China Insurance Sector

Transcription

1 TP Upside 1 March 2016 Asia Pacific/Hong Kong Equity Research Insurance Research Analysts Charles Zhou, CFA charles.zhou@credit-suisse.com Zichen Xu zichen.xu@credit-suisse.com Grace Li grace.li.2@credit-suisse.com Mia Yang mia.yang@credit-suisse.com China Insurance Sector COMMENT Positioning in a downward rate cycle Figure 1: Pecking order: diversified > P&C > pure life Diversified P&C Pure life China Pacific Ping An China Taiping PICC P&C PICC Group China Life NCI Upside under base case Upside under bear case Upside under bull case Source: Credit Suisse estimates. Note: Base case assumptions: risk discount rate 11-16%, CSI300 3,200, investment return 4.; Bear case assumptions: risk discount rate 12-16%, CSI300 2,000, investment return 3.; Bull case assumptions: risk discount rate 11%, CSI300 3,600, and investment return 5.. NCI refers to New China Life. We prefer P&C business to life during the current downward rate cycle, given (1) most P&C policies can be re-priced annually, thereby restoring profitability, while terms and guaranteed rates of in-force life policies cannot be changed until maturity (~15 years duration), and (2) stock market concerns over falling rates are likely to outweigh superior growth prospects offered by Life. Within Life, we prefer insurers that focus on higher quality protection and agency business (mostly diversified with P&C exposure) instead of those selling 4% guaranteed rate or high cash value products (mostly pure lifers). The market has already priced in a bearish scenario. (1) Lower longterm investment return priced in. Current prices of higher quality diversified and P&C names imply % long-term investment returns, below pure lifers' % and 3.7% average of developed markets insurers in (US: 5., EU: 3.9%, Japan 2.2%). (2) Lower stock market level already discounted: Assuming CSI 300 at 2,000, EV/book value would be cut by 4-1/7-18%, which has already been priced in given current sector average valuation of 0.8x P/E and 1.1x P/B, (3) The market is over-concerned about soaring premium growth of small/mid insurers (i.e., Sinolife): we expect limited crowding-out effect on VNB of listed insurers, as aggressors compete for different client base (those who chase aggressive yields). Catalysts Strong FY15 results, monthly premiums and A-share recovery. Top pick: CPIC, (1) it is the best play P&C theme (3 of fair value is nonlife, and P&C turnaround), (2) it is a diversified name with higher quality growth in life. We are less sanguine on PICC P&C, given the increased bank exposure (4 of shareholder value) dilutes its story of a pure P&C play. Our TPs are based on 4. long-term investment return assumption (instead of 5.5% used by insurers), and imply x P/EV and x P/B. We downgrade China Life (H) to NEUTRAL (from Outperform), China Life (A) to UNDERPERFORM (from Neutral) and New China Life (H) to NEUTRAL (from Outperform). Risks: Significant movement in rates, equity market plunge, weak VNB growth and auto insurance deregulation. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 P/BV (x) Bond yield (% pa) VNB growth (% pa) 1 March 2016 Focus charts and tables Figure 2: Bond yield trends downward Figure 3: VNB momentum continues to be strong China 10-year government bond yield (% pa) China life insurance - value of new business growth (12 mth rolling %) F'casts China listed insurers Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Dec-15-1 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Dec-15F Jun-16F Source: Reuters Figure 4: Falling rates have bigger impact to life China insurance Fair value mix by segment (%) ; Note: average VNB growth of listed Chinese insurers weighted by VNB Figure 5: Valuation at historical low China insurance price to book ratio China Life 4.5 New China Life Ping An std dev China Pacific yr average China Taiping 2.5 5yr average PICC Group 2.0 PICC P&C std dev Fair value mix (%) Life Bank Non-life 1.0 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Dec-15. Note: Non-life is mainly P&C business, and the rest includes reinsurance, securities, corporate, group, others and etc. Source: Reuters Figure 6: Diversified names are in better position in a bear case scenario Target price of major Chinese insurers under three scenarios Target Price Diversified Life P&C Pure Life Scenarios Investment return CSI300 Risk discount rate China Pacific Ping An China Taiping PICC P&C PICC Group China Life NCI Bull 5. 3, % Base 4. 3, % Bear 3. 2, % Current price Implied invt return 3.1% 3.1% 3.1% 3.2% 3.4% 3.9% 3.8% Upside to current price, % Assumptions Bull 63% 54% 74% 5 39% 66% 84% Base 27% 22% 26% 22% 15% 3% 7% Bear -5% -3% -2% -5% -9% -32% -27% Source: Credit Suisse estimates. Note: Base case assumptions: risk discount rate 11-16%, CSI300 3,200, investment return 4.; Bear case assumptions: risk discount rate 12-16%, CSI300 2,000, investment return 3.; Bull case assumptions: risk discount rate %, CSI300 3,600, and investment return 5.. China Insurance Sector 2

3 1 March 2016 Positioning in a downward rate cycle Falling rates may persist; P&C business fares better Rates have been falling since 2014, and we expect the trend to continue throughout 2016 (CS view: three rate cuts in 2016). Falling rates create an overhang on life insurers, in particular: (1) weaken investors' confidence on EV, (2) lift reserve charges while lowering profit, (3) compel insurers' to shift to risky assets to chase higher returns, and (4) raise concerns over the 4% guaranteed rate annuity products (given that life insurers also carry distribution / selling costs). In contrast, P&C fares better, since P&C insurance policies can be re-priced annually, thereby restoring profitability, while terms and guaranteed rate of inforce life policies cannot be changed until maturity (15 years duration on average). We share investors' concern over falling rates, but highlight that the market has already priced in a bearish scenario. Current share prices of diversified and P&C names imply % long-term investment returns, below pure lifers' implied yield of % and 3.7% average of developed markets insurers in (US: 5., EU: 3.9%, Japan 2.2%). Under our base case (4. L-T investment return, CSI300 at 3,200 and RDR of 11-16%), diversified insurers, which crucially, have better quality Life products and less exposure to 4% guaranteed products, have 22-27% upside, better than pure lifers that are fairly valued. Under our bear case (3. investment return, CSI300 at 2,000 and RDR of 12-16%), downside risks of pure lifers is significantly higher than diversified names. Equity market more sentimental than real Given the volatile A-share market, we view the equity market as a wild card for insurers near term. However, the impact is more sentimental than real. First, equity exposure has reduced, as insurers gradually shift asset allocation to non-standard assets, after the regulator broadened the investment scope. Second, under our bear case (CSI300 at 2,000), EV would be reduced by 4-1 and book value by 7-18%, which has been priced in at current sector valuation of 0.8x P/EV and 1.1x P/B on average. Finally, solvency remains healthy (>15). While our A-share strategist estimates CSI300 to reach 3,200 (~11% upside) by end of 2016, stock market volatility may continue to dampen investment sentiment on insurers. Strong and structural growth to sustain Despite rates and market uncertainty, we remain positive on life insurance growth prospects and deem agency the key driver of long-term sustainable growth and value creation. In our view, the structural growth would be led by agency business expansion, bancassurance product mix improvement, and favourable regulatory policy on health insurance and deferred tax pension scheme. Investors may find this attractive after the downward rate cycle ends. Into 2016, life insurers recorded strong "jumpstart" sales, with agency new business, according to Shanghai Securities News, increased by YoY in January. Further, the market is concerned over aggressive growth of some small/mid insurers (i.e., Sinolife, Anbang), but we expect limited VNB impact on listed players, whose major focus is sustainable growth and value creation instead of premium scale only. Prefer diversified insurers; Top pick: CPIC We prefer P&C business to life in the current downward rate cycle, given P&C insurance policies have shorter duration and can be re-priced annually, while terms and guaranteed rate of life policies cannot be changed until maturity. Our top pick is CPIC, given (1) it is the best play P&C theme (3 of fair value is non-life, and P&C underwriting turnaround), (2) it is a diversified name with higher quality growth in life. We are less sanguine on PICC P&C, given the increased bank exposure (4 of shareholder value) dilutes its story of pure P&C play. Catalysts: FY15 results, monthly premiums, A-share recovery. Risks: Significant rate movement, stock market crash, weak VNB growth, auto pricing deregulation. China Insurance Sector 3

