China Insurance Sector

Transcription

1 Market Share (%) 24 January 2017 Asia Pacific/ Equity Research Life Insurance Research Analysts Charles Zhou, CFA Steven Zhu Insurance Sector INDUSTRY PRIMER 2017 outlook: An improving landscape Figure 1: Listed insurers regaining market share insurance market share, based on gross written premium 7 6 F'cast Listed insurers market share Platform insurers market share 2 1 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Nov-16 Dec-17 Source: CIRC, Credit Suisse estimates Growth normalises with margin improving. We expect sector growth to normalise in 2017, primarily due to: (1) significant slowdown in short-tomedium term universal products, (2) tightened regulations on "platform" insurers, (3) high premium base built up (+41% in 2016). However, momentum of listed insurers remains strong, with VNB growth at 2 level. The improvement in agency channel and product mix is critical for growth and value creation. We are confident on sector growth in the long term on low penetration and potential pension reform. Macro tailwinds of yield and stock. We view life insurers as the prime beneficiaries of the rising yields, which help lift new money yields, improve creditability of EV assumptions, and reduce reserving charges (peak in 1H17E). Further, we believe the impact of the recent bond market correction to be limited for listed insurers and view potential A-share market rebound (CS report) as a major catalyst for insurers' stock performance as investors tend to trade Chinese insurers as market proxies. Multiple favourable regulations. The new EV rule under C-ROSS is positive for the life insurance sector since it encourages sales of long term protection products. Further, tightening regulations on short-to-medium term products, "platform" players and "Ju Pai" equity investment will curb irrational competition, and help build a benign environment, positive to listed insurers. Retain OVERWEIGHT view. We retain our OVERWEIGHT sector view for (1) strong VNB growth (+2), (2) macro tailwinds, and (3) favourable policies. Factoring in improvement in new business margin and increase in yields, we lift investment return assumption to 4.5% from 4. for life insurers, leading to increase in TPs. The sector valuation is undemanding at 0.81x P/EV, below the three-year historical average of 0.96x P/EV. We prefer Life as a major beneficiary from macro and regulatory tailwinds. We also like Ping An and Taiping as a defensive play on the quality agency franchise and continuous focus on protection products. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE 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.

