19,099) (22,127) (26,286) Underwriting and policy acquisition costs (2,468) (2,686) (3,021) (3,400) (3,898) Finance cost (297) (334) (342) (357) (375) Other expenses (1,638) (1,951) (1,822) (1,974) (2,178) Total expenses (20,635) (22,483) (24,284) (27,858) (32,736)

Share of profit of associated and JVs 0 (5) (5) (5) (5) Profit before tax 4,320 4,776 5,655 6,614 7,601 Income tax expense (735) (763) (916) (1,082) (1,269) Minority interest (29) (80) (62) (63) (72) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 3,556 3,933 4,677 5,469 6,259

Source: Company, DBS Vickers

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Balance Sheet (US$ m) FY Nov 2015A 2016A 2017F 2018F 2019F

Total Investment 126,435 137,479 155,408 175,846 200,558 Property, plant and equipment 579 1,132 1,132 1,132 1,132 Other assets 42,744 46,463 46,525 46,588 46,660 Total assets 169,758 185,074 203,065 223,565 248,350

Net life reserves - traditional 115,969 128,186 142,451 159,564 180,661 Net life reserves - investment contracts 7,116 7,028 7,028 7,028 7,028 Other Liabilities 15,251 14,550 14,550 14,550 14,550 Total liabilities 138,336 149,764 164,029 181,142 202,239

Shareholder's equity 31,119 34,984 38,649 41,972 45,589 Minority interest 303 326 388 451 523 Total equity 31,422 35,310 39,036 42,423 46,112

Source: Company, DBS Vickers

Key Financials & Ratios FY Nov 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 14.7 20.2 23.2 20.5 19.8 Premium income / total asset 11.1 11.2 11.4 11.9 12.7 Total asset / total equity 5 5 5 5 5 Return on equity 8.9 12.6 14.6 13.6 14.3

Embedded value (US$ m) Book value 31,119 34,984 38,649 41,972 45,589 Adjusted items (15,930) (18,440) (19,771) (20,978) (22,291) Adjusted book value 15,189 16,544 18,878 20,995 23,298 Value-in-force 23,009 25,569 28,004 31,679 36,255 Adjustment (if any) 0 0 0 0 0 Group embedded value 38,198 42,113 46,882 52,674 59,553

Per share analysis (US$) EPS 0.23 0.35 0.45 0.46 0.52 BPS 2.58 2.90 3.20 3.48 3.78 DPS 0.09 0.11 0.14 0.18 0.22 EVPS 3.17 3.49 3.88 4.36 4.93

Capital Strength (%) 5 5 5 5 5 Leverage ratio Solvency ratio 428.2 403.8 408.0 402.2 392.3

Source: Company, DBS Vickers

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China / Hong Kong Company Guide Manulife Version 1 | Bloomberg: 945 HK EQUITY | Reuters: 0945.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

BUY (Initiating coverage) Return of the giant Last Traded Price ( 30 Oct 2017): HK$157.20 (HSI : 28,336) Asia Insurance+ WAM drives future growth: Manulife is a multi-national Price Target 12-mth: HK$197 (25% upside) insurance and retirement solution services provider. It has a global presence that Analyst includes Canada, the United States (operates under John Hancock brand) and Ken SHIH +852 2820 4920 Asia. Each market generates roughly one-third of the insurer’s earnings. Driven [email protected] by the low insurance penetration in Asia, successful bancassurance channels, Keith TSANG CFA, +852 2971 1935 and rising demand for retirement solution services amid an aging population [email protected] worldwide, we believe its Asia Insurance and Wealth and Asset Management What’s New (WAM) businesses are well-positioned to capture the structural uptrend. • Asia Insurance and Wealth and Asset Management Good VNB and shareholder value growth potential: The Asian business segments offer strong growth prospects accounted for 66% and 81% of Annual Premium Equivalent (APE) and New • Expanding Asian insurance business on the back Business Value (VNB) in 2016. For NVB, the strong premium growth potential of improving economies of scale will generate in Asia, accompanied by rising economies of scale, and margin improvements

higher shareholder return in Japan, will help to deliver 23% CAGR in FY17-19F. Despite slowing premium • Minimising exposure to legacy Variable Annuity growth in Hong Kong (21%/37% of APE/VNB in Asia) in the near term due to business is a move in the right direction policy headwinds on purchases by Mainland Chinese Visitors (MCV), we believe the impact is manageable as MCV only accounts for 17% of APE from the • Initiating coverage with BUY rating and H-share market. We believe its profit-focus strategy will also help to generate higher target price of HK$197 which offers 25% share shareholder returns and dividends. price upside Minimising exposure to legacy Variable Annuity business : Manulife has taken Price Relative several measures to minimise the negative impact of its legacy Variable Annuity

HK$ Relative Index business, such as (i) strategically scale back and exit less attractive businesses, (ii)

175.3 improve its operating efficiency and in-force management, and (iii) proactive 208 165.3 155.3 188 steps to optimise its balance sheet. As the exposure gradually matures, we 145.3 168 believe the negative impact from its legacy business will fade. Further possible 135.3 148 125.3 divestment or spin-off of its legacy blocks will be positive to the insurer. 128 115.3 108 105.3 88 Initiating coverage with BUY and H-share target price of HK$197: We are 95.3 85.3 68 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 initiating coverage on Manulife with BUY rating and target price of CAD31.5 for TSE listing and HK$197 for H-share listing which represents 1.3x FY18F Manulife (LHS) Relative HSI (RHS) P/BV, and offers 25% upside. The insurer is currently trading at 1x forward

Forecasts and Valuation P/BV, which is in line with its 5-year mean. With the rosy Asia Insurance/WAM FY Dec (C$ m) 2016A 2017F 2018F 2019F Net earned premiums 27,632 29,028 31,088 33,841 business outlook and good VNB growth potential, we believe the insurer’s Net investment income 13,390 13,830 14,520 15,367 valuation will catch-up with its regional peers’ average of 1.4x FY18F P/BV. Net Profit 2,796 4,828 5,045 5,675 EPS (C$) 1.42 2.45 2.56 2.88 Valuation: EPS (HK$) 8.58 14.81 15.48 17.41 Our target price is based on 1.1x FY18F P/EV, which is in line with the upper- EPS Gth (%) 34.0 72.7 4.5 12.5 mid level of its historical 5-year mean.

PE (X) 18.3 10.6 10.1 9.0 DPS (HK$) 4.48 5.02 5.71 6.41 Key Risks to Our View: Net Div Yield (%) 2.9 3.2 3.6 4.1 Reversal of downward interest rate trend, rising equity market volatility, and BV Per Share (HK$) 128.21 139.51 150.84 163.61 slower than expected Asian market growth P/Book Value (X) 1.2 1.1 1.0 1.0 P/EV (X) 1.1 1.0 0.9 0.8 At A Glance ROAE (%) 6.7 11.1 10.7 11.1 Issued Capital (m shrs) 2,125 Mkt. Cap (HK$m/US$m) 332,650 / 42,641 Earnings Rev (%): New New New Major Shareholders Consensus EPS (C$) 2.114 2.348 2.607 NIL (%) 0.0 Other Broker Recs: B: 12 S: 0 H: 5 Free Float (%) 100.0 3m Avg. Daily Val. (US$m) 0.9 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ICB Industry : Financials / Life Insurance

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Company Guide

Manulife

Asia Insurance and WAM to drive future growth Fig 1: Asia, North America and W. Europe GWP Manulife is a multi-national insurance and retirement solutions provider in the areas of pension, wealth and asset management US$bn (WAM), and saving plans, with a global presence in Canada 2,000 1802 1,800 (headquarters), the United States, and Asia. The insurer 1,600 acquired US-based John Hancock Financial Services in 2004. 1,400 Since then, the US business has operated using the “John 1,200 909 Hancock” branches which have evolved to become one of the 1,000 832 851 680 leading retirement and WAM service providers in the market. 800 602 600 400 The insurer first entered Asia in 1897. Throughout the years, 200 Manulife has established solid footprints in 12 Asian markets, 0 with Hong Kong, Japan, Singapore and China as the main Asia North America Western Europe markets for premium and New Business Value growth for the 2015 2025F region and the group. At present, Canada, the United States and Asia roughly account for one-third each of Manulife’s earnings. With Canada serves as a core cash generating and Source: Swiss Re, Manulife& Oliver Wyman, DBS Vickers risk-adjusted return market, and the US serves as the main WAM market by AUM, Asia market, on the other hand, is the Fig 2: APE breakdown by markets – Asia fastest growing and provides an opportunity for the insurer to US$m grow its insurance and WAM business further. 900 800 Favourable structural trends ahead: We believe Manulife is well 700 positioned to capture three structural trends to drive Asia 600 Insurance and WAM business growth. The structural drivers 500 include: 400 300 1. Strong healthcare and wealth management demand from 200 developed countries in Asia coupled with low insurance 100 penetration rate in China and emerging Asia (such as Indonesia 0 and the Philippines) will help to drive premium growth:

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Insurance products, with its tax-exemption feature, have served Hong Kong Japan Asia Other as wealth transfer instruments for high net worth individuals in Asia. The growing demand for healthcare and retirement Source: Company data, DBS Vickers solutions amid an aging population has also helped to drive premium growth in developed Asian countries such as Japan, Fig 3: New Business Value breakdown by markets Hong Kong and Singapore. Coupled with the secular premium CA D m growth potential from China and emerging Asian markets, 450 growth in Asia’s insurance market is expected to remain 400 phenomenal for some years. According to Swisse Re and Oliver 350 Wyman, gross written premium (GWP) in Asia reached 300 US$832bn in 2015, compared to North America’s US$602bn 250 and Western Europe’s US$851bn (figure 1). By 2025F, Asia 200 insurance market is expected to reach US$1.802bn, up 2.2x, 150 outpacing 1.1x growth from North America and Western 100 Europe (combined). 50