4 1 March 2016 China Insurance Sector 4 Figure 7: Asian insurance key financial metrics EPS ROE P / NTA ROTE P / EV P / EV* EV ROEV VNB* VNB Payout Div Yld Reporting Market Monthly Daily Monthly Price 52 Week 12mth 12mth Inv'ment Year Consensus PE (x) Growth P / BV (x) (%pa) (x) (%pa) (x) (x) growth (%pa) VNB (x) (x) growth ratio (%) (%pa) Price movement (%) Company Currency Cap Volume Volume Liquidity 29-Feb high/low Target Return Rating End PE (x)* 12mth forward diluted (Credit Suisse forecasts) 1wk 1mth 1qtr 1hy 1yr YTD US$m US$m US$m % local local % Dec Australia AMP.AX AMP AUD 11, % % OPFM 31-Dec 13.7x 15.5x -2% 1.8x 11.2% 3.3x 21.2% 1.2x 1.2x 11% 7.5% 6.0x 6.0x 4% 81% 5.5% % -8.4% -10.6% -20.6% -8.7% CGF.AX Challenger AUD 3, % % OPFM 30-Jun 11.8x 11.6x 7% 1.4x 13.2% 1.8x 15.5% na na na na na na na 52% 4.5% -3.6% -5.3% -10.9% 5.2% 7.1% -13.8% CVW.AX Clearview AUD % na na NC 31-Dec 15.5x 15.5x 25% 1.4x 8.8% na na na na na na na na na 56% 3.6% % -6.2% % -5.3% TWR.AX Tower NZD % % NTRL 30-Sep 9.1x 9.1x 1 0.9x 9.8% 1.1x 11.6% 0.3x 0.3x 7% 3.1% -67x -60x 5% 336% 10.5% -0.7% -10.8% -15.7% -22.5% -33.2% -21.6% NHF.AX NIB Holdings AUD 1, % UPFM 31-Dec 17.6x 17.6x 12% 3.6x 20.4% 8.9x 50.5% na na na na na na na 66% 3.7% 2.3% 0.6% -5.8% % 2.6% MPL.AX Medibank Private AUD 4, % % UPFM 31-Dec 18.0x 18.0x 3% 4.3x 23.9% 5.1x 28.7% na na na na na na na 75% 4.2% 0.8% 0.4% 8.6% 8.2% 17.2% 17.2% GMA.AX Genworth Australia AUD % na na NC 31-Dec 5.7x 5.7x na 0.6x 10.1% 0.6x 10.1% na na na na na na na 75% 13.1% -3.6% -14.3% -12.7% -17.2% -18.1% -19.6% IAG.AX IAG AUD 9, % % OPFM 30-Jun 13.8x 14.2x 5% 1.9x 13.6% 3.9x 27.7% na na na na na na na 114% 7.2% -5.1% -0.1% -4.9% 3.9% -13.7% -5.3% QBE.AX QBE USD 10, % % NTRL 31-Dec 10.7x 13.6x 11% 0.9x 6.9% 1.4x 10.1% na na na na na na na 88% 5.1% 1.7% -2.8% -15.2% -19.9% -18.6% -16. SUN.AX Suncorp AUD 10, % % OPFM 30-Jun 12.0x 11.3x 12% 1.0x 9.4% 1.7x 14.9% na na na na na na na 83% 6.6% -3.9% -3.5% -16.4% -12.7% -19.2% -7.7% 54,378 4, % 17.5% 13.2x 13.8x 9% 1.7x 12.1% 5.3x 35.4% 0.7x 0.7x % -30.3x -27.0x 5% 9 5.7% -2.2% % -7.1% -12.7% -7.2% China SS China Life (A) CNY 63,231 6, % % UPFM 31-Dec 12.2x 13.5x 14% 1.6x x x 1.0x 13% 6.6% -2.1x -0.1x 22% 39% 2.6% -3.3% -2.7% -24.4% -21.9% -46.9% -29.8% SS China Pacific (A) CNY 22,576 6, % OPFM 31-Dec 12.6x 13.0x -6% 1.5x 11.6% 1.5x 11.7% 0.9x 0.9x 12% 7.3% -1.0x -1.6x 26% 39% 3.1% -2.8% % % -18.5% SS New China Life (A) CNY 10,746 5, % % UPFM 31-Dec 11.4x 12.7x -6% 1.6x 12.5% 1.6x 12.8% 0.9x 1.1x 11% 7.3% -1.1x 1.4x 19% 11% % -8.1% -23.2% -12.3% 42.4% -35.2% SS Ping An (A) CNY 53,260 26,509 1, % % OPFM 31-Dec 8.0x 10.3x x 13.5% 1.6x 15.1% 0.8x 0.9x 15% x -0.9x 29% 17% 1.9% -6.3% -3.9% -14.2% -4.2% -17.4% -19.4% 149,814 44,895 2, % 11.1x 12.4x -2% 1.5x 12.4% 1.6x 12.9% 0.9x 1.0x 13% 7.3% -1.9x -0.3x 24% 27% 1.9% -5.2% % % -24.8% Hong Kong 1299.HK AIA USD 61,496 4, % % OPFM 30-Nov 15.9x 18.1x 23% 1.9x 10.4% 2.0x 11.1% 1.4x 1.4x 9% 7.9% 8.1x 6.8x 19% % -7.4% -14.3% -7.4% % 0945.HK Manulife CAD 4, % % OPFM 31-Dec 9.3x 11.0x x 9.6% 1.4x 12.6% 0.7x na na 6.1% -10.9x na na % -5.1% -19.2% -18.5% -24.6% -14.3% 2378.HK Prudential plc GBP 4, % OPFM 31-Dec 9.6x 8.4x 14% 2.0x 23.7% 2.3x x 0.9x na 9.2% -4.0x -1.7x 8% 37% 4.3% -3.5% % -21.6% % 2628.HK China Life (H) CNY 16,126 3, % NTRL 31-Dec 8.9x 9.8x 1 1.2x x x 0.7x 13% 6.6% -6.7x -4.5x 18% 39% 3.6% -7.4% -9.9% -36.7% -36.9% -49.1% -32.5% 2601.HK China Pacific (H) CNY 9,111 1, OPFM 31-Dec 11.7x 11.8x x 11.6% 1.4x 11.7% 0.9x 0.7x 12% 7.3% -2.4x -2.8x 22% 39% 3.4% % -21.2% -10.8% -37.9% -21.2% 0966.HK China Taiping HKD 6, % % OPFM 31-Dec 8.1x 8.6x -8% 0.8x 9.7% 0.8x 9.7% 0.5x 0.1x 16% 5.8% -8.5x -10.2x 29% % -7.2% -35.8% -31.5% -44.4% -37.5% 1336.HK New China Life (H) CNY 3, % % NTRL 31-Dec 6.3x 7.2x -6% 0.9x 12.5% 0.9x 12.2% 0.5x 0.6x 11% 7.4% -7.7x -5.4x 15% 11% 2.2% -9.6% -14.8% -29.9% -25.7% -21.1% -30.9% 2318.HK Ping An (H) CNY 26,486 5, % % OPFM 31-Dec 8.6x 9.9x -13% 1.3x 13.5% 1.5x 15.2% 0.8x 0.8x 15% x -1.3x 24% 17% % -5.9% -22.5% -13.3% -23.7% -23.5% 0656.HK Fosun CNY 11, % OPFM 31-Dec 6.3x 6.1x 25% 0.9x x 17.4% na na na na na na na 12% % -2.2% -27.7% -23.1% 187.4% -17.4% 1339.HK PICC Group CNY 15, % OPFM 31-Dec 6.7x 5.9x -18% 0.7x 12.4% 0.8x 12.9% 1.5x -1.6x 13% 26.3% 8.2x -35.5x 1 8% 1.3% -5.1% -9.1% -29.8% -23.4% -19.3% -26.1% 2328.HK PICC P&C CNY 22,388 1, % % OPFM 31-Dec 7.8x 7.8x x 15.6% 1.2x 15.6% na na na na na na na 25% 3.2% -7.4% -10.7% -30.2% -20.2% -29.4% -23.9% 1508.HK China Re CNY 10,489 na na na na na NC 31-Dec 9.1x 9.1x 0.9x 9.5% 0.9x 9.5% na na na na na na na 15% 1.7% -5.4% 1.6% ,863 18, % 28.4% 8.1x 8.4x -4% 1.1x 12.7% 1.1x 13.4% 0.2x 13% 10.2% -3.5x -10.0x 2 19% 2.2% -3.9% -7.7% -23.2% -16.7% -11.5% -21.5% India RLCP.BO Reliance Capital INR 1, % na na NC 31-Mar 7.7x 7.7x 1 0.5x 6.8% 0.5x 6.8% na na na na na na na 24% 3.1% -5.2% -16.3% -26.5% 2.1% -29.7% -26.5% MAXI.BO Max India INR 1, % % UPFM 31-Mar 18.8x 24.6x 3 2.2x x 8.9% 1.2x 2.7x 2% x 19.2x 15% 52% 0.2% -2.5% -7.9% -24.6% -20.4% -13.5% -21.7% 2, % 12.6% 13.3x 16.2x 2 1.4x 8.4% 1.4x 7.8% 1.2x 2.7x 2% x 19.2x 15% 38% 1.6% -3.8% -11.9% -25.5% -9.7% -21.2% -24. Japan 8750.T Dai-Ichi Life JPY 14,341 2, ,368 1,193-2,556 2, % OPFM 31-Mar 7.4x 7.1x 31% 0.4x 5.7% 0.5x 6.4% 0.2x 0.3x 16% 2.8% -20.8x -18.3x 1% 23% 2.9% 4.7% -16.3% -35.8% -38.2% -24.4% -32.8% 7181.T Japan Post JPY 13, % 2,474 2,253-3,890 na na NC 31-Mar 17.4x 17.4x 0.7x 4.2% 0.7x 4.2% na na na na na na na 43% 2.5% 4.1% -9.8% 8729.T Sony Financial JPY 6, % 1,575 1,356-2,455 2, % NTRL 31-Mar 11.4x 11.5x 4% 1.1x 9.7% 1.2x 10.1% 0.4x 0.6x 5% 3.7% -14.9x -10.2x -1% 41% 3.9% 1.5% -19.9% -30.6% -30.7% -13.1% -27.7% 8795.T T&D Holdings JPY 6,392 1, % 1,114 1,022-1,959 1, % NTRL 31-Mar 7.9x 7.8x 7% 0.5x 6.5% 0.5x 6.6% 0.3x 0.4x 9% 3.7% -19.2x -12.8x 24% 19% 2.8% -0.3% % -31.9% -28.3% -30.8% 8725.T MS&AD Insurance JPY 16,417 1, % 3,073 2,535-4,397 4, % OPFM 31-Mar 10.2x 9.9x 6% 0.6x 6.4% 0.7x 6.8% na na na na na na na 24% 2.6% 3.4% -4.7% -11.5% -19.7% % 8630.T Sompo Holdings JPY 11,623 1, % 3,250 2,688-4,660 4, % NTRL 31-Mar 7.9x 7.6x 16% 0.7x 9.4% 0.7x 9.8% na na na na na na na 21% 2.9% 5.7% -7.6% -14.4% -19.2% -12.7% T Tokio Marine JPY 26,285 2, % 3,936 3,350-5,404 5, % OPFM 31-Mar 10.7x 11.5x 2 0.7x 6.4% 0.8x 7.2% na na na na na na na 37% 2.9% 3.8% -7.3% -13.3% -19.3% -9.5% -16.5% 94,257 9, % 62.2% 10.4x 10.4x 14% 0.7x 6.9% 0.7x 7.3% 0.3x 0.4x 9.9% 3.4% -18.3x -13.8x 8% 3 2.9% 3.7% -10.1% -17.3% -21.1% -11.9% -18.2% Korea KS Samsung Life KRW 18, % 112,000 92, , , % OPFM 31-Mar 13.3x 13.3x 19% 0.8x 6.2% 0.8x 6.1% 0.7x 0.8x 8% 5.5% -6.5x -4.7x -5% 28% 1.9% 2.8% 1.8% 8.7% 13.9% 12.4% 1.8% KS Hanwha Life KRW 4, % 6,120 6,120-8,550 8, % NTRL 31-Mar 9.3x 9.3x -2% 0.5x 5.8% 0.5x 5.8% 0.5x 0.6x 11% 5.2% -12.3x -9.1x 4% 28% 3.5% -8.9% -11.7% -19.9% % -17.2% KS Tong Yang Life KRW % 10,350 9,880-15,600 na na NC 31-Mar 6.9x 6.9x -11% 0.5x 7.4% 0.5x 7.4% na na na na na na na 37% 5.4% -2.4% 1.5% -19.8% % KS Dongbu KRW 3, % 67,500 46,700-71,900 67, NTRL 31-Mar 9.2x 9.8x 1 1.1x 11.5% 1.0x 10.6% 0.7x 1.0x 5% 7.5% -4.1x -0.2x -1% 26% 2.7% 0.3% -0.7% 8.7% 26.9% 27.4% KS Hyundai M&F KRW 2, % 30,750 23,950-36,150 34, % NTRL 31-Mar 8.1x 8.3x 12% 0.9x 11.3% 0.9x x 0.2x 7% 5.7% -7.0x -10.5x 5% 29% 3.3% -2.7% -4.9% -9.3% 9.8% 12.8% -14.7% KS LIG Insurance KRW 1, % 32,250 21,700-32,000 na na NC 31-Mar 7.0x 7.0x 5 0.8x 11.5% 0.8x 11.5% na na na na na na na 19% 2.7% 0.8% 8.6% 16.6% 31.9% 34.4% 10.4% KS Meritz F&M KRW 1, % 15,750 11,350-17,000 na na NC 31-Mar 8.5x 8.5x 13% 1.0x 11.6% 1.0x 11.6% na na na na na na na 29% 3.4% % % 20.2% -2.5% KS Samsung F&M KRW 11, % 303, , , , % OPFM 31-Mar 13.9x 12.4x 8% 1.2x 8.8% 1.1x x 0.7x 8% 6.1% -5.9x -6.0x 4% 27% 2.1% 3.1% 1.7% -1.1% 12.4% 18.8% -1.5% KS Korean Re 1, % 13,000 10,100-14,950 na na NC 31-Mar 7.4x 7.4x 2% 0.7x 9.3% na na na na na na na na na 3.1% 0.8% -1.9% % % 43,881 1, % 18.9% 9.5x 9.5x 12% 0.9x 9.3% 0.8x 9.1% 0.6x 0.7x 8% x -6.1x 1% 28% 3.1% 1.1% 0.2% % -2.6% South East Asia GELA.SI Great Eastern SGD 7, % % OPFM 31-Dec 11.9x 9.7x 9% 1.4x 14.2% 1.4x 14.3% 0.9x 0.9x 7% 9.2% -3.0x -2.7x 13% 49% 4.7% 4.1% 4.8% % 3.9% AINM.KL Allianz Malaysia MYR % na na NC 31-Dec 5.6x 5.6x na 0.7x 13.7% na na na na na na na na na 3% 0.5% 1.9% % -5.5% -18.5% -4.6% LOND.KL LPI Capital MYR 1, % na na NC 31-Dec 17.5x 17.5x na 2.6x 15.1% 2.6x 15.1% na na na na na na na 77% 4.4% -1.7% -5.1% 0.3% 13.8% -0.7% -8. TUNE.KL Tune Protect MYR % % OPFM 31-Dec 10.9x 10.9x na 1.8x 16.4% 1.8x 16.5% na na na na na na na 44% % 3.4% -11.8% -8.4% -11.1% -7. PNLF.JK Panin Financial IDR % na na NC 31-Dec 3.5x 3.5x na 0.6x 14.1% 0.6x 14.1% na na na na na na na % -3.9% -24.7% -42.7% -51.9% -19.5% PNIN.JK Panin Insurance IDR % na na NC 31-Dec 2.6x 2.6x na 0.5x 14.7% na na na na na na na na na % % % -10.1% SMMA.JK Sinar Mas IDR 2, ,100 3,750-5,600 na na NC 31-Dec 19.6x 19.6x na 2.9x 14.9% na na na na na na na na na % 1. BLA.BK Bangkok Life THB 1, % % UPFM 31-Dec 14.2x 14.7x 25% 2.2x 14.9% 2.2x 14.9% 1.4x 1.4x 9% 9.5% 17.7x 22.4x 1 18% 1.4% 3.1% -12.7% -23.3% -15.8% -19.1% -25.7% BKI.BK Bangkok Insurance THB 1, % na na NC 31-Dec 15.4x 15.4x na 1.0x 10. na na na na na na na na na 52% 3.4% -1.4% % -0.6% % BVH.HM Bao Viet VND 1,587 na na na 52,000 32,600-66,000 na na NC 31-Dec 10.5x 10.5x na 2.2x 20.7% na na na na na na na na na 4 3.8% % 11.8% 38.7% -1.9% 18, % 49.5% 9.3x 9.2x 17% 1.6x 16.4% 1.2x 12.8% 1.1x 1.1x 8% 9.3% 7.3x 9.9x 11% 29% 2.9% 1.7% 0.5% -3.8% -0.3% -0.5% -2.6% Taiwan 2882.TW Cathay FHC TWD 14, % NTRL 31-Dec 9.5x 12.2x x 8.8% 1.1x x 0.9x 4.3% -7.9x -0.8x 19% 1.2% 1.1% -0.8% -18.3% -20.5% % 2823.TW China Life TW TWD 2, % % OPFM 31-Dec 10.9x 10.9x -23% 1.0x x x 1.0x -6% 7.8% -0.6x 0.0x 2% 19% 1.8% 0.2% -3.8% -12.8% % -8.5% 2881.TW Fubon FHC TWD 12, % % NTRL 31-Dec 7.3x 10.3x -33% 1.2x 11.6% 1.2x 11.6% 0.7x 1.0x 5% 7.1% -4.2x -0.4x 5% 15% 1.5% 2.9% 3.3% -24.1% -29.4% -29.6% -12.3% 2888.TW Shin Kong FHC TWD 1, % % NTRL 31-Dec 7.2x 9.6x -3% 0.7x 7.4% 0.7x 7.3% 0.2x 0.5x 1 2.4% -11.8x -6.9x -2% 8% 0.8% 0.8% -2.6% -12.3% -18.7% -27.5% -12.2% 30,871 1, % 13.8% 9.4x 11.0x -22% 1.0x 9.3% 1.0x 9.2% 0.6x 2% 5.4% -6.1x -2.0x 1% 12% 1.1% 1.7% 0.5% -19.7% -22.8% % Total NJA insurance 483,176 70,489 3, % 17% 11.1x 12.1x 3% 1.4x 11.8% 1.6x 13.3% 0.8x 9% 6.4% -1.0x -1.2x 14% 34% 2.7% -3.1% % -11.2% -14.8% -18. Total Asia insurance 577,433 80,225 4, % 23% 11.4x 12.3x 4% 1.4x 11.6% 1.5x 12.3% 0.6x 8% 5.5% -1.7x -1.7x 12% 35% 2.8% -1.8% -5.3% -17.7% % -18.4% Source: Reuters, Credit Suisse (*IBES consensus) 12mth forward rolling forecasts (non-covered stocks use consensus forecasts), *Adjusted EV and VNB multiples have standardised assumptions and adjusted for non-life operations

