China P&C Insurance Sector

Transcription

1 Research Sector Report Hong Kong China Valuation not attractive enough; Downgrade to Neutral Industry-wide Combined Ratio has increased since For example, PICC P&C s (02328) aggregate combined ratio has increased from 92.4% in 1H12 to 93.6% in 1H13. According to industry experts we interviewed, this was mainly due to intensified competition in the industry, higher material costs, and higher labor costs. Rating: Rating Change: Top Pick Neutral Downgraded No strong policy support from the 18 th Third Plenum. According to the 18 th Third Plenum and the CIRC, the industry policy will promote the development of catastrophe insurance and agriculture insurance. We think the former is not a stable source of profit, and the latter is underdeveloped implying some growth potential. P&C Insurance Market Share Downgraded to Neutral from Positive for China P&C insurance sector. Our rating for China P&C insurance sector is Neutral because: (1) As P&C insurance industry in general showed a cyclical pattern, the industry-wide combined ratio in China may still rise in near future; (2) Uncertainty with future Motor Vehicle insurance reform; (3) Valuation not attractive enough as most P&C counters have outperformed HSI and HSCEI over the most of 2H13. (Source: CIRC) PICC P&C (02328). PICC P&C (02328), the largest P&C insurance company in China with a market share of 34%, is trading at 1.9x 2013PB or 1.7x 2014PB. According to the global ROE-PB relationship for P&C insurance companies, we think PICC P&C s (02328) fair valuation should be approximately 2x PB. Therefore we do not think PICC P&C s (02328) current valuation is attractive enough. Our rating for PICC P&C (02328) is Hold with TP of HK$12.5 based on 2x 2014PB. Analyst Felix Luo SFC CE Number:AQF573 Tel: (852) FelixLuo@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited ( GF Securities (HK) ) 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, H.K. Company Name Code Rating Price (HK$) 13EPS ( %) 14EPS ( %) 13 PER 14 PER PICC P&C Hold (13.7) (2.8) China Life Buy Ping An Buy CPIC Buy NCI Buy China Taiping Buy P/B 13P/B 13ROE (%) Source.. Company data, GF Securities (HK) Research

2 Review of China P&C insurance sector Industry-wide Combined Ratio increased since For example, PICC P&C s (02328) combined ratio has increased from 92.4% in 1H12 to 93.6% in 1H13; Ping An (02328) s combined ratio has increased from 93.1% in 1H12 to 95.5% in 1H13 (due to the seasonality of Combined Ratio, it is only fair to compare 1H12 with 1H13, or similarly compare 2012 with 2013). According to industry experts we interviewed, the increase was mainly due to intensified competition in the industry, higher material costs, and higher labor costs. Combined Ratio of major China P&C insurance players increased since 2013 Combined Ratio 1H10A 1H11A 1H12A 1H13A 2010A 2011A 2012A PICC P&C (02328.HK) 96.7% 92.5% 92.4% 93.6% 97.8% 94.0% 95.1% Ping An 96.5% 92.9% 93.1% 95.5% 93.2% 93.5% 95.3% China Pacific 94.5% 91.1% 94.2% 97.7% 93.7% 93.1% 95.8% China Taiping 99.9% 98.4% 98.0% 99.5% 101.0% 99.9% 99.8% Source: the Company, GF Securities (HK) Research Profitability on Motor Vehicle insurance decreased; diversification of P&C insurance premiums is needed. Take PICC P&C (02328) as example, its underwriting profit margin of Motor Vehicle insurance has decreased from 7.0% in 1H11, to 5.9% in 1H12 and to 2.6% in 1H13. This is mainly due to intensified competition and rising material costs. As a result, companies such as PICC P&C (02328) had to take diversification measures to maintain its profitability. One of the solutions is to develop agriculture insurance. For PICC P&C (02328), currently its agriculture insurance is only 15% of total turnover but the demand on agriculture insurance is still high. PICC P&C s (02328) example showed decreased profitability on Motor Vehicle insurance 1H10A 1H11A 1H12A 1H13A FY10A FY11A FY12A Loss Ratio (%) Motor vehicle insurance Commercial property Liability insurance Accidental and health Cargo insurance Other insurance Expense Ratio (%) Motor vehicle insurance Commercial property Liability insurance Accidental and health Cargo insurance Other insurance Underwriting Profit Margin (%) Motor vehicle insurance Commercial property Liability insurance Accidental and health Cargo insurance Other insurance Source: the Company, GF Securities (HK) Research No strong policy from the 18 th Third Plenum. China has released a series of policies for the insurance sector following the 18 th Third Plenum. A few policies are related to P&C insurance sector including: 1. The CIRC continues to promote development of catastrophe insurance. Page 2 of 5