0 In 2016, Asia accounted for 66% and 81% of Manulife’s APE and VNB. Of this, Hong Kong and Japan collectively accounted for 61% and 71% of region’s APE and VNB (figures 2-3). With 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Canada U.S. Asia the insurer’s increasing scale in the Asian insurance market amid the market’s strong growth potential, we believe it is well- positioned to capture this demand, and record rising premiums. Source: Company data, DBS Vickers

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2. The emergence of middle class population and fast growing An aging population is a global phenomenon, especially with wealth accumulation in Asia is expected to enhance demand the “baby boomer” generation starting to age. With social for insurance coverage and wealth management: healthcare systems and retirement saving plans inadequate in most countries, the retirement gap (difference between one’s The improving Asian economies is expanding the middle class retirement income and actual expense after retirement) is population. Based on Brookings Institute, the middle class expected to widen considerably, especially in densely population is Asia is expected to reach 2.8bn in 2025F, populated countries such as China and the US by 2050F, compared to North America’s 1.4bn. Regional economic according to World Economic Forum (figure 6). This growth is also expected to accelerate wealth creation and undoubtedly will trigger a growing demand for retirement accumulation among households, where total household solution services, ranging from pension, wealth and asset wealth is forecasted to reach US$119tn in 2025F, compared management, saving plans, and health insurance coverage. to US$97tn in North America market (figure 5), according to We believe the trend also bodes well for Manulife, given its Oliver Wyman. As people become wealthier, health well-established franchise in retirement service solutions, consciousness will also rise. Thus, this will also lead to rising accompanied by its fasting growing WAM business. demand for insurance coverage and wealth and asset management services. Fig 6: Retirement gap in major market

Fig 4: Middle class population in N. America and China US$tn 137 140 Middle class population, bn 119 3.0 2.8 120 100 2.5 80 2.0 60 1.4 1.5 40 26 28 1.0 20 13 11 11 3 0.4 0.5 0.3 0 Canada Japan China US 0.0 2015 2050F 2015 2025F

North America Asia Source: World Economic Forum, DBS Vickers

Source: Brookings Institute, DBS Vickers Wealth and Asset management another rising star: In addition to Manulife’s bright Asian Insurance business prospects, Fig 5: Household wealth in N. America and China growth in its WAM business is also on a rise. Its total AUM has grown at 28% CAGR during 2012-16, driven mainly by its (Household wealth, US$tn) retirement platform (50%+ of total AUM), followed by retail 119 investment (32%), and institutional asset management (15%, 120 figure 7). 97 100 Fig 7: Manulife’s WAM’s AUM by customer type 2.5x 80 1.6x CAD m 59 60 600 45 40 500 400 282 +30% Cagr 20 268 300 0 143 North Amecia Asia 200 125 +25% Cagr 101 171 178 2015 2025F 100 101 130 74 84 +29% Cagr 33 42 71 Source: Oliver Wyman, DBS Vickers 0 29 2012 2013 2014 2015 2016 3. An aging population with widening retirement gaps Institutional Asset Management (difference between retirement income and actual expense) in Retail Investments major markets driving demand for retirement products and Retirement platforms WAM : Source: Manulife, DBS Vickers

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The continuous growth in Manulife’s WAM AUM has result in rising earnings contribution from its WAM business. In 2016, Fig 9: New Business Value by country - Asia profit from its WAM contributed 21% of Manulife’s pre-tax earnings, and earnings from this segment increased by 30% US$ m y-o-y in 1H17. We believe its WAM business will serve as 800 4% 3% another growth catalyst for Manulife in the future. 7% 4% 600 11% Good VNB and shareholder value growth potential 400 4% 35% 2% 13% 0% 200 26% Asia Insurance business has served as major growth drivers for 37% APE and VNB for Manulife, and accounted for 66% and 81% 56% 0 -2% of its APE and VNB in 2016, respectively (figure 8). In 1H17, Asia’s VNB rose by 33% y-o-y, which enabled Manulife to -200 deliver 32% y-o-y growth in total VNB. With demand for 2014 2016 insurance products in the region continuing to rise, Hong Kong Japan accompanied by Manulife’s strategic move to scale back its Singapore China low margin insurance business in the US, we believe the Indonesia Philippine contribution from its Asian market will continue to rise. Other Asia countries

Fig 8: New Business Value by country - Asia Source: Company data, DBS Vickers

US$m China next in the spotlight: Growth from China market has 300 been on an exponential growth trajectory for the past 3 years, 250 with APE, VNB and core earnings from the market posting 43%/138%/41% CAGR during the period. China’s 200 contribution to APE, VNB and core earnings has increased from 7% to 8%, 2% to 7% and 4% to 7% from 2014 to 150 2016, respectively. With the market’s low insurance 100 penetration (~3%), which implies great long term growth potential, we believe contribution from Manulife’s China 50 insurance business will continue to rise.

0 Fig 10: Annual Premium Equivalent by country - Asia

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 US$ m Hong Kong Japan Asia Other 2,500 6% 4% 8% 2,000 8% Source: Company data, DBS Vickers 15% 1,500 5% 5% 7% 9% Developed Asia versus Emerging Asia: Like most of the 1,000 5% 41% 46% regional life insurers, Manulife has set footprints in both the 500 Developed Asia (defined as Hong Kong, Japan and Singapore), 22% 20% China, and Emerging Asia markets (Indonesia, Philippines and 0 Vietnam among others). Contribution from Developed Asia 2014 2016 markets have continued to rise during the past 3 years, with Hong Kong Japan APE/VNB/core earnings collectively accounting for Singapore China 73%/82%/89% in 2014 to 76%/83%/89% in 2016, Indonesia Philippine respectively (figure 9-11). This was driven mainly by (i) its Other Asia countries profit refocus strategy in Japan which has helped its VNB contribution to grow from 26% in 2014 to 35% in 2016; and Source: Company data, DBS Vickers (ii) the successful bancassurance business model in Singapore which led to a rise in contribution in both APE and VNB during Emerging Asia holds strong potential: Contribution from the same period (APE up from 5% to 15% and VNB up from Emerging Asia markets has been volatile, as the markets have 0% to 11% from 2014 to 2016). Volatility was seen in Hong to reach a certain stage of maturity. Manulife is growing its Kong; APE contribution was stable at 20-22% but there was a business scale in Emerging Asia (APE/VNB/core earnings decline in VNB’s contribution from 56% to 37% during the accounted for 16%/11%/4% of its Asia business in 2016) . period. While Hong Kong’s contribution is on the rise, With the sizable population base, low insurance penetration, contributions from Japan and Singapore are rising at a faster fast growing economies, we believe long term opportunities pace. are substantial.

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Fig 11: Core earnings by country - Asia Fig 12: VNB margin trend by major markets

US$ m 70% 1,200 6% 7% 4% 60% 1,000 4% 6% 4% 7% 800 2% 34% 50% 600 31% 40% 400 50% 200 56% 30% 0 -4% -5% 20% -200 2014 2016 10% Hong Kong Japan 0% Singapore China Canada U.S. Hong Japan Other Total Indonesia Philippine Kong Asia Other Asia countries 2015 2016

Source: Company data, DBS Vickers Source: Company data, DBS Vickers

VNB growing at 23% CAGR in FY17F-19F: Manulife’s overall VNB margin increased to 25.7% in 2016, from 23.5% in Fig 13: VNB margin quarterly trend in Asia markets 2015 (figure 12). The main reasons were due to a noticeable improvement in margins in Japan, where the insurer has 80% refocused on profitability, accompanied with the rising 70% economy of scale in other Asia markets. Margins in Hong 60% Kong declined in 2016, mainly due to product mix as growth for the year was driven by purchases by Mainland Chinese on 50% high cash value products (lower margin). On the other hand, 40% margins in the matured markets of Canada and the US are 30% steady, thus the VNB margin trend has remained relatively 20% stable. 10% Given the rising scale in Japan, the VNB margin in Japan and 0% Asia continued to trend up in 1H17, as compared to 2016 (figure 13). As contribution from Asia Insurance continues to 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 rise, we expect Manulife’s VNB margin will remain on an Hong Kong Japan upward trend going forward. With the strong growth Asia Other Total Asia prospects and rising contribution from Manulife’s Asia Insurance business, we expect VNB earnings will continue to Source: Company data, DBS Vickers grow strongly at 23% CAGR in FY17-19F, compared to 28% y-o-y in FY16.