5 Investment return and discount rate (%) Bond yield (% pa) Interst rate (%) P/B ratio (x) 1 March 2016 Falling rates may persist; P&C fares better Interest rate in China has been trending downward since 2014, with the 10-year government bond yield falling to below 3%. Experience from developed markets suggest that insurers, life insurers in particular, tend to underperform in a downward rate cycle. In contrast, the outlook for P&C business is less challenging, given P&C players (1) can attempt to re-price most insurance policies or reset underwriting terms on an annual basis, thereby restoring profit quickly, (2) do not rely on investment yield to attract customers, and (3) asset-liability mismatch is less of an issue than life. Life insurers, however, can hardly re-price guaranteed rates or re-set terms and conditions of the long-term in-force policies before maturity. Figure 8: Govt bond yield continues to trend down Chinese 10-year government bond yield (% p.a.) Figure 9: Valuation under pressure as rates fall US/UK insurers P/B ratio vs. long-term interest rates Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Dec-15 P/B ratio (RHS) US UK Source: Reuters Source: Bloomberg, Swiss Re Economic Research & Consulting Figure 10: Falling rates have bigger impact to lifers As such we prefer P&C business to life. Within life, we like insurers because they (1) focus on protection and agency business instead of bancassurance and spread business, (2) are more conservative in EV assumptions and policyholder's reserves, and (3) do not promote the 4. guaranteed rate long-term annuity as the major product. Indeed, falling rates improve the attractiveness of insurance, facilitating short-term sales, as rates cut have an immediate impact on the yield of competitive products (deposit, bank WMPs). That said, we see rate challenges outweigh strong growth prospects. From an investor's view, we believe that rates trend would be a key factor for Chinese insurers, from EV assumptions and reserves to product mix and investment asset allocation, in 2016 and beyond. Figure 11: Net RDR of Chinese insurers China insurance Fair value mix by segment (%) China insurers Investment yield, rdr assumptions (and net rdr) (%) China Life 12. New China Life 10. Ping An % 5.5% 5.5% 5.5% 5.8% 6. China Pacific 6. China Taiping 4. PICC Group PICC P&C Fair value mix (%) Life Bank Non-life 0. PICC Group China Life Ping An China Taiping China Pacific New China Life Long-term investment return assumption Risk discount rate. Note: Non-life is mainly P&C business, and the rest includes reinsurance, securities, corporate and etc. Source: Company data China Insurance Sector 5