3 2. The CIRC continues to promote development of agriculture insurance. Our comments: 1. Catastrophe insurance is not a stable source of profit. Take Year 2012 as an example, of the USD 186 billion in total damage caused by catastrophic events in the world (Source: Sigma), more than USD 77 billion were covered by insurance. This makes 2012 the third-most expensive year for the insurance industry (in 2011 record earthquakes and floods contributed to losses of over USD 126 billion; and in 2005 Hurricanes Katrina, Wilma, and Rita alone caused claims of over USD 100 billion). 2. Agriculture insurance is underdeveloped in China, implying growth potential. According to the CIRC, China s agriculture insurance premium was RMB30.7billion. This is equal to agriculture insurance penetration of 0.5%, and lower than the world average of 0.9% (Source: World Bank). The agriculture insurance is underdeveloped in China, implying growth potential for P&C insurance players. Agriculture insurance penetration is approximately 0.9% as world average Source: World Bank, GF Securities (HK) Research Outlook of China P&C insurance sector Downgraded to Neutral for China P&C insurance sector. Because: (1) As P&C insurance industry in-general showed a cyclical pattern, the industry-wide combined ratio in China may still rise in near future; (2) Uncertainty with Motor Vehicle insurance reform; (3) Valuation not attractive enough. Industry-wide combined ratio in China may still rise. The cyclical nature of the P&C insurance industry refers to the upward and downward movements in insurance prices and the combined ratio, which might takes 6 to 9 years. The typical explanation is that the P&C insurance industry causes the cycle more or less on its own, through periods of destructive competition followed by cutbacks in supply. The motor insurance underwriting cycle in US is approximately 5 years, and in the UK 5-7 years according to some statistics. The chart below shows the existence of European motor insurance underwriting cycle in the past decade as an example. As the China industry-wide combined ratio has just started to rise (since 2012 or 2013), we think it may still rise in near future. Page 3 of 5

4 Cyclical pattern of combined ratio of Motor Vehicle insurance in Europe Source: CEA Statistics N 38, GF Securities (HK) Research Note: the curve represents the average Combined Ratio of motor insurance of 21 European nations Uncertainty with proposed marketization of Motor Vehicle insurance. With the proposed future marketization of motor insurance rate by CIRC, it was generally worried that premium would fall and combined ratio would increase. Case Study: Shenzhen introduced a flexible commercial auto insurance rate in March Shenzhen's pilot project shows that (according to the actual operation results released by the Shenzhen Bureau of the Insurance Regulatory Commission): average premium fell by 4.64% after the flexible rate mechanism was adopted, but the combined payout ratio was stable and settlement of claims fell by 2.8% YoY. The fall in small-amount cases was particularly noticeable. In conclusion, the overall effects of Shenzhen motor insurance rate marketization were slightly negative. Valuation not attractive enough. According to the global ROE-PB relationship of P&C insurance players, there is an upward sloping relationship as shown by the chart below. Take PICC P&C (02328) as an example, it is the largest P&C insurance company in China with a market share of 34%. Our estimated ROE is 18.8% in 2013 and 15.4% in 2014 for PICC P&C (02328). According to the slope, its fair valuation should be less than 2x PB. Currently PICC P&C s (02328) closing price represents 1.9x 2013PB or 1.7x 2014PB. We do not think the current valuation is attractive enough. Our rating for PICC P&C (02328) is Hold with TP of HK$12.5 based on 2x 2014PB. Global ROE-PB relationship of major P&C insurance companies PICC P&C s (02328) fair valuation supposed to be about here, approx. 2x PB Source: AON Benfield, GF Securities (HK) Research Note: No Hit are companies which have avoided any quarter with a net income loss over the previous 24 quarters (excluding the financial crisis quarters Q3 and Q4 2008). +1 Hit are companies which failed to avoid that. Page 4 of 5

5 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 12 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Hold Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 12 months Rating Definition Positive Sector outperforms the Hang Seng Index by 10% or more; or the fundamental outlook of the sector is positive. Neutral Sector outperforms or underperforms the Hang Seng Index by -10% to 10%; or the fundamental outlook of the sector is stable. Cautious Sector underperforms the Hang Seng Index by 10% or more; or the fundamental outlook of the sector is negative. Analyst Certification The research analyst(s) is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the Company or relevant securities that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the Company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in the research report. DISCLOSURE OF INTERESTS (1) Proprietary trading division of GF Securities (Hong Kong) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) All the views expressed in this research report accurately reflect independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. DISCLAIMER This report is prepared by GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. The information contained in the research report has been complied or arrived at from publically available sources believed to be reliable in good faith, no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright GF Securities (Hong Kong) Brokerage Limited Without the prior written consent obtained from the GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms being copied or reproduced or (ii) being re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All Rights Reserved /F., Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel.: (852) Fax: (852) Website: Page 5 of 5