2 Target Price Upside / Downside (%) P/EV (x) Market Share (%) New money yield (%) 24 January 2017 Focus charts Figure 2: New money yield bouncing back insurance new money yield (%) 8% 7% Taiping Pacific New Life F'cast Figure 3: But pressure from reserving charges remain 10Y gov t bond yield (%) and 750-day average bond yield (%) % Forecast 6% 4. 5% Ping An Life 3.5% 4% 3% Jun-05 Dec-06 Jun-08 Dec-09 Figure 4: Platform insurers built up premium by selling universal products life insurer market share (%), based on gross premium, Nov % 12% 8% 18% Listed Names 11% PICC Group Jun-11 1 Dec-12 Jun-14 Platform Insurers Dec-15 Dec-17 Policyholder s investment fund (universal) Premium % Jan-07 Jan-08 Jan-09 Jan-10 Figure 5: Our top picks are Life, Ping An, and Taiping insurer valuation sheet, Price in HK$ 2628.HK 2318.HK 0966.HK 2601.HK 1336.HK Life Jan-11 10yr Bond Jan-12 Ping An Jan-13 Taiping Pacific New Life Price TP Jan-14 Jan-15 Jan-16 Jan-17 10yr bond 750 day average 3.1%, Oct 2018 Jan-18 Jan-19 4% 5% 4% 4% 3% 6% 5% 5% 3% 2% 2% 2% Upside 26% 36% 44% 41% 7% Life Ping An Life CPIC PICC Life NCL Taiping Life Figure 6: Substantial upside under 4.5% assumptions Upside/downside for listed insurers under various investment returns 8 6 Anbang Life Huaxia Life Sino Life Hexie Health Foresea Life Tianan Life Sunshine Life Evergrande P/EV(x) 0.84x 0.89x 0.53x 0.87x 0.86x VNB(x) -2.4x -1.6x -10.6x -1.7x -2.1x ROE 8.7% 14.6% 9.8% 10.2% 12.5% Figure 7: Sector valuations 1std below 3Y average insurance price to embedded value multiple (x) - spot 1.6x 1.4x x + 1 std dev Upside under 5. investment return Upside under 4.5% investment return Downside under 3. investment return New Life Life Taiping Pacific Ping An 1.0x 0.8x 0.6x Jan-12 Jul-12 Jan-13 Jul-13-1 std dev Jul-14 Jan-14 3yr average Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: Reuters, CIRC, company data, Credit Suisse estimates Insurance Sector 2

3 24 January 2017 Growth normalises in 2017, but remains strong for listed insurers Insurers are prime beneficiaries of rising yields and a better stock market C-ROSS and tightened regulations on platform players are positive for the sector Expect high single digit growth and margin to remain stable 2017 outlook: An improving landscape Growth normalises with margin improving We expect sector growth to normalise in 2017, primarily due to: (1) significant slowdown in short-to-medium term universal life products, (2) tightened regulations on "platform" insurers, (3) high premium base built up (+41% in 2016), and (4) slowdown in agency expansion. However, momentum of listed insurers remains strong, with VNB growth at 2 level. The agency channel and product improvement are critical for growth and value creation. We are confident on sector growth upside in the long term on low penetration and potential pension reform. Macro: Benefit from rising yield and stock We view life insurers as prime beneficiaries of rising yields, with the benefits from: (1) rising new money yields, (2) enhanced confidence on EV assumptions, (3) lower liability costs from regulatory tightening on universal products and "platform" insurers, and (4) improvement of reserving charges (peak in 1H17E). Further, we believe impact from the recent bond market correction to listed insurers to be limited as the majority of bonds are classified as Held to Maturity (HTM). In EV calculation, lower bond price leads to negative market value adjustment, but this is one-off and policyholders share 7 