6 Investment yield (%) Investment yield (%) Long-term investment return (%) Risk discount rate (%) 1 March 2016 Falling rates weaken confidence on EV While embedded value (EV) is a power value metric to reflect life insurers' long-term economic value creation, the reported numbers are based on several assumptions, including long term investment return, risk discount rate, lapse/surrenders among others. Investment return assumptions depend on the underlying assets backing each of the policies in force, varying from one to another. For instance, most Chinese insurers adopt 5.5% as long-term investment yield, except CPIC (5.2%) and PICC Group (5.75%). That said, investors tend to adjust this assumption to the same level, as they do not believe any insurers can consistently outperform others in investment performance over the long term. Figure 12: Most set invt return assumption at 5.5% Figure 13: Most set RDR assumption at 11% China life insurers Long-term investment return assumption (%) China life insurers Risk discount rate assumption (%) 5.8% % 11.5% 5.4% % 5.2% % 4.8% China Life Ping An China Pacific New China Life China Taiping PICC Group 9. China Life Ping An China Pacific New China Life China Taiping PICC Group Source: Company data Source: Company data Given that Chinese life insurers primarily generate profit from "interest variance", EV numbers are highly sensitive to change in investment return assumptions. With poor equity market and falling yields, investors become skeptical about Chinese insurers' long term return assumption of 5.5%. Thus, we see investors' confidence level on EV, especially investment assumption, began to weaken since 2H15. Increasingly, investors believe that Chinese insurers need to revise down the investment return assumptions under EV, as new money continue to decline, and current assumption of 5.5% is under pressure. However, the chance of revision appears to be low for FY15 results, in our view. First, the average investment yield of insurance sector from 2004 to 2014, according to association of insurance asset management, is around 5.4%, not far away from long-term assumption of 5.5%. Second, CIRC reported that the investment yield of insurance sector was 7.6% in 2015, which does not provide supporting evidence for revision of 2015 data. Third, we expect insurers to gradually shift asset allocation to non-standard assets for higher yields, a change that may partially offset the falling rates of bond and deposit. Figure 14: Historical return is close to assumption Industry gross inv. yield vs LT inv. return assumption (% p.a.) 12% Figure 15: Actual investment return moves together Listed Chinese insurers gross inv. yield vs LT inv. assumption (% p.a.) 15% 1 Industry gross return (pa %) 13% China Taiping Ping An 1 8% 6% 4% Average gross return (pa%) Long-term investment return assumption (pa %) 8% 5% 3% China Life China Pacific New China Life PICC Group 2% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Source: CIRC, Credit Suisse estimates China Insurance Sector 6

