Investment liberalization, part 1: what it means for yields/valuations
Investment liberalization: back in focus, good progression
We first highlighted investment liberalization as a key fundamental, secular
driver for China insurers in our March 26, 2007 sector report. Since then, the
boom-bust of insurance stocks has been driven by equity-related earnings
performance, in our view. But the A-share market starting to stabilize should
allow investors to refocus on the underlying fundamentals of the insurers.
We see good progression on investment liberalization of late: (1) launch of
medium-term note market; (2) listed companies allowed to issue bonds;
(3) potential property investments; (4) likely expanding QDII.
US-style bond market buildout, Euro-style asset diversification
US-style bond market buildout. A well-developed bond market could
significantly improve China insurers’ net investment yields ex-equities
(3%+) in the longer term. We point to the stable, handsome returns (4.5%-
6.0%) that have been achieved by the bond-centric US insurers, which
benefit from a large and deep domestic bond market. European-style
diversification. We also believe investment liberalization could, over
time, narrow the discount rate-yield spreads of China insurers from the
current 6% to the 3% (and lower) spreads enjoyed by European insurers,
which have diversified assets. By our estimate, if the above developments
could raise investment returns by 15 bp and reduce the discount rate by 15
bp (less reliance on volatile A-share income, hence better earnings stability
and lower correlation with A-share index) per year, they should raise China
insurers’ NBV by 5%-7%.
Likely multi-year secular story; affirm fundamentally positive view
It is still early days for liberalization; we believe China life insurers have the
luxury of structural improvement in recurring investment yields while
enjoying robust premium growth (low penetration) and wide margins
(regulated pricing). The key is execution, which hinges on asset/risk
management. We see Ping An as best-placed, China Life as best-geared.
Raising trading ranges; add on dips; China Life our top pick
We raise our trading ranges and TPs for life insurers due to premium growth
pickup and ongoing liberalization moves; also raise Ping An EPS. We need to
see stabilization/easing of China inflation and tightening to get outright
positive on insurance stocks. China Life (H; Neutral) is our top pick for rising
operating momentum; avoid PICC (Sell) on falling underwriting margin.

Table of contents
Investment liberalization: back in focus, good progression so far 2
US-style bond market buildout, Euro-style asset diversification 6
Likely multi-year secular story; affirm fundamentally positive view 13
Raising trading ranges; add on dips; China Life our top pick 14
Disclosures 17