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Manageable impact from slower MCV purchase: Similar to other regional insurers, Hong Kong’s contribution is the Fig 15: Manulife’s core earnings and dividend per share largest for Manulife in Asia, with APE/VNB/core earnings from Hong Kong forming 20%/37%/50% of the Asia market in Dividend per share 2016. Growth in APE had started to accelerate from 1Q16, CAD m driven mainly by the strong influx of Mainland Chinese 4,500 0.8 Visitors (MCV). However, with increasing policy measures to 4,000 0.7 prevent further capital outflow from the Mainland, MCV 3,500 0.6 purchases of insurance products in Hong Kong has noticeably 3,000 0.5 slowed down. We expect APE growth in Hong Kong market 2,500 will start to normalise going forward. 0.4 2,000 0.3 1,500 We believe the impact of slower MCV purchases is 0.2 manageable, as MCV only accounted for 17% of APE in 1,000 Hong Kong in 1H17, versus market average of near 40%. 500 0.1 Excluding MCV, APE growth in Hong Kong was in fact 27% 0 0 y-o-y in 1H17 (+17% y-o-y in 2Q17). 2011 2012 2013 2014 2015 2016 Core earnings (CA$ m) Dividend per share -RHS Fig 14: APE YoY growth trend in Asia market Source: Company data, DBS Vickers YoY (%) 120% Negative impact from legacy Variable Annuity business fading 100% 80% Manulife has long suffered from its exposure in legacy Variable 60% Annuity guaranteed products, which was a good and profitable 40% product prior to 2008. However, since late-2008, when the 20% global equity market collapsed, the insurer, like many other 0% North American insurance companies, had been negatively -20% impacted by its exposure to the Variable Annuity business and -40% had to substantially increase its reserves over the period in order -60% to meet liabilities. -80% While the legacy Variable Annuity block has remained on Manulife’s books as of today given the relatively lengthy

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 product duration, but since 2012, the insurer has taken several Hong Kong Japan steps to mitigate the impact from the in-force blocks, and at the Asia Other Total Asia same time to improve shareholders return. The measures include (i) enhance its in-force block management, (ii) Source: Company data, DBS Vickers strategically scale back sales of low margin product, i.e. long- term health and variable annuity products, (iii) conduct macro hedging strategies to hedge its market exposure from the Growing shareholder value and dividend: Manulife delivered variable annuity block (fully hedged on newly sold exposure), 13% CAGR in core earnings from 2011-2016. This has been (iv) optimising its balance sheet and enhance cost efficiency, supported by several measures that have been put in place and (v) proactively seek opportunities to divest the existing such as (i) strategically scaling back on low margin Long Term legacy business to enhance shareholders value. Health business, (ii) enhance in-force business management, We have seen initial success from its exchange of CA$8bn in (iii) improve operating efficiency and implementing cost reserves from a capital intensive, low return closed block for savings program, and (iv) profit refocus strategy in Japan, and New York Life’s retirement business in Dec. 2014. Management accompanied by growth in both Asia Insurance and WAM continues to be open to any disposal opportunity on their business. It also successfully met its target that was set in legacy in-force block, and any realisation will be positive. 2012 to achieve core earnings of CA$4bn by 2016 (figure 15, In addition to its proactive measures to mitigate the impact core earnings defined as earnings excluding direct impact of from the legacy blocks, strong growth in other parts of its equity markets and interest rates as well as a number of other business, such as Asia Insurance and WAM business, coupled items). with the gradual maturity of these legacy blocks, would also

help to dilute the negative impact of the capital intensive but Its rising earnings profile has also translated into higher low return exposure (figure 17). We believe further downside dividend payout, where dividends have grown by 15% CAGR risk of legacy Variable Annuity block is capped, and impact from 2013-2016. We forecast its dividend per share will grow should fade going forward. by 12% 0.83 in FY17F, which implies 3.2% yield based on closing price of CA$25.86 as of 19 Oct. 2017.

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Fig 16: Strategic decisions taken since the Global Financial Crisis

Source: Company data, DBS Vickers

Fig 17: Strategies in different business segments

Category Core growth Core return Turnaround/Improve Legacy - Global Wealth and Asset - North Amercian Permanet Managemnt - Canadian Group - U.S. Variable Annuity Business Insurance - Asia Insurance Benefits - Long-term care insurance segment - Sub-scale businesses in - Vitality - Japan Life - Long duration, guranteed products attractive markets - Direct-to-consumer

High profitability, high Relatively low profitability, high High profitability, high cash Business cash generation, cash genration, moderate Low profitability, high cash generation, generation, strong growth nature relatively strong growth growth outlook, relatively high weak growth outlook, high risk outlook, low risk outlook, moderate risk risk

- Thoughtfully exit or slow sales in least attractive businesses - Leverage analytics to expand - Conisder structural changes to - Invest to grow at or faster than distribution and improve operational and business models to the market Maximize returns underwriting efficiency Strategic improve expense efficiencies - Further develop digital offering and/or cash generation - Further develop digital offering actions - Optimize capital consumption - Expand product capabilities and in core return business - Expand product capabilities - Drive expense efficiencies through increase scale - Optimize capital consumption digitization, analytics, etc and expense base - Consider strategic alternatives to divest or accelerate run-off

Source: Company data, DBS Vickers

Initiating Coverage with BUY and H-share target price of HK$ 197 Fig 18: Manulife’s Price to EV trend We initiate coverage on Manulife with a BUY rating and TSE target price of CA$3 and H-share target price of HK$ , HK$ 1.5 197 1.15x which is based on 1.1x FY18F P/EV (in line with the upper-mid 200.0 180.0 level of historical 5-year mean, figure 18), assuming FY18F EV 0.99x per share of CA$29.1 (up 11% y-o-y). Our price target is 160.0 equivalent to 1.3x FY18F P/BV, and offers 24% potential share 140.0 price upside. 120.0 0.83x 100.0 0.66x Trading at 1.0x forward P/BV, compared to regional peers 80.0 which are trading at an average of 1.4x consensus FY18F P/BV, 60.0 0.50x Manulife’s valuation is undemanding. We believe its discount 40.0 to peers reflects its on-going exposure toward its Variable 20.0 Annuity in-force block. Nonetheless, given the fast-growing 0.0 outlook of its Asia Insurance and WAM businesses, 12 13 14 15 16 17 accompanied by fading impact of its legacy business, we believe Manulife’s valuation will catch-up with its regional Source: Company data, DBS Vickers peers.

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Gross written premiums CRITICAL FACTORS TO WATCH C$ m 30% 40,000 25% Critical Factors 35,000 US 10-year government bond yield 30,000 20% 25,000 15% Sensitive to US government bond yield: increase in the US 20,000 government bond yield would lower the insurance reserve 15,000 10% 10,000 5% assessment. This is positive to insurer's reinvestment yield under a 5,000 0 0% rising yield environment. We believe US' gradual pace of interest 2015A 2016A 2017F 2018F 2019F hikes is favourable to life insurers. Gross written premium (LHS) yoy growht (%) (RHS)

Value of new business in Asia division Net Investment return Manulife’s new business value (NBV) is largely driven from Asia 5.0% Division, accounting for 80% of the group’s NBV in the first half 4.5% of 2017. Canadian and U.S. divisions representing 17% and 3% 4.0% of the group’s NBV respectively. Within Asia, Hong Kong played a significant role (32% of total Asia’s NBV in 17H1) with strong NBV 3.5% margin (52% vs group’s total 33%). Because of limited sales to 3.0% Mainland Chinese Visitors (MCV), the softening sales from MCV 2.5% will not affect the NBV growth tremendously. 2.0% 2015A 2016A 2017F 2018F 2019F Net investment return Total investment return

Group embedded value C$ m 30% 60,000 25% 50,000 20% 40,000

30,000 15%

20,000 10%

10,000 5%

0 0% 2015A 2016A 2017F 2018F 2019F

Group embedded value (mn) (LHS) yoy growht (%) (RHS)

Source: Company, DBS Vickers

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Appendix 1: A look at Company's listed history – what drives its share price?

Share Price History

HK$ Manulife acquired Issued 8 mn series 3 Issued 19 mn series retirement plan 180 preferred shares 23 preferred shares 45,000 services business 160 of New York Life 40,000 140 35,000

120 30,000

100 25,000

80 Manulife Manulife Appointed 20,000 acquired formed 15 Issued 16 Roy Gori 60 Revision of economic year regional 15,000 reinvestment Canadian- mn series as life Issued CAD900 mn based 21 president 40 assumptions by the bancassurance 10,000 medium term notes operations of preferred Actuarial Standards partnership 20 Board becomes effective Standard Life shares 5,000 with DBS 0 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Manulife share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs US 10-year government bond yield

Strong correlation of 0.83 between HK$ US 10-year government bond yield 180 4.5 and share price since Jan16. 160 4.0 140 3.5 This is attributed to benefits from 120 3.0 lower reserve required from increasing government bond yield 100 2.5 and higher new money yield in its 80 2.0 investment portfolio. 60 1.5 40 1.0 20 0.5 0 0.0 -17 -16 y p Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sep-17 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Se May-10 May-11 May-12 May-13 May-14 May-15 May-16 Ma Manulife share price (LHS) US 10 yr government bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Balance Sheet: Solvency ratio The consolidated capital levels totaled C$ 52bn in the first half of 2017. The Minimum Continuing Capital and Surplus Requirements 250.0% (MCCSR) reached 230%, well above the supervisory target of 230.0% 150%. 210.0% 190.0% 170.0% 150.0% Share Price Drivers: 130.0% US government bond yield: 110.0% Increase in US government bond yield would lower the insurance 90.0% 2015A 2016A 2017F 2018F 2019F reserve assessment. This is also positive to insurer's reinvestment yield under a rising yield environment. We believe US' gradual pace of interest hikes is favourable to life insurers. ROE

10.0% New Business Value growth in Asia: 8.0% NBV is largely driven from Asia Division (80% of group’s NBV). Within Asia, Hong Kong played a significant role (32% of total 6.0% Asia’s NBV in 17H1) with strong NBV margin (52% vs group’s total 4.0%

33%). Manulife is relatively resilient to sales slowdown because of 2.0% limited exposure to Mainland Chinese Visitors (MCV). 0.0% 2015A 2016A 2017F 2018F 2019F Key Risks: Increase in pricing competition would affect company's new PEV Band business margin.