7 Investment yield (%) Investment yield (%) Investment yield (%) Investment yield (%) Investment yield (%) Investment yield (%) 1 March 2016 The historical average investment return tends to be slightly lower than long-term investment return assumptions, but still at around 5%. Thus, insurers are unlikely to change long-term investment return assumption for FY15 results, we think. Figure 16: China Life avg investment return at 5.1% Figure 17: Ping An avg investment return at 5. China Life gross inv. yield vs LT inv. return assumption (% p.a.) Ping An gross inv. yield vs LT inv. return assumption (% p.a.) 12.5% 12.5% Gross return (pa %) % Gross return (pa %) Long-term investment return assumption (pa %) 7.5% % Average gross return (pa%) Long-term investment return assumption (pa %) 5. Average gross return (pa%) % -2.5% FY14 FY13 FY12 FY11 FY10 FY09 FY08 FY07 FY06 FY05 FY04 FY14 FY13 FY12 FY11 FY10 FY09 FY08 FY07 FY06 FY05 FY04 Figure 18: CPIC avg investment return at 5.3% Figure 19: NCI avg investment return at 4.4% China Pacific gross inv. yield vs LT inv. return assumption (% p.a.) New China Life gross inv. yield vs LT inv. return assumption (% p.a.) % Long-term investment return assumption (pa %) Gross return (pa %) 7.5% 5. Average gross return (pa%) Average gross return (pa%) Gross return (pa %) 5. Long-term investment return assumption (pa %) 2.5% 2.5% 0. FY14 FY13 FY12 FY11 FY10 FY09 FY08 FY14 FY13 FY12 FY11 FY10 FY09 FY08 FY07 FY06 Figure 20: Taiping avg investment return at 5.9% Figure 21: PICC Group avg invt return at 4.8% China Taiping gross inv. yield vs LT inv. return assumption (% p.a.) PICC Group gross inv. yield vs LT inv. return assumption (% p.a.) 17.5% 7.5% 15. Long-term investment return assumption (pa %) 12.5% Gross return (pa %) 5. Average gross return (pa%) 10. Gross return (pa %) 7.5% Average gross return (pa%) 2.5% % Long-term investment return assumption (pa %) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 0. FY09 FY10 FY11 FY12 FY13 FY14 China Insurance Sector 7