of loss. Lastly, CS strategist remains positive on the A-share market. The market rebound would be a catalyst for insurers' stock performance, as investors tend to trade them as market proxies. Regulations: Multiple tailwinds The implementation of EV under C-ROSS is positive for the life insurance sector since it encourages the sales of long-term protection products and provides listed names an opportunity to revise down EV investment return assumptions. Most listed insurers benefit from the new rules with higher EV, especially those with a higher agency business and protection elements. In addition, tightening regulations on short-to-medium term products, "platform" players and "Ju Pai" equity investment are positive for listed players, as irrational competition would be restrained, helping build up a benign market environment. The major revision in two accounting standards (effective in 2018) will change the way insurers manage investment assets. Given the significant swing of profit under FVTPL method, we believe most companies will opt for the FVOCI method under IFRS9. P&C: Slowdown in growth, but profitability protected We expect premium growth of P&C sector to slow to a high single digit level in 2017, on the back of: (1) slower momentum of new car sales, (2) negative impact of VAT reform till May, and (3) potential second round of motor pricing reform (i.e. reducing channel factor to 0.75 from 0.85). Despite investor s concern over motor insurance pricing deregulation, we expect the underwriting margin to be stable in 2017, given CIRC has stringent monitoring of sector-wide combined ratio (i.e., quarterly combined cannot exceed that of the threeyear average) in place. We argue that strong margins would be sustainable for the large insurers (PICC, Ping An and Pacific specifically) given their significant scale advantage in pricing, risks selection, and claim processing to protect profitability. Retain OVERWEIGHT view We retain our OVERWEIGHT sector investment view, as we believe (1) strong VNB growth (+2), (2) macro tailwinds on yield and stock market, and (3) favourable regulatory policies (i.e., C-ROSS, tightening on "platform" insurers) would be key stock drivers. Factoring in improvement in new business margin and increase in yields, we lift investment return assumption to 4.5% from 4. for life insurers, leading to an increase in TP. The sector valuation is undemanding at 0.81x P/EV, below the three-year historical average of 0.96x P/EV. We prefer Life as the major beneficiary from macro and regulatory tailwinds. We also like Ping An and Taiping as defensive plays on quality agency franchise and continuous focus on protection products. Insurance Sector 3