Company Background Manulife Financial Corporation was established in 1887. It was listed on HKEX in September 1999. The company mainly provides financial advisory services, insurance, and wealth and asset management solutions for individuals, groups and institutions. At end-16, its total assets and equity reached CAD 721bn and CAD 43bn respectively.

PB Band

Source: Company, DBS Vickers

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Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Total weighted premium growth N/A N/A N/A N/A N/A VNB growth 0.0 0.0 0.0 0.0 0.0 VNB margin N/A N/A N/A N/A N/A Net investment return 4.2 4.1 4.0 4.0 4.0 Total investment return 2.9 4.6 4.0 4.0 4.0 EV growth 0.0 0.0 0.0 0.0 0.0 Solvency ratio 223.0 230.0 233.3 236.0 239.9

Income Statement (C$ m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total weighted premium income N/A N/A N/A N/A N/A Gross written premiums 32,020 36,659 38,511 41,245 44,897 Net earned premium 15,929 27,632 29,028 31,088 33,841 Investment income 11,465 13,390 13,830 14,520 15,367 Other operating income 7,036 12,315 16,803 16,950 17,516 Total income 34,430 53,337 59,661 62,558 66,724

Benefits and claims (31,213) (43,073) (42,834) (44,989) (47,568) Underwriting and policy acquisition costs (1,615) (1,646) (1,691) (1,811) (1,971) Finance cost (1,101) (1,013) (1,089) (1,199) (1,317) Other expenses 2,117 (4,276) (7,856) (8,101) (8,635) Total expenses (31,812) (50,008) (53,470) (56,100) (59,490)

Share of profit of associated and JVs N/A N/A N/A N/A N/A Profit before tax 2,618 3,329 6,190 6,458 7,235 Income tax expense (328) (196) (929) (969) (1,085) Minority interest (69) (143) (240) (251) (281) Preferred dividend (116) (133) (133) (133) (133) Net income attributable to shareholders 2,075 2,796 4,828 5,045 5,675

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Balance Sheet (C$ m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 309,267 321,869 334,744 354,828 376,118 Segregated funds net assets 313,249 315,177 324,720 327,250 329,477 Property, plant and equipment 0 0 0 0 0 Other assets 82,127 83,635 83,635 83,635 83,635 Total assets 704,643 720,681 743,099 765,714 789,230

Net life reserves - traditional 251,633 262,553 279,641 296,998 314,716 Net life reserves - investment contracts 3,497 3,275 3,603 3,783 3,972 Segregated funds net liabilities 313,249 315,177 315,177 315,177 315,177 Other Liabilities 94,326 96,853 98,108 99,426 100,809 Total liabilities 662,705 677,858 696,528 715,383 734,674

Shareholder's equity 41,159 41,832 45,519 49,217 53,382 Participating policyholders' equity 187 248 309 370 431 Minority interest 592 743 743 743 743 Total equity 41,938 42,823 46,571 50,330 54,556

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 13.0 10.1 16.6 16.2 16.8 Premium income / total asset 0.3 0.4 0.6 0.7 0.7 Total asset / total equity 17 17 16 15 14 Return on equity 5.6 6.7 11.1 10.7 11.1

Embedded value (C$ m) Book value 41,159 41,832 45,519 49,217 53,382 Adjusted items (1,202) 437 437 437 437 Adjusted book value 39,957 42,269 45,956 49,654 53,819 Value-in-force 20,044 20,658 22,358 24,207 26,219 Adjustment (if any) (12,241) (16,453) (16,453) (16,453) (16,453) Group embedded value 47,760 46,474 51,861 57,408 63,585

Per share analysis (C$) EPS 1.06 1.42 2.45 2.56 2.88 BPS 20.87 21.18 23.05 24.92 27.03 DPS 0.67 0.74 0.83 0.94 1.06 EVPS 24.22 23.53 26.26 29.07 32.20

Capital Strength (%) 17 17 16 15 14 Leverage ratio Solvency ratio 223.0 230.0 233.3 236.0 239.9

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China / Hong Kong Company Guide

People's Ins Co Group of China Version 1 | Bloomberg: 1339 HK Equity | Reuters: 1339.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

HOLD (Initiating coverage) Exposure away from P&C Last Traded Price ( 30 Oct 2017): HK$3.68 (HSI : 28,336) Prefer PICC over PICC P&B: People's Ins Co Group of China (PICC) is the parent Price Target 12-mth: HK$3.90 (6% upside) company of PICC P&C (2328 HK, SELL). Its main business started from P&C, Analyst and gradually expanded to Life and Health insurance since 2005. PICC P&C Ken SHIH +852 2820 4920 accounted for close to 70% of PICC’s equity value and profitability. Given the [email protected] gloomy P&C market outlook in China, which is impacted by the second auto Keith TSANG CFA, +852 2971 1935 pricing reform, PICC offers exposure to other segments, other than just the [email protected] P&C business. In addition, we note that PICC P&C’s market cap is US$26bn compared to PICC at US$19bn, and as PICC holds 68.98% of PICC P&C, this What’s New implies that PICC’s Life+Health businesses account for only 6% of PICC’s • PICC offers exposure away from just P&C business, market value. We believe this is low. Between the two insurers, we prefer PICC

and is our preferred pick within the PICC group over PICC P&C. Will take time for Life business to make a meaningful contribution: Given • Late entry into life insurance business would take PICC’s late entry into Life insurance, we believe more time is needed for its non- time to see a more significant contribution P&C business to make a meaningful impact to the group. In 1H17, 47% of • Small duration gap means that duration matching PICC Life’s first-year premium (FYP) was single premiums, while regular and prudent investment strategies are important premiums accounted for only 3%. We believe its underwriting portfolio needs to undergo a significant product mix adjustment before VNB growth is

• Initiate with HOLD and TP of HK$3.9 noticeable with higher renewal policy rates. PICC had aggressively built up its agent force in 2016 by 34% y-o-y, in order to expand its agency channels and shift in product mix. However, its agent force remains small and it would take Price Relative time to build up capacity. HK$ Relative Index Prudent investment portfolio: PICC’s investment portfolio is considered relatively 5.9 208 prudent. With the group’s asset/liability duration at 5.5/7 years with a small 5.4 188 duration gap, this enables PICC to pursue a duration matching investment 4.9 168

4.4 148 strategy. In 1H17, it allocated more assets to cash and fixed income securities, 3.9 128 while scaling back on equity investments. Despite a lower risk appetite, its 3.4 108 recurring yield remained stable at 5.3% (annualised), which is at higher end 2.9 88 among peers. Its investment into Hua Xia Bank (600015 CH, NR) is also 2.4 68 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 considered a good investment.

People's Ins Co Group of China (LHS) Relative HSI (RHS) Initiate with HOLD and TP of HK$3.9. We initiate coverage on PICC with HOLD rating and TP of HK$3.9. The insurer is currently trading at 0.9x FY18F P/BV, Forecasts and Valuation which is undemanding but lacks strong near term catalysts. Nonetheless, we FY Dec (RMB m) 2016A 2017F 2018F 2019F Net earned premiums 396,870 430,240 478,032 539,885 prefer PICC compared to PICC P&C. Net investment income 33,075 33,054 36,554 40,867 Valuation: Net Profit 14,245 16,009 17,740 20,440 Out target price is based on SOTP valuation, which assumes (i) 1.0x FY18F P/EV for EPS (RMB) 0.34 0.36 0.38 0.43 EPS (HK$) 0.40 0.42 0.44 0.51 PICC Life+Health, (ii) DBS’ TP of HK$11.7 for 68.98% owned PICC P&C, and (iii) EPS Gth (%) (27.1) 6.6 5.4 15.2 15% conglomerate discount. Our TP implies 1.1x FY18F P/B and 1.0x FY18F P/EV. PE (X) 9.3 8.7 8.3 7.2 Key Risks to Our View: DPS (HK$) 0.04 0.04 0.04 0.05 Increasing market competition, unfavorable policy development, rising natural Net Div Yield (%) 1.1 1.2 1.2 1.4 BV Per Share (HK$) 3.50 5.25 5.86 6.56 catastrophes, and slower than expected economic growth in China. P/Book Value (X) 1.1 0.7 0.6 0.6 At A Glance P/EV (X) 0.9 0.9 0.8 0.7 Issued Capital - H shares (m shs) 8,726 ROAE (%) 11.8 11.3 10.7 11.2 - Non H shares (m shs) 33,698 H shs as a % of Total Earnings Rev (%): New New New Total Mkt. Cap (HK$m/US$m) 156,120 / 20,028 Consensus EPS (RMB) 0.39 0.413 0.436 Major Shareholders Other Broker Recs: B: 9 S: 5 H: 7 Ministry of Finance of China (%) 70.5 National Council for Social Security Fund (%) 9.0 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Major H Shareholders (%) BlackRock, Inc. (%) 5.1 H Shares-Free Float (%) 94.9 3m Avg. Daily Val. (US$m) 16.2 ICB Industry : Financials / Nonlife Insurance