8 Sensitivity (%) Sensitivity (%) Sensitivity (%) Sensitivity (%) Sensitivity (%) Sensitivity (%) 1 March 2016 Overall, we share investor's concern over falling rates, and agree that it could pose a key operating and financial challenge to Chinese life insurers, especially those selling longterm annuities with 4. guaranteed rates. We conduct an analysis to group EV and VNB and evaluate the sensitivity under different scenarios investment return at 4., 4.5% and 5.. Figure 22: Group EV sensitivity (yield at 4.) Figure 23: VNB sensitivity (yield at 4.) EV sensitivity assuming investment return of 4. VNB sensitivity assuming investment return of 4. -5% % % China Life Ping An China Pacific China Taiping New China Life PICC Group -16 China Life Ping An China Pacific China Taiping New China Life PICC Group Figure 24: Group EV sensitivity (yield at 4.5%) Figure 25: VNB sensitivity (yield at 4.5%) EV sensitivity assuming investment return of 4.5% VNB sensitivity assuming investment return of 4.5% -2% -4% -2-6% -4-8% % -8-14% -16% % China Life Ping An China Pacific China Taiping New China Life PICC Group -12 China Life Ping An China Pacific China Taiping New China Life PICC Group Figure 26: Group EV sensitivity (yield at 5.) Figure 27: VNB sensitivity (yield at 5.) EV sensitivity assuming investment return of 5. VNB sensitivity assuming investment return of 5. -1% -1-2% -3% -2-4% -3-5% -4-6% -5-7% -8% -6-9% China Life Ping An China Pacific China Taiping New China Life PICC Group -7 China Life Ping An China Pacific China Taiping New China Life PICC Group China Insurance Sector 8

9 Investment return Investment return 1 March 2016 CIRC sets the "ultimate rate" used in reserve calculations under C-ROSS at 4.5%, and thus, we take 4.5% as investment return for our sensitivity analysis. Our findings suggest that group EV would be reduced by 6-16% for major insurers, assuming long-term investment return assumptions declined to 4.5%. Under the scenario of 4. long-term investment returns, diversified names (i.e., CPIC, Ping An, Taiping), from a group EV perspective, are more defensive than peers, possibly due to (1) an inclusion of non-life business, which is less vulnerable than pure life to the rates decline, and (2) better channel and product mix towards agency and protection business, and (3) more conservative EV assumptions (CPIC's long-term investment return at 5.2% vs peers' 5.5% / 5.75%). Indeed, PICC Group is most defensive from a group EV perspective. We believe this is primarily due to its significant holding of P&C business. We recommend investors to buy CPIC, or PICC P&C (if exposure to Chinese bank is not a concern) directly for P&C exposure, rather than owing PICC Group, whose life and health business is of lower quality. From a VNB perspective, CPIC is more defensive than peers when lowering investment return assumptions to 4., while PICC Group is most sensitive, possibly due to its product mix skewed to spread business, bancassurance exposure, and aggressive EV assumption Figure 28: Five-year avg investment return of 3.7% Investment return of insurers in US, Europe and Japan Figure 29: Base case in line with actual inv't return avg inv return of insurers in US, Europe and Japan (% pa) bull case base case bear case US Europe Japan US Europe Japan avg Bull Base Bear Source: US Federal Insurance Office Annual Report on the Insurance Industry, June 2013 Source: US Federal Insurance Office Annual Report on the Insurance Industry, June 2013 We set our long-term investment return assumption at 4. after reviewing the investment yield of insurers in the major developed markets. For instance, the average investment return of US life and health insurance companies between 2010 and 2014 is around 4.99%, according to US annual insurance report by US treasury. The five-year average investment returns of European and Japanese insurers between 2010 and 2014 were lower, 3.7% and 2.2%, respectively. Overall, we feel comfortable with our assumption of 4., compared with 3.7%, the five-year average investment yield of developed markets insurers (US, Europe and Japan) from 2010 to Risk discount rate (RDR), another important assumption item, is derived from risk free rate and equity premiums required. Theoretically, when risk free rate falls, RDR assumptions should also be revised downward, which partially offset the negative impact on EV/VNB from lower investment return assumptions. However, our discussion with actuarial auditors suggests that they may not take this approach in reality, as they perceive higher operational risks arising from increased sales of high guaranteed products (i.e., 4.025% annuity) and shift in assets mix towards risky and less transparent non-standard assets. China Insurance Sector 9

10 Investment yield (%) Investment return 1 March 2016 The sensitivity of TPs to investment assumption Given the importance of investment return assumption to EV and VNB, which are used to derive the target price of insurers, we conduct an analysis of fair value under three scenarios with investment return at 5., 4. and 3.. Our findings suggest that insurers with the below characteristics are more defensive to rates changes: (1) an inclusion of non-life business, such as P&C, and/ or bank, (2) product mix skewed toward protection business and agency channel rather than spread business and bancassurance channel and (3) conservative assumptions on EV and policyholder's reserves. From this perspective, CPIC and Ping An stand out. PICC Group also appears to be less sensitive, but we attribute this to its significant holding of P&C business. We recommend investors to accumulate CPIC, or PICC P&C (if exposure to Chinese bank is not a concern) directly for P&C exposure, rather than owing PICC Group, whose life and health business is of lower quality. In contrast, target prices of China Life and New China Life are more sensitive to change in investment return, possibly due to the pure life exposure and a product mix skewed toward "interest sensitive" business. It is challenging to estimate the long-term yield of Chinese insurers. Indeed, the historical average investment return for insurance sector between 2004 and 2014 is 5.4%, broadly in line with 5.5% assumption. Further, CIRC has broadened the range of eligible investment assets since 2012, a change that could partially offset falling rates. That said, we set long-term investment return assumptions at 4. after reviewing the five-year average investment yield of developed markets insurers (average 3.7%; US 5.; Europe 3.9% and Japan 2.2%) from 2010 to To conclude, falling rates and implication to EV and VNB may continue to outweigh on insurance strong growth. Thus, we prefer P&C business to life in near term. We remain positive on strong and structural growth of life insurance, led by agency business expansion, bancassurance product mix improvement, and favourable regulatory policy on health insurance and deferred tax pension scheme. Investors may find this attractive after downward pressure on rates starts easing. Figure 30: Actual investment return moves together Figure 31: 5-year avg investment return of 3.7% Listed Chinese insurers gross inv. yield vs LT inv. assumption (% p.a.) 15% 13% China Taiping Ping An Investment return of insurers in US, Europe and Japan (% p.a.) % 3. 5% China Pacific PICC Group 2. 3% China Life New China Life 1. FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY US Europe Japan Source: US Federal Insurance Office Annual Report on the Insurance Industry, June 2013 China Insurance Sector 10