4 24 January 2017 Insurance Sector 4 Sector valuation matrix Figure 8: Asia insurance key financial metrics EPS ROE P / NTA ROTE P / EV* ROEV 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) P / EV (x) (x) EV growth (%pa) VNB (x) (x) VNB growth ratio (%) (%pa) Price movement (%) Company Currency Cap Volume Volume Liquidity 20-Jan high/low Target Return Rating End PE (x)* 12mth forward diluted (Credit Suisse forecasts) 1day 1wk 1mth 1qtr 1hy 1yr YTD US$m US$m US$m % local local % Dec Australia AMP.AX AMP AUD 11, % % NTRL 31-Dec 14.3x 15.3x -602% 2.0x 12.9% 2.9x 19.1% 1.0x 1.0x 7% 6.8% 1.3x 1.3x 4% -414% 5.7% % -0.4% -4.4% -14.6% -4.7% -13.9% CGF.AX Challenger AUD 5, % % OPFM 30-Jun 15.3x 15.5x 9% 2.0x 13.7% 2.5x 15.8% na na na na na na na 52% 3.3% % -3.2% 4.3% % 24.1% CVW.AX Clearview AUD % na na NC 31-Dec 21.9x 21.9x 16% 1.9x 8.6% na na na na na na na na na 52% 2.4% -0.7% -2.2% -0.4% 10.8% 38.5% 41.3% 41.3% TWR.AX Tower NZD % NTRL 30-Sep 5.9x 5.9x 15% 0.6x 9.5% 0.6x 10.9% na na na na na na na -139% % -38.8% -51.8% -57.3% NHF.AX NIB Holdings AUD 1, % % UPFM 31-Dec 18.8x 18.8x 9% 4.2x 22.1% 9.2x 48.9% na na na na na na na 66% 3.5% % -1.1% 0.4% 3.5% 38.9% 34.2% MPL.AX Medibank Private AUD 5, % % NTRL 31-Dec 17.8x 17.8x -5% 4.3x 24.2% 5.3x 29.8% na na na na na na na 77% 4.3% -1.5% -3.4% -2.7% 2.9% -9.5% 25.8% 25.8% GMA.AX Genworth Australia AUD 1, % na na NC 31-Dec 9.1x 9.1x na 0.8x x 9. na na na na na na na 83% 9.2% -0.9% -3.7% 0.8% 6.8% 18.5% 21.3% 42.1% IAG.AX IAG AUD 11, % % UPFM 30-Jun 16.2x 16.9x 14% 2.1x 12.9% 4.2x 25.1% na na na na na na na 102% 4.7% -0.7% -3.7% -1.3% 5.4% 0.4% 17.2% 8.4% QBE.AX QBE USD 12, % % NTRL 31-Dec 13.6x 14.7x 21% 1.1x 7.5% 1.6x 11. na na na na na na na 77% 4.7% % -2.2% 18.3% 9.5% 14.6% -3.2% SUN.AX Suncorp AUD 13, % % OPFM 30-Jun 13.3x 13.9x 6% 1.2x 8.7% 1.9x 13.6% na na na na na na na 81% 5.6% -0.4% -4.4% -3.6% 4.6% -0.4% 14.7% 7.4% 65,342 3, % 15.9x 16.3x -39% 2.1x 12.4% 6.0x 34.4% 1.0x 1.0x 7.3% 6.8% 1.3x 1.3x 4% 21% 4.3% -0.8% -2.9% -1.7% % % SS Life (A) CNY 77, % % UPFM 31-Dec 25.4x 41.4x 1% 2.2x 5.4% 2.2x 5.4% 1.0x 1.1x 16% 2.4% -0.3x 1.3x 2 35% 0.7% -0.4% % 20.7% 14.6% -9.9% SS Pacific (A) CNY 26, % % OPFM 31-Dec 17.7x 20.5x 17% 1.8x 8.9% 1.8x 8.9% 0.9x 1.0x 15% 4.6% -0.9x -0.4x 24% 49% 2.4% 0.3% 0.2% 3.7% -1.8% 6.1% 20.2% -0.4% SS New Life (A) CNY 13,866 1, % % UPFM 31-Dec 19.0x 26.8x 2% 2.2x 8.4% 2.3x 8.6% 1.0x 1.2x 15% 3.9% 0.6x 3.4x 14% 14% % % 7.3% 13.1% 92.9% -12.3% SS Ping An (A) CNY 63,415 3, % % OPFM 31-Dec 10.1x 11.2x 1% 1.5x 13.3% 1.7x 15.5% 0.8x 1.0x 18% 7.4% -3.0x -0.2x 28% 16% 1.4% 0.6% 0.2% 4.4% 5.1% 12.3% % 180,833 7, % 7.3% 18.0x 25.0x 5% 1.9x x 9.6% 0.9x 1.1x 16% 4.6% -0.9x 1.0x 21% 29% 1.4% 0.1% 0.1% 5.8% 9.2% % -5. Hong Kong 1299.HK AIA USD 73,696 2, % % NTRL 30-Nov 17.1x 15.9x 6% 1.8x 11.4% 1.9x 11.9% 1.5x 1.5x 11% 9.5% 9.3x 8.6x 8% 29% 1.9% -0.2% 2.2% % 13.5% 1.8% 0945.HK Manulife CAD 6, % % OPFM 31-Dec 11.3x 15.5x x 9.6% 2.0x 12.6% 0.9x na na 6.1% -1.8x na na 42% 2.8% 1.1% -0.3% % 41.9% 20.7% 2628.HK Life (H) CNY 20,447 2, % % OPFM 31-Dec 20.6x 31.1x -4% 1.7x 5.4% 1.7x 5.4% 0.7x 0.8x 16% 2.4% -4.1x -2.4x 15% 35% 0.9% -1.4% 1.7% 6.7% 5.7% 21.6% 12.2% -14.6% 2601.HK Pacific (H) CNY 9, % % OPFM 31-Dec 15.9x 17.5x 12% 1.6x 8.9% 1.6x x 0.8x 15% 4.6% -2.9x -2.2x 19% 49% 2.8% -1.4% -0.5% 3.2% -6.6% -0.4% 3.8% -13.9% 0966.HK Taiping HKD 7, % % OPFM 31-Dec 10.8x 12.2x 1.0x 8.5% 1.0x 8.5% 0.5x 0.2x 14% 4.1% -6.9x -7.0x 26% 32% % % 5.4% 7.9% -5.8% -30.7% 