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Company Guide

People's Ins Co Group of China

CRITICAL FACTORS TO WATCH Gross written premiums RMB m 20% Critical Factors 18% Sensitive to China government bond yield: 500,000 16% 400,000 14% An increase in 750-day moving average would lower the 12% 300,000 10% insurance reserve assessment. This is positive to the insurer's 8% 200,000 reinvestment yield under a rising yield environment. We believe 6% 100,000 4% China's tightening stance is favourable to life insurer like PICC. 2% 0 0% 2015A 2016A 2017F 2018F 2019F First-year premium / Value of new business Gross written premium (LHS) yoy growht (%) (RHS) For life segment, PICC’s first-year premium, reaching RMB Value of new business 70,567m and down 7% y-o-y, composed of agency channel RMB m 8,000 (29%), bancassurance (62%) and group (9%) in FY1H17. PICC is 11.0% 7,000 10.0% shifting to value focus with agency channel increasing by 3% to 6,000 9.0% RMB 20,333m and bancassurance decreasing by 10% to RMB 5,000 8.0% 43,657m given more lucrative new business margin from agency 4,000 3,000 7.0% channel (15.1%) than bancassurance channel (1.1%). 2,000 6.0% 1,000 5.0% 0 4.0% Value of new business reached RMB 3,907m, increasing by 82% 2015A 2016A 2017F 2018F 2019F yoy in FY1H17. Agency, bancassurance and group channel Value of new business Value of new business margin contributed 80% and 12% and 8% respectively. Agency growth

Agency growth and productivity 49.0% 39.0% In the first half of 2017, the group’s individual agency sales force 29.0% reached 213K, increasing by 13% HoH. However, the 19.0% productivity, measured in first-year premium per average agency, 9.0% declined by 27% y-o-y to RMB 16,086. -1.0% 2015A 2016A 2017F 2018F 2019F -11.0% Investment Performance -21.0% PICC achieved net investment yield of 5.3% in the first half of Agency growth Agency productivity growth 2017, remaining at the same level as the corresponding of 2016. Fixed income investments (Term deposits, Bonds and other fixed Net Investment return 7.0% income investments) represented 58% of its investment portfolio. 6.5% Thus, with its sizable fixed income portfolio, we believe the 6.0% group’s re-investment yield will benefit under rising interest rate 5.5% environment. 5.0% 4.5% 4.0%

3.5% 3.0% 2015A 2016A 2017F 2018F 2019F

Net investment return Total investment return Group embedded value RMB m 30% 200,000

25% 150,000

20% 100,000

50,000 15%

0 10% 2015A 2016A 2017F 2018F 2019F

Group embedded value (mn) (LHS) yoy growht (%) (RHS)

Source: Company, DBS Vickers

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Company Guide People's Ins Co Group of China

Solvency ratio Balance Sheet: PICC Group’s core and comprehensive solvency ratio reached 200.0% 233% and 296% in FY1H17, increasing by 13% and 12% 180.0% respectively compared with end of 2016. The leverage level, 160.0% measured in total asset / total equity, was 5.5x, similar to the 140.0% 120.0% second half of 2016. 100.0% 80.0% Share Price Drivers: 60.0% Sensitive to China government bond yield: 2015A 2016A 2017F 2018F 2019F

An increase in 750-day moving average would lower the insurance reserve assessment. This is positive to the insurer's reinvestment ROE yield under a rising yield environment. We believe China's 18.0% tightening stance is favourable to PICC. 16.0% 14.0%

12.0% Value of New Business 10.0% The share price performance is linked to the group’s ability to 8.0% 6.0% deliver value of new business growth. Change in product mix or 4.0% channel that is favorable to value of new business is positive to 2.0% 0.0% value of new business growth. 2015A 2016A 2017F 2018F 2019F

Key Risks: PEV Band Substantial decline in China's government bond yield would require a higher reserve. Deterioration in underwriting profitability from increase in loss ratio (higher than expected losses) and expenses ratio (more competition). Slower than expected China economic growth.

Company Background PICC was established in 1949 as the first nation-wide insurer in China. It was listed on HKEX in 2012. The company operates P&C business via PICC P&C and PICC Hong Kong, and life and health businesses via PICC Life and PICC Health. At end-16, its total assets and equity was RMB 932bn and RMB 126bn respectively. PB Band

Source: Company, DBS Vickers

Page 122

Company Guide

People's Ins Co Group of China

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ PICC AMC became 100% PICC P&C and PICC New rules from 6 45,000 owned subisdiary Life acquired 3.2% of CIRC to curb low- margin investment Industrial Bank 40,000 5 type products 35,000 4 30,000 25,000 3 Subscribed PICC P&C acquired 20,000 Hua Xia bank Industrial Established PICC 2 Bank (19.9%) 15,000 PICC increased reinsurance Proposed shares share capital of A-share 10,000 1 PICC Health to CIRC warned aggressive equity offering 92.1% investment and universal life 5,000 insurance 0 0 4 -14 -1 g Jun-15 Jun-16 Jun-17 Jun-13 Jun-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 Feb-13 Oct-13 Feb-14 Oct-14 Apr-15 Apr-16 Apr-17 Apr-13 Apr-14 Dec-15 Dec-16 Dec-12 Dec-13 Dec Aug-15 Aug-16 Aug-17 Aug-13 Au PICC share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs China 10-year government bond yield Remarks

Strong correlation of 0.7 between HK$ 6 5.0 China 10-year government bond yield 4.5 and share price since Jan16. 5 4.0 This is attributed to benefits from 3.5 4 lower reserve requirements amid 3.0 increasing government bond yield 3 2.5 and higher new money yield in its 2.0 investment portfolio. The company is 2 1.5 set to benefit from tightening. 1 1.0 0.5 0 0.0 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 PICC share price (LHS) 10-yr China govt bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Company Guide People's Ins Co Group of China

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 11.2 13.3 8.3 11.2 12.9 Agency growth 49.7 33.6 10.0 10.0 20.0 Agency productivity growth 13.7 (1.7) (20.0) (10.0) (5.0) VNB margin 4.2 4.5 6.7 8.5 10.7 Net investment return 4.5 4.2 4.0 4.0 4.1 Total investment return 6.2 4.3 4.0 4.0 4.1 EV growth 11.8 8.5 12.1 13.0 14.7 Solvency ratio 216.5 176.6 171.9 164.9 152.6

Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 388,387 439,874 476,206 529,712 598,225 Net earned premium 349,311 396,870 430,240 478,032 539,885 Investment income 44,336 33,075 33,054 36,554 40,867 Other operating income 24,290 14,200 14,925 16,834 19,009 Total income 417,937 444,145 478,219 531,419 599,761

Benefits and claims (278,069) (302,575) (323,455) (358,499) (405,679) Underwriting and policy acquisition costs (35,963) (53,664) (59,641) (66,603) (74,996) Finance cost (4,603) (4,333) (4,728) (4,828) (4,933) Other expenses (71,823) (68,640) (75,823) (84,093) (93,872) Total expenses (390,458) (429,212) (463,647) (514,024) (579,481)

Share of profit of associated and JVs 6,491 10,386 13,453 13,746 15,249 Profit before tax 33,970 25,319 28,024 31,142 35,529 Income tax expense (6,305) (4,638) (4,491) (5,082) (5,726) Minority interest (8,123) (6,436) (7,524) (8,320) (9,363) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 19,542 14,245 16,009 17,740 20,440

Source: Company, DBS Vickers

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People's Ins Co Group of China

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 742,821 807,738 872,357 959,593 1,074,744 Property, plant and equipment 23,095 24,113 24,113 24,113 24,113 Other assets 77,552 100,298 134,340 155,639 189,772 Total assets 843,468 932,149 1,030,810 1,139,344 1,288,629

Net life reserves - traditional 507,686 538,513 580,529 635,103 707,311 Net life reserves - investment contracts 27,601 38,370 56,222 85,816 134,875 Other Liabilities 150,986 184,272 184,272 184,272 184,272 Total liabilities 686,273 761,155 821,023 905,191 1,026,458

Shareholder's equity 116,101 126,101 157,370 173,416 192,071 Minority interest 41,094 44,893 52,417 60,737 70,100 Total equity 157,195 170,994 209,787 234,153 262,171

Source: Company, DBS Vickers

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 5.6 3.6 3.7 3.7 3.8 Premium income / total asset 41.4 42.6 41.7 42.0 41.9 Total asset / total equity 5 5 5 5 5 Return on equity 18.7 11.8 11.3 10.7 11.2

Embedded value (RMB m) Book value 116,101 126,101 157,370 173,416 192,071 Adjusted items 8,501 12,994 (3,435) (2,991) (2,449) Adjusted book value 124,602 139,095 153,935 170,425 189,622 Value-in-force 17,687 19,912 27,594 36,193 47,070 Adjustment (if any) (10,876) (11,942) (13,264) (14,993) (17,351) Group embedded value 131,413 147,065 168,265 191,625 219,341

Per share analysis (RMB) EPS 0.46 0.34 0.36 0.38 0.43 BPS 2.74 2.97 4.46 4.98 5.58 DPS 0.02 0.03 0.04 0.04 0.04 EVPS 3.10 3.47 3.58 4.08 4.66

Capital Strength (%) 5 5 5 5 5 Leverage ratio Solvency ratio 216.5 176.6 171.9 164.9 152.6

Source: Company, DBS Vickers

Page 125

China / Hong Kong Company Guide

China Reinsurance Group Corp Version 1 | Bloomberg: 1508 HK Equity | Reuters: 1508.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017

FULLY VALUED (Initiating coverage) More time needed for transition Last Traded Price ( 30 Oct 2017): HK$1.74 (HSI : 28,336) Reinsurance competitive landscape remains fierce: The China reinsurance Price Target 12-mth: HK$1.50 (-14% downside) market has been competitive since opening its doors to international players Analyst in 2001, and this trend is likely to continue. As an industry leader, China Ken SHIH +852 2820 4920 Reinsurance (China Re), has suffered from market share loss, as evidenced by [email protected] its gross written premium (GWP) growth of 10.0% CAGR during 2012-16, Keith TSANG CFA, +852 2971 1935 versus primary market’s growth of 18.9% CAGR. Despite the 35% y-o-y [email protected] increase in China Re’s GWP in 1H17, this was driven mainly by protection- What’s New type policies from the primary market, which we believe carries low margins. With the reinsurer adopting “profit refocus” strategy, we believe future GWP • Competitive landscape to remain intense growth will normalise, but it would take time for the business to transform. • Primary P&C business continues to be impacted by Primary (P&C) business impacted by second auto price reform: Through China the second auto insurance pricing reform with Continent Insurance, China Re’s P&C business, which accounted for 27% of deteriorating earnings outlook GWP in 1H17, has steadily gained market share (to 3.53%). However, we believe its profitability will inevitably be impacted as China’s second auto • Investment portfolio to include more equities, insurance pricing reform kicked off in July 2017. Potentially, we believe this will lead to higher loss ratio, and subsequently the combined ratio. In 1H17, which helps to support recurring yield China Continent Insurance’s combined ratio was 98.2%, +1ppt y-o-y. This • Initiating coverage with FULLY VALUED rating and trend is expected to continue in the near term.

