Life insurance in China is an asset growth story. The building blocks of
asset growth are premium growth, investment returns and how these
interact with in-force maturity. Asset growth drivers were solid in 1Q09
and we remain bullish on the long-term asset accumulation outlook.
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Premium growth has held up well so far in 2009 and recent regulatory
reforms aimed at deepening penetration through tax incentives bode
well for long-term growth. While business mix restructuring at China
Life and Tai Ping Life (CIIH) have held back premium growth, Ping An
has maintained strong momentum with YTD growth of 42% YoY.
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Investment returns solidified in 1Q09. Stabilisation of bond yields
(above 3%) since January is crucial in alleviating “negative spread”
and EV erosion fears, while the deepening bond market and ongoing
investment channel liberalisation support long-term investment return
upside. The 30% gain in the Shanghai Composite Index YTD also
bodes well for future earnings and embedded value growth trends.
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We remain positive on the sector. Our top pick is Ping An (target price
HK$62 from HK$60), due to its superior growth in EV and VNB, and
cheaper valuation multiple. We are cautious on China Life (target price
HK$26.50 from HK$25). While its business mix improvement should
offset weak FYP growth, the share price factors in too much growth, in
our view. Finally, we like CIIH (target price HK$17.50 from HK$15) as a
strong growth, high-beta play for the long term, despite near-term
earnings pressure caused by elevated costs and uncertainty
surrounding the corporate structure.
Back to basics
Life insurance in China is an asset growth story. In basic terms, the main building blocks of
asset growth are premium growth, investment returns and how these interact with in-force
maturity. These drivers of asset growth are performing better than expected so far in 2009
and we are bullish on the long-term asset accumulation outlook for the sector.
Premium growth
Premium growth has held up well so far in 2009, and recent regulatory reforms aimed at
deepening insurance penetration through tax incentives bode well for long-term growth.
While business mix restructuring at China Life and Tai Ping Life (CIIH) have held back
premium volume growth to low double-digit levels, Ping An has maintained its strong
momentum with YTD growth of 42% YoY. As a result of the trends observed so far in 2009
and our detailed analysis overleaf, we upgrade our VNB growth assumptions as follows:
■ Ping An: +5% to 25%
■ China Life: +0.5% to 12.5%
■ TPL (CIIH): +2% to 20%
Investment returns
The stabilisation of bond yields (above 3%) since mid-January is crucial in alleviating fears
of ‘negative spread’ and EV erosion. The deepening of the bond market in conjunction with
fiscal stimulus, coupled with investment channel liberalisation, supports long-term
investment returns while, in the immediate future, the 33% gain in the Shanghai
Composite Index year to date bodes well for both reported earnings and embedded value.
In the recent FY08 results, the three life insurers reduced investment yield assumptions
used in their actuarial valuations to varying degrees. We believe that 5.5% can be justified
on a long-term basis and, hence, we use this as the long-term level-off assumption
underpinning our target prices.
Catalysts and recommendations
We remain positive on the life insurance sector and would be buying on pull-backs.
■ Our top pick is Ping An due to its superior growth, relative value and potential for
operating earnings to recover in 2009 via its P&C and securities business units. While
some may question the sustainability of Ping An’s growth due to the high universal life
crediting rates, we believe their advantage can be sustained for multiple years.
■ We are NEUTRAL on China Life on relative grounds. It trades at a P/EV premium to
its peers, despite having weaker EV growth and the business mix restructuring
complicates the volume versus margin calculation underpinning VNB estimates. Its
P&L is more stable than its sector peers’, however, we believe this is more than priced
in and we believe China Life’s relative performance may suffer if investors rotate back
into China banks.
■ We are positive on CIIH, as its immature in-force book underpins strong EV growth
relative to the large-scale insurers. The investment case does have some moving
parts – for example, the potential for ICBC to buy into Tai Ping, recent moves to
acquire Ming An (to merge with TPI)) and uncertainty with respect to Fortis’s stake in
Tai Ping. However, we believe that this is more than compensated for by the growth
versus valuation equation.
The key stock recommendation that has been added into the Credit Suisse Trade Idea
Monitor are long Ping An, short China Life as a play on growth versus value.