1336.HK New Life (H) CNY 5, % % NTRL 31-Dec 14.3x 19.8x 2% 1.5x 8.4% 1.5x 7.8% 0.8x 0.9x 15% 3.9% -3.9x -1.5x 9% 14% 0.8% -0.9% 1.2% 8.2% 9.6% 34.5% 32.6% 16.1% 2318.HK Ping An (H) CNY 56,563 3, % % OPFM 31-Dec 10.4x 11.2x -3% 1.5x 13.4% 1.7x 15.6% 0.8x 1.0x 18% 7.5% -2.8x -0.1x 22% 16% 1.4% -0.4% % -0.5% 11.6% 16.7% -5.8% 0656.HK Fosun CNY 13, % % OPFM 31-Dec 8.5x 7.2x 11% 1.0x 11.8% 1.2x 16.8% na na na na na na na 13% 1.9% 1.4% 7.2% 10.9% 1.2% 15.4% 243.7% -1.2% 1339.HK PICC Group CNY 16, % % OPFM 31-Dec 7.7x 8.0x 7% 0.8x 9.9% 0.8x 10.3% 0.7x -1.4x 14% 8.8% -9.4x -27.1x 17% 6% 0.7% -0.7% 0.3% 0.7% -4.4% % -20.3% 2328.HK PICC P&C CNY 22, % % OPFM 31-Dec 7.7x 8.3x 1 1.2x x 14. na na na na na na na 25% 3.6% -0.3% % -11.8% -24.4% 1508.HK Re CNY 9,748 na na na na na NC 31-Dec 10.1x 10.1x 0.8x 8.3% 0.8x 8.3% na na na na na na na 24% 2.4% % 1.7% -24.9% 283,553 11, % 12.0x 14.4x 4% 1.3x x 10.9% 0.4x 15% 5.2% -5.0x -6.7x 18% 24% 1.9% -0.2% 1.1% 4.2% -0.7% 6.6% 17.8% -8.4% India RLCP.BO Reliance Capital INR 1, % na na NC 31-Mar 8.6x 8.6x 17% 0.7x 8.1% 0.7x 8.1% na na na na na na na 23% 2.6% % 3.2% -17.5% 6.5% % MAXI.BO Max India INR 2, % % UPFM 31-Mar 45.5x 45.5x 14% 6.5x 14.2% 6.5x 14.2% 3.9x na 9% na na na na 15% 1% -0.5% 0.9% 6.2% 1.2% -3.6% 44.7% 30.8% 3, % -26.3% 27.0x 27.0x 16% 3.6x 11.1% 3.6x 11.1% 19% 1.9% -1.6% 0.4% 4.9% -6.9% 0.7% 33.6% 18.8% Japan 8750.T Dai-Ichi Life JPY 21,212 1, % 2,064 1,012-2,064 2, % OPFM 31-Mar 11.5x 10.7x 9% 0.7x x 7.9% 0.4x 0.5x 8% 3.4% -17.6x -12.9x 4% 22% 2.1% 2.6% 4.4% 5.2% 40.1% 64.3% 21.5% 1.4% 7181.T Japan Post JPY 13, % 2,484 1,927-2,756 na na NC 31-Mar 17.4x 17.4x 0.8x 4.6% 0.8x 4.6% na na na na na na na 44% 2.5% 3.9% 4.7% -3.2% 8729.T Sony Financial JPY 7, % 1,914 1,050-1,968 1, % NTRL 31-Mar 16.4x 17.0x 4% 1.4x x 8.3% 0.6x 0.8x 6% 3.3% -11.6x -5.2x -2% 51% % 6.1% 3.2% 37.4% 52.5% % 8795.T T&D Holdings JPY 9, ,637 0,813-1,642 1, % OPFM 31-Mar 12.5x 11.7x 7% 0.8x 6.7% 0.8x 6.7% 0.5x 0.7x 5% x -6.6x 24% 26% 2.1% 2.5% 5.3% 5.8% 34.1% 60.9% 17.4% 1.7% 8725.T MS&AD Insurance JPY 19, % 3,796 2,429-3,802 3, % OPFM 31-Mar 11.1x 9.9x 24% 0.9x 8.7% 1.0x 9.9% na na na na na na na 32% 2.8% 2.5% 3.2% 3.8% 28.1% 29.7% 23.4% 6.3% 8630.T Sompo Holdings JPY 14, % 4,144 2,593-4,184 3, % NTRL 31-Mar 10.3x 11.8x -2% 1.0x x 8.7% na na na na na na na 22% 2.3% 3.1% 5.2% 3.3% 24.8% 25.8% 22.6% 3.3% 8766.T Tokio Marine JPY 31,599 2, % 4,812 3,154-5,381 4, % OPFM 31-Mar 12.4x 13.9x 1.0x 7.2% 1.3x 9.3% na na na na na na na 38% 3.2% 2.4% 2.7% -2.1% 19.1% 22.8% 18.6% 2.1% 116,461 6, % 4.6% 13.1x 13.2x 7% 0.9x 7.2% 1.0x 7.9% 0.5x 0.7x 6.2% 3.5% -14.1x -8.2x 8% 33% 2.6% 1.5% % 25.3% 34.2% 17.1% 1.7% Korea KS Samsung Life KRW 19, % 114,500 94, , , % OPFM 31-Mar 15.2x 15.2x -34% 0.7x 4.7% 0.6x 4.1% 0.7x 0.8x 7% 4.5% -8.4x -6.1x 3% 15% 1.8% -0.4% 2.2% % 15.3% 14.5% 4.1% KS Tong Yang Life KRW % 10,850 9,880-13,950 na na NC 31-Mar 7.1x 7.1x -15% 0.5x 6.8% 0.5x 6.8% na na na na na na na 4 5.6% 0.5% 0.5% -18.4% -16.2% 0.5% 8.5% -6.9% KS Dongbu KRW 3, % 61,000 60,900-76,200 72, % NTRL 31-Mar 7.3x 7.9x 11% 0.8x x 10.5% 0.6x 0.8x 5% 7.3% -7.0x -3.9x -1% 21% 3.3% -0.3% -0.8% -4.2% -14.3% -5.1% % KS Hyundai M&F KRW 2, % 30,950 28,150-37,650 43, % OPFM 31-Mar 6.4x 6.4x 6% 0.7x 10.4% 0.7x 10.6% 0.4x 0.1x 7% 6.9% -7.5x -11.5x 5% 2 3.7% -1.1% -0.2% -2.2% -15.8% 3.3% 1.1% -14.1% KS LIG Insurance KRW 1, % 25,450 24,750-34,050 na na NC 31-Mar 4.8x 4.8x 12% 0.6x x 12. na na na na na na na 17% 3.4% 1.8% 2.8% -3.4% -9.8% -9.8% -11.5% -12.8% KS Meritz F&M KRW 1, ,250 14,400-16,850 na na NC 31-Mar 6.6x 6.6x 0.7x 11.3% 0.7x 11.3% na na na na na na na 31% 4.7% % -3.5% -2.6% 0.3% 4.8% -5.6% KS Samsung F&M KRW 10, % 272, , , , % OPFM 31-Mar 10.8x 10.4x 16% 0.9x 8.6% 0.9x 9.1% 0.6x 0.5x 8% 6.1% -9.0x -9.4x 4% 29% 2.8% 0.7% -0.7% -0.4% -6.2% 0.2% -5.7% -11.5% KS Korean Re 1, % 10,950 10,950-14,100 na na NC 31-Mar 5.7x 5.7x 23% 0.6x 9.6% na na na na na na na na na 3.8% -0.5% -2.2% % -8.8% -15.4% -22.6% 45,407 1, % 24.5% 8.7x 8.7x 0.7x 8.7% 0.7x 8.6% 0.6x 0.5x 7% 6.2% -8.0x -7.8x 3% 24% 3.5% 0.1% 1.2% -1.3% -2.3% 7.6% 3.8% -5.1% South East Asia GELA.SI Great Eastern 6, % na na NC 31-Dec 13.0x 13.0x na na na na na na na na na na % 0.9% -3.3% 3.4% 2. AINM.KL Allianz Malaysia MYR % na na NC 31-Dec 5.7x 5.7x na 0.7x 13.7% na na na na na na na na na 3% 0.5% % 0.2% 2.8% % LOND.KL LPI Capital MYR 1, % na na NC 31-Dec 18.9x 18.9x na 2.6x 13.8% 2.6x 13.8% na na na na na na na 71% 3.7% -0.1% -0.1% 1.5% -0.2% 4.8% 6.8% 4.2% TUNE.KL Tune Protect % na na NC 31-Dec 11.5x 11.5x na 1.8x 16.1% na na na na na na na na na 44% 3.8% % -0.7% -7.1% -14.2% 7.4% 12.4% PNLF.JK Panin Financial IDR % na na NC 31-Dec 4.2x 4.2x na 0.7x 14.1% 0.7x 14.1% na na na na na na na % 4.1% -8.7% -15.2% 34.8% -3.8% PNIN.JK Panin Insurance IDR na na NC 31-Dec 3.5x 3.5x na 0.7x 14.7% na na na na na na na na na % -7.1% 8.3% 23.8% 19.3% SMMA.JK Sinar Mas IDR 4, ,600 5,000-8,800 na na NC 31-Dec 33.1x 33.1x na 4.9x 14.9% na na na na na na na na na % 6.8% 7.5% 70.3% 70.3% BLA.BK Bangkok Life 2, % na na NC 31-Dec 15.5x na na na na na na na na na na 0.5% % -1.5% 19.4% 1.5% -11.3% BKI.BK Bangkok Insurance THB 1, % na na NC 31-Dec 15.1x 15.1x na 1.0x 10. na na na na na na na na na 52% 3.4% 0.3% 0.9% 2.6% 1.2% -2.2% % BVH.HM Bao Viet VND 1,836 na na na 60,900 49,000-72,900 na na NC 31-Dec 9.5x 9.5x na 2.0x 20.7% na na na na na na na na na 4 4.2% 0.2% -1.1% 2.2% -10.4% 3.2% 29.9% 14.9% 20, % 10.0x 9.7x 1.7x 16.5% 0.9x 11.1% 28% 4.7% 0.4% 0.2% 0.8% 1.1% 3.8% 20.4% 16. Taiwan 2882.TW Cathay FHC TWD 18, % % OPFM 31-Dec 12.2x 12.6x 1% 1.2x 9.6% 1.2x 9.6% 0.7x 1.2x 5.3% -5.6x 3.2x 4 3.2% 0.6% -0.3% 0.3% 17.1% 29.5% 38.3% 1.8% 2823.TW Life TW TWD 3, % % NTRL 31-Dec 9.8x 9.8x 1 1.5x 14.9% 1.5x 14.9% 1.2x 1.3x 2% 12.4% na na na % 2.2% -3.7% 4.7% 17.4% 39.7% TW Fubon FHC TWD 16, % % NTRL 31-Dec 9.7x 10.4x 2% 1.3x 12.6% 1.3x 12.6% 1.8x 1.4x 15% 17.4% 31.8x 14.3x 63% 35% 3.4% 0.6% 0.2% 1.4% 12.6% 26.7% 44.3% 12.2% 2888.TW Shin Kong FHC TWD 2, % % UPFM 31-Dec 12.3x 22.9x 56% 0.7x 3.3% 0.7x 3.3% 0.3x 0.7x 9% 1.2% -12.4x -4.2x -2% % -0.5% 1.9% 15.7% 20.3% 29.5% 11.2% 41,457 1, % 11.8% 11.2x 13.6x 17% 1.2x x 10.1% 1.0x 6% 9.1% 4.6x 4.4x 2 19% 1.7% 0.5% 0.1% 0.5% 14.2% 26.7% % Total NJA insurance 641,914 24,819 1, % 14.7x 16.6x -8% 1.5x 9.4% 1.7x 10.7% 0.7x 1 4.7% 0.0x 0.3x 13% 2 1.9% -0.1% 0.3% 3.3% 3.7% 9.7% 19.9% -3.5% Note: * Adjusted EV and VNB multiples have standardised assumptions and adjusted for non-life operations. Source: Reuters, company data, Credit Suisse estimates (12-month forward rolling forecasts for covered stocks), IBES consensus estimates for Not Covered (NC) stocks