TP of HKD1.5 Asset allocation to include more equity investments: With reinsurance and P&C as main businesses, China Re’s liability duration is shorter at 7 years and 1 year for life reinsurance and P&C (including reinsurance), respectively. As Price Relative such, the asset-liability duration gap is limited, and the reinsurer is able to HK$ Relative Index maintain a flexible investment strategy. In 1H17, with Rmb8bn worth of term 2.9 207 2.7 187 deposits having matured, it has raised the asset allocation for equity

2.5 167 investments (including AM products, schemes and unlisted 147 2.3 stocks). We believe this will help to support its recurring yield despite seeing a 127 2.1 107 temporary decline of 0.68ppt y-o-y in 1H17. 1.9 87 Initiate with FULLY VALUED and TP of HKD1.5: We initiate coverage on China 1.7 67 1.5 47 Re with Fully Valued rating and target price of HK$1.5, based on SOTP Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 valuation. Our target price implies 0.8x FY18F P/B, which is at lower-end of its

China Reinsurance Group Corp (LHS) Relative HSI (RHS) historical 5-year average. Within the industry, the competitive landscape is unlikely to ease in the near term, and we thus hold a conservative view on the Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F company. Net earned premiums 82,620 101,715 115,765 132,072 Valuation: Net investment income 7,739 8,272 9,977 12,129 Our target price is based on our SOTP valuation, which assumes 0.6x FY18F P/B Net Profit 5,146 5,654 6,369 7,641 EPS (RMB) 0.12 0.14 0.15 0.18 for China Re P&C, 0.8x FY18F P/B for China Continent Insurance (P&C), 0.6x EPS (HK$) 0.14 0.16 0.18 0.22 FY18F P/EV for China Re Life, and 0.8x FY18F P/B for its other business arms. EPS Gth (%) (39.8) 9.9 12.6 20.0 Key Risks to Our View: PE (X) 12.0 10.9 9.7 8.1 Intensifying competition from both international reinsurers and domestic DPS (HK$) 0.05 0.06 0.07 0.08 insurers; natural catastrophes may potentially lead to higher insurance Net Div Yield (%) 3.1 3.4 3.8 4.6 reclaims; policy risk; and slower than expected economic growth in China. BV Per Share (HK$) 1.97 2.10 2.22 2.36

P/Book Value (X) 0.9 0.8 0.8 0.7 At A Glance Issued Capital - H shares (m shs) 42,480 P/EV (X) 0.9 0.8 0.8 0.7 - Non H shares (m shs) 35,800 ROAE (%) 7.2 7.6 8.2 9.2 H shs as a % of Total 54

Total Mkt. Cap (HK$m/US$m) 136,208 / 17,479 Earnings Rev (%): New New New Major Shareholders Consensus EPS (RMB) 0.141 0.164 0.183 Central Huijin Investment Ltd. (%) 71.6 Other Broker Recs: B: 1 S: 2 H: 8 Ministry of Finance of China (%) 12.7 Major H Shareholders (%) Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX National Council for Social Security Fund (%) 9.1 Great Wall Pan Asia Int'l In. Co., Ltd (%) 6.5 H Shares-Free Float (%) 84.5 3m Avg. Daily Val. (US$m) 2.2

ed-JS/ sa- AH

Company Guide

China Reinsurance Group Corp

ICB Industry : Financials / Life Insurance

CRITICAL FACTORS TO WATCH Gross written premiums RMB m 140,000 30% Critical Factors 120,000 25% 100,000 20% Gross written premium growth 80,000 15% China Re generated gross written premium(GWMP) of RMB 60,000 10% 67,829m in the first half of 2017, increasing by 35% y-o-y. P&C 40,000 5% reinsurance, life & health reinsurance and primary P&C insurance 20,000 0 0% represented 20%, 54% and 36% of the gross written premium 2015A 2016A 2017F 2018F 2019F respectively. Life and health reinsurance delivered 64.2% yoy Gross written premium (LHS) yoy growht (%) (RHS) growth caused by domestic savings-type reinsurance and Value of new business domestic financial reinsurance business. RMB m 0.0% 2,000 -10.0% Value of New Business (VoNB) -20.0% 1,500 -30.0% Value of new business reached RMB 1,744m, increasing by 74% -40.0% -50.0% 1,000 yoy in FY1H17. The embedded value reached RMB 79,262m, -60.0% -70.0% increasing by 4% compared with the end of 2016. 500 -80.0% -90.0% 0 -100.0% Investment Performance 2015A 2016A 2017F 2018F 2019F

China Re achieved net investment yield of 5.7% in the first half of Value of new business Value of new business margin 2017, 95 bps higher than the corresponding of 2016. Fixed Net Investment return income investments (Term deposits, Bonds and other fixed income 8.0% investments) represented 63% of its investment portfolio. Thus, 7.5% we believe the group’s re-investment yield will benefit under rising 7.0% interest rate environment. 6.5% 6.0% 5.5% Sensitive to combined ratio for its primary P&C segment: 5.0% China Re’s primary P&C’s gross premium composed mainly of 4.5% motor vehicle (73% of total premium). Therefore, the change in 4.0% 2015A 2016A 2017F 2018F 2019F combined ratio from motor vehicle segment is vital to the group’s Net investment return Total investment return P&L. Its combined ratio reached 98.2% in FY1H17, slightly higher than 97.2% in FY1H16. Group embedded value RMB m 10% 90,000 9% 80,000 8% 70,000 7% 60,000 6% 50,000 5% 40,000 4% 30,000 3% 20,000 2% 10,000 1% 0 0% 2015A 2016A 2017F 2018F 2019F

Group embedded value (mn) (LHS) yoy growht (%) (RHS)

Source: Company, DBS Vickers

Page 127

Company Guide China Reinsurance Group Corp

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ Granted reinsurance license CIRC warned aggressive equity 3.0 in Singapore investment and universal life 40,000 insurance 35,000 2.5 30,000 2.0 25,000

1.5 20,000

15,000 1.0 10,000 Subscribed RMB8 bn to real Issued US$700 mn 5 0.5 estate debt investment scheme year note 5,000

0.0 0 Jul-16 Jul-17 Jan-16 Jan-17 Jun-16 Jun-17 Oct-15 Feb-16 Oct-16 Feb-17 Apr-16 Sep-16 Apr-17 Dec-15 Dec-16 Nov-15 Nov-16 Mar-16 Mar-17 Aug-16 May-16 May-17 China Re share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs Return on average equity Remarks

China Re has been listed in HKEX since late 2015. We believe the weak share price performance is linked to weak ROE generation (sharp decline from 12.2% in FY2H15 to 5.8% in FY1H16, and 7.6% in FY1H17).

We are not optimistic for China reinsurance achieving substantial ROE improvement going forward (FY17/18F: 7.3%/7.8%) therefore providing limited upside to the stock

Source: Bloomberg Finance L.P., DBS Vickers

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China Reinsurance Group Corp

Balance Sheet: China Re group’s core and aggregated solvency ratio both declined Expense/Loss/Combined ratio from 258% to 199%, down by 59% compared with the end of 120% 2016. The leverage level, measured in total asset / total equity, 100% increased significantly from 2.9x in end of 2016 to 4.2x. 80%

60%

Share Price Drivers: 40%

Sensitive to bond yield: 20%

Increase in bond yield is positive to insurers' reinvestment yield. We 0% believe re-insurer China Re can be the beneficiary under rising rate 2015A 2016A 2017F 2018F 2019F environment. Expense ratio Loss ratio

Solvency ratio Value of New Business The share price performance is linked to the group’s ability to 280.0% 260.0% deliver value of new business growth. Change in product mix or 240.0% 220.0% channel that is favorable to value of new business is positive to 200.0% value of new business growth. 180.0% 160.0% 140.0% 120.0% Key Risks: 100.0% Substantial decline in China's government bond yields would 80.0% 2015A 2016A 2017F 2018F 2019F require higher reserves. Large risk exposure to reinsurance business. ROE 12.0% Company Background China Reinsurance was restructured from People’s Insurance 10.0% Company of China (PICC) into a joint-stock limited company in 8.0% October 2007. It was listed on HKEX in October 2015. Principal 6.0% activities include (P&C) reinsurance, life and health reinsurance, 4.0% primary P&C insurance and asset management business. At end- 2.0%