11 TP Upside 1 March 2016 Diversified insurers are in better position in a bear case scenario We summarise our sensitivity analysis into three scenarios, taking into account the impact from changes in the long-term investment return assumption, equity index, and RDR (risk discount rate) on insurers group EV. Under our base case, investment return is assumed at 4., CSI300 at 3,200 (~11% upside), and RDR at 11-16%. Our bull case sets investment return at 5., CSI300 at 3,600, and RDR at %, while our bear case sets investment return at 3., CSI300 at 2,000, and RDR at 12-16%, respectively. Our target price for major insurers is based on the base case. We share investors' concerns over falling rates, but highlight that the market has already priced in a bearish scenario. Current share prices of diversified and P&C names imply % long-term investment returns, below pure lifers' implied yield of % and 3.7% average of developed markets insurers in (US: 5., EU: 3.9%, Japan 2.2%). Under our base case (4. L-T investment return, CSI300 at 3,200 and RDR of 11-16%), diversified insurers, which crucially, have better quality Life products and less exposure to 4% guaranteed products, have 22-27% upside, better than pure lifers that are fairly valued. Under our bear case (3. investment return, CSI300 at 2,000 and RDR of 12-16%), downside risks of pure lifers is significantly higher than diversified names. Figure 32: Diversified insurers are in a better position Target price of major Chinese insurers under three scenarios Assumptions Target Price Diversified Life P&C Pure Life Scenarios Investment return CSI300 Risk discount rate China Pacific Ping An China Taiping PICC P&C PICC Group China Life NCI Bull 5. 3, % Base 4. 3, % Bear 3. 2, % Current price Implied invt return 3.1% 3.1% 3.1% 3.2% 3.4% 3.9% 3.8% Upside to current price, % Bull 63% 54% 74% 5 39% 66% 84% Base 27% 22% 26% 22% 15% 3% 7% Bear -5% -3% -2% -5% -9% -32% -27% Source: Credit Suisse estimates. Note: Base case assumptions: risk discount rate 11-16%, CSI300 3,200, investment return 4.; Bear case assumptions: risk discount rate 12-16%, CSI300 2,000, investment return 3.; Bull case assumptions: risk discount rate 11%, CSI300 3,600, and investment return 5.. Figure 33: Diversified insurers are in a better position Target price of major Chinese insurers under three scenarios 11 Diversified P&C Pure life China Pacific Ping An China Taiping PICC P&C PICC Group China Life NCI Upside under base case Upside under bear case Upside under bull case Source: Credit Suisse estimates. Note: Base case assumptions: risk discount rate 11-16%, CSI300 3,200, investment return 4.; Bear case assumptions: risk discount rate 12-16%, CSI300 2,000, investment return 3.; Bull case assumptions: risk discount rate 11%, CSI300 3,600, and investment return 5.. NCI refers to New China Life China Insurance Sector 11

12 China life insurance product mix (%) Bond yield (% pa) Sensitivity (%) Sensitivity (%) 1 March 2016 Reserve charge on the rise and profit under pressure China Life reported its net profit declined by over 66% YoY in 4Q15, primarily due to additional reserve charges arising from a lower bond yield curve. This triggered investors' concern on lower rates and its implication for reserves and net profit. According to the China Life annual report, the following accounting polices apply to the discount rate in reserve calculation, For insurance contracts of which future insurance benefits are not affected by investment yields of corresponding investment portfolios, the discount rate assumption is based on the Yield curve of reserve computation benchmark for insurance contracts, published on China Bond website with consideration of liquidity spreads, taxation and other factors. Put in plain language, life reserve, a liability item on balance sheet, reflects the present value of future liabilities. The discount rate used in reserve calculations for traditional policies (non-participating) have two components, (1) 750-day bond yield curve, and (2) liquidity spreads. The bond yield curve is a prescribed one set by China Bond and applies to all insurers, while the spread is at the actuarial judgement of each insurer. Figure 34: NPAT sensitivity to discount rate Net profit after tax sensitivity (%) discount rate down 5 bps (FY14) -5% -1-15% -2-25% -3-35% Figure 35: Book value sensitivity to discount rate Book value sensitivity (%) discount rate down 5 bps (FY14) % -0.4% -0.6% -0.8% % -1.4% -1.6% -4 China Life Ping An China Pacific New China Life PICC Group China Taiping -1.8% China Life Ping An China Pacific New China Life PICC Group China Taiping. Note: Assumed tax rate is 2.. Note: Assumed tax rate is 2. Stripping out all other factors, as rates continue to fall, the bond yield curve trends downward, which lowers the discount rate used in reserve calculations. A lower discount rate pushes up policyholders' reserves, and thus reduces insurers' profit on P&L. For both participating and traditional (non-participating) insurance polies, assuming all other factors unchanged, our sensitivity analysis suggests that a 5 bp decline in the discount rate would lead to a 4-37% cut in net profit and % hit to shareholder value. Figure 36: China life insurance product mix China life insurance product mix (%) 10 Figure 37: Government bond yield trending down Chinese 10-year government bond yield (% p.a.) Health Accident Unit-linked Universal Participating Traditional 2.5 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Dec-15 Source: CIRC, Credit Suisse estimate. Note: Average life product mix percentage of China Life, Ping An, China Pacific, New China Life, China Taiping, Taikang and AIA Source: Reuters China Insurance Sector 12