16, its total assets and equity reached RMB 211bn and RMB 72bn 0.0% respectively. 2015A 2016A 2017F 2018F 2019F

PEV Band

PB Band

Source: Company, DBS Vickers

Page 129

Company Guide China Reinsurance Group Corp

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 9.1 7.8 25.5 14.2 14.5 Expense ratio 34.1 38.5 37.6 42.1 42.1 Loss ratio 64.0 61.1 62.0 57.0 56.8 Combined ratio 98.0 99.6 99.6 99.1 98.9 Net investment return 4.3 4.3 4.1 4.3 4.4 Total investment return 7.7 4.7 4.1 4.3 4.4 EV growth 31.3 3.2 8.2 7.6 8.3 Solvency ratio 329.2 257.7 253.9 236.8 212.0

Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 80,434 86,677 108,744 124,211 142,168 Net earned premium 73,236 82,620 101,715 115,765 132,072 Investment income 11,696 7,739 8,272 9,977 12,129 Other operating income 1,385 2,006 1,082 1,140 1,262 Total income 86,318 92,364 111,070 126,882 145,463

Benefits and claims (50,097) (61,248) (75,382) (86,390) (98,923) Underwriting and policy acquisition costs (16,426) (13,835) (11,756) (12,270) (12,869) Finance cost (141) (137) (140) (140) (140) Other expenses (11,021) (12,189) (17,961) (21,314) (25,126) Total expenses (77,685) (87,408) (105,240) (120,115) (137,058)

Share of profit of associated and JVs 1,256 1,446 1,446 1,446 1,446 Profit before tax 9,889 6,402 7,276 8,214 9,851 Income tax expense (2,214) (1,169) (1,526) (1,737) (2,080) Minority interest (96) (87) (96) (108) (129) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 7,579 5,146 5,654 6,369 7,641

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Company Guide

China Reinsurance Group Corp

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 163,138 167,363 206,234 254,866 311,217 Property, plant and equipment 2,559 2,547 2,547 2,547 2,547 Other assets 163,296 41,297 38,559 38,559 38,559 Total assets 328,993 211,207 247,341 295,972 352,324

Net life reserves - traditional 112,690 95,181 127,650 172,003 223,061 Net life reserves - investment contracts 118,993 11,530 11,530 11,530 11,530 Other Liabilities 26,353 32,357 32,357 32,357 32,357 Total liabilities 258,036 139,068 171,537 215,890 266,949

Shareholder's equity 70,187 71,182 74,797 79,019 84,241 Minority interest 770 958 1,007 1,063 1,134 Total equity 70,957 72,140 75,804 80,082 85,375

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 10.3 6.2 5.6 5.5 5.8 Premium income / total asset 22.3 39.1 41.1 39.1 37.5 Total asset / total equity 5 3 3 4 4 Return on equity 12.1 7.2 7.6 8.2 9.2

Embedded value (RMB m) Book value 70,187 71,182 74,797 79,019 84,241 Adjusted items (230) 1,592 2,642 2,791 2,975 Adjusted book value 69,957 72,774 77,439 81,809 87,216 Value-in-force 4,210 3,757 5,338 7,278 9,228 Adjustment (if any) 0 0 0 0 0 Group embedded value 74,167 76,531 82,777 89,087 96,444

Per share analysis (RMB) EPS 0.20 0.12 0.14 0.15 0.18 BPS 1.89 1.68 1.78 1.89 2.01 DPS 0.05 0.05 0.05 0.06 0.07 EVPS 1.67 1.68 1.78 1.89 2.01

Capital Strength (%) 5 3 3 4 4 Leverage ratio Solvency ratio 329.2 257.7 253.9 236.8 212.0

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China / Hong Kong Company Guide

PICC Property & Casualty Version 1 | Bloomberg: 2328 HK EQUITY | Reuters: 2328.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Nov 2017 SELL (Initiating coverage) Drag from dim auto insurance outlook Last Traded Price ( 30 Oct 2017): HK$15.24 (HSI : 28,336) Drag from auto insurance pricing reform to continue: PICC Property & Price Target 12-mth: HK$11.70 (-23% downside) Casualty (PICC P&C) is the leading property and casualty (P&C) insurer in

Analyst China, with a dominant 34% market share in the P&C segment. With auto Ken SHIH +852 2820 4920 insurance accounting for 65-70% of Gross Written Premium (GWP) led by [email protected] the recent auto insurance pricing reform, this has inevitably had an impact Keith TSANG CFA, +852 2971 1935 [email protected] on PICC P&C’s premium growth and combined ratio. As the second auto

pricing reform kicked off in July 2017, we believe this will continue to have What’s New a negative impact. Similar to the first pricing reform during 2H15 and • Drag from China’s second auto insurance pricing 2016, where we saw a worsening in its expense ratio (due to competition),

reform and slower new auto sales we expect the second reform will result in a higher loss ratio, as there is limited room for further price discounts. Slower growth in new auto sales • Better non-auto insurance outlook but too small in China may also dampen its long-term outlook. to move the needle Non-auto insurance too small to move needle: The outlook for PICC P&C’s • Shorter asset and liability duration may result in non-auto insurance looks better, with agricultural and liability insurance

higher reinvestment risk driving both premiums and underwriting profit growth. While premium • Initiating coverage with SELL rating and TP of growth in Accident & Health insurance is also strong, but due to the HKD11.7 broader and higher protection coverage especially for critical illness, new rural supplementary medical insurance and urban basic medical insurance,

the product line is recording underwriting losses. Backed by more stringent Price Relative cost controls, we expect improvement in PICC P&C’s non-auto insurance HK$ Relative Index combined ratio. Nonetheless, its remains too small to move the needle. 219 20.5 199 Higher reinvestment risk: With the shorter liability duration for P&C insurers 18.5 179 (usually 1 year), PICC P&C also maintain a relatively short asset duration of 16.5 159 4 years. Given the positive duration gap, we believe this is negative to its 14.5 139 long-term equity value amid the rising interest rate environment. The 12.5 119

10.5 99 shorter asset duration also implies the insurer needs to turn over its 8.5 79 portfolio faster than peers, potentially resulting in higher reinvestment risk. Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Initiating coverage with SELL rating and TP of HKD11.7. We initiate PICC Property & Casualty (LHS) Relative HSI (RHS) coverage on PICC P&C with a SELL rating and target price of HKD11.7.

Forecasts and Valuation Despite PICC P&C’s leading market position, we believe unfavourable FY Dec (RMB m) 2016A 2017F 2018F 2019F Net earned premiums 270,261 301,199 336,812 376,745 market development may limit its share price performance. Net investment income 15,073 16,643 18,917 20,809 Valuation: Net Profit 18,020 20,769 22,528 25,045 Our target price is based on P/B valuation. We have pegged our TP at 1.0x FY18F EPS (RMB) 1.22 1.40 1.52 1.69 P/B (low end of past 5-year trough valuation) on FY18F BVPS of HKD11.7. EPS (HK$) 1.43 1.65 1.79 1.99 EPS Gth (%) (17.5) 15.3 8.5 11.2 Key Risks to Our View: PE (X) 10.7 9.3 8.5 7.7 Increasing market competition, unfavourable policy developments, rising DPS (HK$) 0.36 0.42 0.45 0.51 natural catastrophes, and slower than expected economic growth in China. Net Div Yield (%) 2.4 2.7 3.0 3.3 At A Glance BV Per Share (HK$) 9.47 10.70 12.03 13.51 Issued Capital - H shares (m shs) 4,600 P/Book Value (X) 1.6 1.4 1.3 1.1 - Non H shares (m shs) 8,454 P/EV (X) N/A N/A N/A N/A H shs as a % of Total 35 ROAE (%) 15.8 16.3 15.7 15.6 Total Mkt. Cap (HK$m/US$m) 198,942 / 25,521 Major Shareholders Earnings Rev (%): New New New PICC Holding (%) 69.0 Consensus EPS (RMB) 1.46 1.568 1.663 Major H Shareholders (%) Other Broker Recs: B: 16 S: 3 H: 7 American International Group, Inc (%) 31.9 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX JPMorgan Chase & Co. (%) 6.8 Citigroup Inc. (%) 6.0 BlackRock, Inc. (%) 5.3 H Shares-Free Float (%) 50.0 3m Avg. Daily Val. (US$m) 47.4 ICB Industry : Financials / Nonlife Insurance

ed-JS/ sa- AH

Company Guide

PICC Property & Casualty

CRITICAL FACTORS TO WATCH Gross written premiums RMB m 20% Critical Factors 400,000 18% Gross written premium growth 350,000 16% 300,000 14% PICC P&C generated gross written premium(GWP) of RMB 250,000 12% 10% 200,000 179,683m in the first half of 2017, increasing by 11% y-o-y. 8% 150,000 Motor vehicle, representing 66% of GWP, increased by 9% y-o-y 6% 100,000 4% to RMB 117,847m. The domestic new car sales growth rate 50,000 2% 0 0% declined mildly compared to the same period of last year. The 2015A 2016A 2017F 2018F 2019F group seized the opportunity from second round of deregulation Gross written premium (LHS) yoy growht (%) (RHS) of premium rates of commercial vehicle and enhanced the accurate pricing. Net Investment return 7.0%

Sensitive to combined ratio under motor vehicle segment: 6.5%

PICC P&C’s gross premium composed mainly of motor vehicle 6.0% (66% of total premium). Therefore, the change in combined ratio 5.5% from motor vehicle segment is vital to the group’s P&L. Its 5.0% combined ratio reached 95.5% in 1H17, slightly higher than 95% in 1H16. 4.5% 4.0% 2015A 2016A 2017F 2018F 2019F

Investment Performance Net investment return Total investment return PICC P&C achieved net investment yield of 4.5% in the first half of 2017, 32 bps lower than the corresponding of 2016. Fixed Source: Company, DBS Vickers income investments (Term deposits, Bonds and other fixed income investments) represented 65% of its investment portfolio. Thus, with its sizable fixed income portfolio, we believe the group’s re- investment yield will benefit under rising interest rate environment.