13 Government bond yield movement (bps) 1 March 2016 Insurers with (1) lower portion of traditional policies (or non-participating polices), and (2) inclusion of non-life business (i.e., P&C, bank, or others), would be less affected by lower yields in terms of profit and shareholder equity. Ping An and PICC Group appear to be more defensive in terms of reserve charges. Figure 38: The 750-day government bond yield curve is moving downward 750-day government bond yield curve movements (compared with bond curve on 31 Dec 2014) (bps) Terms (year) 6/30/2015 9/30/ /31/2015 2/26/2016 Source: Chinabond.com.cn Looking into 2016 and beyond, the 750-day bond yield curve, which is used as the benchmark for discount rate, is likely to continue to trend downward. Thus, insurers would see increased pressure on profit from a higher reserve level. However, we highlight that the negative impact may not be as severe as investors expect, given most insurers have decent room to increase the liquidity spread, which partially offsets the negative effect from lower bond yield curve movements. China Insurance Sector 13

14 Investment yield (%) Earnings from interest spread (%) Investment asset mix (%) 1 March 2016 Shifting toward non-standard asset for higher yields Chinese insurers in general allocate about 8 of their investment assets to fixed-income assets, such as government and corporate bonds, and deposit among others. Thus, they suffer in a falling rate environment in the medium to long term, as re-investment yields decline. Figure 39: Fixed-income at around 8 of portfolio China insurance Investment mix (%) (1H15) China Life Ping An Group Ping An China Pacific New China Life China Taiping PICC P&C PICC Group Insurance Listed equities Unlisted equity / prefs Other WMP / Trust repos Debt schemes Property / infrastructure Loans Corporate bonds Finance bonds Govt agency bonds Govt bonds Term deposits Cash Figure 40: Detailed breakdown of investment mix China insurance Investment mix (%) (1H15) Ping An Ping An Group Insurance China New China Pacific Life China Taiping PICC P&C PICC Group 30- China Life Lower risk assets Cash 3.6% 7.4% % 3.1% 3.3% 7.7% 6.8% Term deposits 29.3% 12.2% % 22.4% 11.2% 29.8% 22.5% Govt bonds 4.7% % % 8.5% 3.3% 1.8% Govt agency bonds 12.3% Finance bonds % 18.8% 18.4% 12.1% 16.5% 12.7% 14.5% 54.9% 34.8% 47.5% 49.5% 44.8% 39.5% 53.4% 45.6% Mediumr risk assets Corporate bonds 16.6% 11.6% 15.1% % 15.5% 15.7% 14.3% Loans 8.4% % % na 7.5% na Property / infrastructure 0.1% 0.5% 1.4% 0.8% 0.1% 3.2% 1.4% 1.4% Debt schemes 2.9% % % 17.4% na 11.7% % 28.7% 30.8% 26.6% % 27.4% Higher risk assets WMP / Trust % 6.2% 2.6% 7.7% na na na Unlisted equities / prefs 5.2% 3.2% 6.9% 8.7% 9.7% 4.9% 8.9% 11. Listed equities 11.6% % 5.8% 9.2% 9.5% 9.7% 5. Other 0.3% 9.1% % 2.1% 10.1% 3.4% % 20.1% 23.8% 19.7% 28.6% 24.4% As Chinese insurers primarily generate profit from "interest variance", the profit is highly sensitive to change of interest rate. Falling interest rates, however, gradually translate into lower investment income, as average asset duration is 7-8 years. Only new premiums and matured investment assets need to be reinvested each year, while the majority of fixedincome assets can still enjoy higher interest rates set in previous years. Figure 41: Historical return is close to assumption China insurance industry gross investment yield vs long-term investment return assumption (% p.a.) Figure 42: Major earning source interest spread China Life source of earnings / surplus from 'investment spread' % 10. Industry gross return (pa %) % 9 85% 10 87% 86% 9 101% 8. Long-term investment return assumption (pa %) Average gross return (pa%) 2 2. FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY Source: CIRC, Credit Suisse estimates Source: China Life investor day presentation, November 2013 To cope with low rates challenge and maintain a decent investment yield, insurers tend to shift their asset allocation to alternative investment assets (i.e., debt investment scheme, WMPs, ABS among others) from government bonds and deposits to chase yields. This trend is likely to sustain in the next few years, should rates continue to fall. Thus, the change of investment mix towards risky assets would trigger concerns over asset quality. China Insurance Sector 14

15 Crediting / Deposit rate (%) 1 March 2016 Strong sales, but concern over the guaranteed rate In general, a falling rate environment makes insurance products more attractive vs substitute products (deposit, bank WMP, trust), leading to strong sales, especially insurance policies with high guaranteed rates and long liability durations (i.e. whole life pension annuity). Figure 43: Insurance becomes more attractive Crediting rate vs. (3 & 5yr) bank deposit rates vs. 1yr bank WMP (%) 6.5 Figure 44: Guarantee rates reform over time China life insurance - Guarantee rates reforms : Increase the max guarantee rate on universal products to 3.5% from 2.5% : Remove the max guarantee rate on participating products : Increase the max guarantee rate on traditional products to 3.5% from 2.5% Dec-15 Dec-08 Jun-08 Dec-07 Jun-07 Dec-06 Jun-06 Dec-05 Jun-05 Dec-04 Jun-04 UL crediting rate 1yr WMP 3yr bank deposit 5yr bank deposit Source: Company data, PBoC, Wind Source: CIRC To recap, CIRC announced removal of maximum guaranteed rates of 2.5% for participation products (effective rate rise to 3.5%), after removing the guaranteed rate of traditional products in August 2013, and universal products in October If nonparticipating product is structured as an annuity policy, the effective guaranteed rate can rise to 1.15x of 3.5% or 4.025%. The highly guaranteed product is increasingly becoming a concern for investors, given the falling rates environment and asset-liability mismatch. During the "jumpstart" sales season, China Life sold over Rmb27 bn of such products (already met full year target), or close to 35-45% of its agency first year premiums. Ping An has a similar product on shelf, but it is a not major one to push. CPIC has also launched the 4.025% guaranteed product, but their sales quota was restricted to 20-25% of full year agency FYP. New China Life and Taiping by far have not launched such products, and their major products remain participating and protection-oriented products. Figure 45: Introduction of 2016 "jumpstart sales" major products Introduction of 2016 "jumpstart sales" major products Company Product name Product type Channel Payment term Guarantee rate China Life Xin Fu Nian Nian Annuity Agency 3/5/10 years 4.025% Ping An Zun Hong Ren Sheng Participating Agency 3/5/10 years 2.5 China Pacific Xing Fu Xiang Ban Annuity Agency 3/5/10 years 4.025% New China Life Fu Xiang Yi Sheng Participating Agency 3/5/10 years 2.5 China Taiping Chang Xiang Shi Jia Participating Agency 3/5/10 years 2.5 Source: Company data While some investors are worried about potential a "negative spread" portfolio arising from the 4.025% product, we believe the chance appears low, at least in the near to medium term. Overall impact on listed insurers remains manageable. First, the accumulated sales amount of 4% guaranteed rate for China Life, the most aggressive player, would be less than Rmb60 bn by end of 2016, or a small percentage of its Rmb2.3 tn total assets. China Insurance Sector 15