Income from Associate (Hua Xia Bank) Hua Xia Bank, 19.99% owned by PICC P&C, is an associate accounted for under the equity method. Profit attributable to the company was RMB 2,240m, equivalent to 15% of the group’s pre-tax profit.

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Balance Sheet: In the first half of 2017, the group’s comprehensive solvency Expense/Loss/Combined ratio margin ratio was 290%, and core solvency margin ratio was 120% 237%, representing an increase of 5% and 3% compared to the 100% end of 2016. The leverage level, measured in total asset / total 80% equity, was 4.2x, increasing by 4.0x in FY16H2. 60%

40% Share Price Drivers: 20%

Sensitive to bond yield: 0% Increase in bond yield is positive to insurers' reinvestment yield. We 2015A 2016A 2017F 2018F 2019F believe insurer PICC P&C can be the prime beneficiary under rising Expense ratio Loss ratio rate environment. Solvency ratio

Sensitive to combined ratio under motor vehicle segment: With motor vehicle being PICC P&C’s largest segment, 290.0% improvement in the segment’s combined ratio is important to the 240.0% group’s P&L. 190.0%

140.0% Key Risks: Deterioration of underwriting profitability from increase in loss 90.0% 2015A 2016A 2017F 2018F 2019F ratio (higher than expected loss) and expenses ratio (more competition). Rising natural catastrophes. Slower China economic growth. ROE

20.0% Company Background PICC P&C, the largest property and casualty insurer, was 15.0% established in July 2003. It was listed on HKEX in November 2003. 10.0% Its insurance products include motor vehicle, commercial property, cargo, liability, accidental injury and short-term health etc. At end- 5.0%

16, its total assets and equity reached RMB 476bn and RMB 119bn 0.0% respectively. 2015A 2016A 2017F 2018F 2019F

PE Band

PB Band

Source: Company, DBS Vickers

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Company Guide

PICC Property & Casualty

Appendix 1: A look at Company's listed history – what drives its share price?

Share price history

HK$ raised RMB 5.8bn from acqn of 19.9% of 20 rights issue (1.1 rights 45,000 Hua xia Bank AIG sold remaining 18 for every 10 shares) stake in PICC P&C 40,000 16 35,000 14 30,000 12 25,000 10 20,000 8 raised RMB 7.2bn 2nd round CIRC warned from rights issue of auto aggressive 15,000 6 pricing equity raised RMB 5bn from (0.9 rights for investment 10,000 4 rights issue (1 rights Subscribed shares every 10 shares) deregulation and universal for every 10 shares) in Industrial Bank 2 life insurance 5,000 0 0 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Oct-16 Oct-15 Oct-14 Oct-13 Oct-12 Oct-11 Oct-10 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13 Apr-12 Apr-11 Apr-10 PICC P&C share price (LHS) HSF (RHS)

Source: Company Data, DBS Vickers

Share price performance vs 10-year government bond yield Remarks

Strong correlation of 0.72 between HK$ China 10-year government bond yield 20.0 5.0 and share price since January 2016. 18.0 4.5 16.0 4.0 This is attributed to benefits from 14.0 3.5 higher re-investment income 12.0 3.0 increasing bond yield and therefore 10.0 2.5 higher new money yield in its 8.0 2.0 investment portfolio. We believe the 6.0 1.5 investment performance can benefit 4.0 1.0 from the tightening. 2.0 0.5 0.0 0.0 -17 y p-17 e Jul-13 Jul-17 Jul-14 Jul-15 Jul-16 Jan-14 Jan-15 Jan-16 Jan-17 Sep-13 S Sep-14 Sep-15 Sep-16 Nov-13 Nov-14 Nov-15 Nov-16 Mar-14 Mar-15 Mar-16 Mar-17 May-14 May-15 May-16 Ma PICC P&C share price (LHS) 10-yr China govt bond yield (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Company Guide PICC Property & Casualty

Share price performance vs Combined ratio Remarks

HK$HK$ The share price performance is 20 4% negatively correlated to the y-o-y% level change of combined ratio 18 3% starting from 1H12. 16 14 2% The lowered combined ratio will be 12 1% more favorable to PICC P&C’s 10 profitability. We factor in mild 8 0% increase in combined ratio mainly driven by pressure from auto de- 6 -1% regulation. 4 -2% 2 0 -3% 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 PICC P&C share price (LHS) Combined ratio y-o-y change (Motor vehicle) (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

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Company Guide

PICC Property & Casualty

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premium growth 11.3 10.5 11.4 12.0 12.0 Expense ratio 33.8 34.6 34.2 33.9 33.5 Loss ratio 62.7 63.6 63.9 64.4 64.9 Combined ratio 96.5 98.1 98.2 98.3 98.4 Net investment return 4.6 4.4 4.5 4.6 4.6 Total investment return 6.7 5.2 4.5 4.6 4.6 Solvency ratio 283.7 286.9 267.7 250.0 234.1

Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Gross written premiums 281,698 311,160 346,738 388,238 434,912 Net earned premium 244,567 270,261 301,199 336,812 376,745 Investment income 14,268 15,073 16,643 18,917 20,809 Other operating income 7,790 4,658 5,896 5,632 6,494 Total income 266,625 289,992 323,739 361,362 404,048

Benefits and claims (153,419) (171,759) (192,590) (217,040) (244,524) Underwriting and policy acquisition costs (75,030) (86,101) (94,926) (105,020) (116,115) Finance cost (1,638) (1,208) (1,346) (1,368) (1,390) Other expenses (8,808) (11,418) (14,528) (15,129) (16,941) Total expenses (238,895) (270,486) (303,389) (338,557) (378,970)

Share of profit of associated and JVs 473 2,945 5,527 5,263 6,125 Profit before tax 28,203 22,451 25,876 28,068 31,203 Income tax expense (6,356) (4,430) (5,106) (5,538) (6,157) Minority interest 0 (1) (1) (1) (1) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 21,847 18,020 20,769 22,528 25,045

Source: Company, DBS Vickers

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Company Guide PICC Property & Casualty

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Total Investment 344,002 379,884 431,310 470,736 514,105 Property, plant and equipment 14,110 14,977 14,977 14,977 14,977 Other assets 62,308 81,088 97,991 112,908 130,320 Total assets 420,420 475,949 544,278 598,621 659,402

Net life reserves - traditional 217,288 242,093 274,907 312,449 354,552 Net life reserves - investment contracts N/A N/A N/A N/A N/A Other Liabilities 94,181 114,544 134,569 134,569 134,569 Total liabilities 311,469 356,637 409,476 447,018 489,121

Shareholder's equity 108,946 119,306 134,794 151,595 170,271 Minority interest 5 6 7 8 10 Total equity 108,951 119,312 134,802 151,603 170,281

Source: Company, DBS Vickers

Key Financials & Ratios FY Dec 2015A 2016A 2017F 2018F 2019F

Du Pont analysis (%) Net profit / premium income 8.9 6.7 6.9 6.7 6.6 Premium income / total asset 58.2 56.8 55.3 56.3 57.1 Total asset / total equity 4 4 4 4 4 Return on equity 22.4 15.8 16.3 15.7 15.6

Per share analysis (RMB) EPS 1.47 1.22 1.40 1.52 1.69 BPS 7.35 8.05 9.09 10.22 11.48 DPS 0.30 0.31 0.36 0.39 0.43 EVPS 0.00 0.00 0.00 0.00 0.00

Capital Strength (%) 4 4 4 4 4 Leverage ratio Solvency ratio 283.7 286.9 267.7 250.0 234.1

Source: Company, DBS Vickers

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Industry Focus China Insurance Sector

DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 1 Nov 2017 10:18:40 (HKT) Dissemination Date: 1 Nov 2017 17:14:01 (HKT)

Sources for all charts and tables are DBS Vickers unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), 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 DBSV 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 contained 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, who 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 communication 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, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, 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 vary 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.

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

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the 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 recommendations 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 associate1 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 who 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 as 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.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Ping An Insurance (Group) Company (2318 HK), China Life Insurance Company Limited (2628 HK), The People'S Insurance Company (Group) (1339 HK), Picc Property & Casualty Company Limited (2328 HK), China Pacific Insurance (Group) Company Limited (2601 HK) and Aia Group Limited (1299 HK) recommended in this report as of 30 Oct 2017.

DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Ping An Insurance (Group) Company (601318 CH) and China Life Insurance Company Limited (601628 CH) recommended in this report as of 30 Sep 2017.

2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services: 3. 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. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, 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 recommendations published by DBS Bank Ltd, DBSVHK, 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 in 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

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Wong Ming Tek, Executive Director, ADBSR Singapore 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 persons 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. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it. United This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission

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United States This report was prepared by DBSVHK. 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 company, 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 should

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DBS Regional Research Offices

HONG KONG MALAYSIA SINGAPORE DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: 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 2863 1523 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong Ltd e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 657 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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