5 24 January 2017 Table of contents Focus charts outlook: An improving landscape 3 Growth normalises with margin improving... 3 Macro: Benefit from rising yield and stock... 3 Regulations: Multiple tailwinds... 3 P&C: Slowdown in growth, but profitability protected... 3 Retain OVERWEIGHT view... 3 Sector valuation matrix 4 Growth normalises with margin improving 7 Growth normalises, but listed names remain strong... 7 Agency to fuel growth and value creation... 9 Margin improving with better products Sector structural growth to continue in long term Long-term growth driver from pension reform Macro: Benefit from rising yield and stock 18 An inflection point of new money yields A positive move of falling liability costs Lower earnings pressures from additional reserves Impact of falling bond prices manageable A good proxy of better A-share market The sensitivity of TPs to investment assumptions Regulations: Multiple tailwinds 26 The implementation of C-ROSS Global/domestic systemically important insurers Revision in accounting standards Clamping down on "platform" insurers The regulations on "Ju Pai" equity investment P&C: Slowdown in growth, but profitability protected 36 Lift TP on positive outlook 38 Retain OVERWEIGHT view 40 Life (2628.HK / 2628 HK) 43 Ping An (2318.HK / 2318 HK) 45 Insurance Sector 5

6 24 January 2017 Taiping (0966.HK / 966 HK) 47 Pacific (2601.HK / 2601 HK) 49 PICC Group (1339.HK / 1339 HK) 51 New Life (1336.HK / 1336 HK) 53 PICC P&C (2328.HK / 2328 HK) 55 Life ( SS) 57 Ping An ( SS) 59 Pacific ( SS) 61 New Life ( SS) 63 Insurance Sector 6

7 Rmb (bn) 24 January 2017 Growth normalises with margin improving Growth normalises, but listed names remain strong insurance premiums reach Rmb3.1 tn at the end of 2016, implying a 29.7% YoY growth rate. Life insurance premiums are expected to reach Rmb2.3 tn, or 75% of the total insurance premium, and up 41% compared with If we include premiums from universal products, the total life premium is expected to exceed Rmb3.5 tn, up 47% compared with Figure 9: insurance premiums (Rmb mn/cagr %) (Rmb mn) Dec-01 Dec-06 Dec-11 Dec-13 Dec-15 Dec-16* CAGR 10 yr (%) 5 yr (%) 3 yr (%) 1 yr (%) Life 142, , ,143 1,100,998 1,628,755 2,300, % 18.8% 27.9% 41.3% P&C 68, , , , , , % 12.9% 10.9% 6.1% Total 210, ,144 1,433,925 1,722,224 2,428,252 3,148, % % 29.7% Source: CIRC, Credit Suisse estimates, * 2016 pro-rata, based on data to Nov 2016, excl. premium from universal products Figure 10: Life insurance growth strong in 2016 Life insurance premiums (Rmb mn) and growth (% p.a.) Strong growth in universal product premiums 3,500 3, , , , , Nov-16 Dec-15 Dec-14 Dec-13 Dec-12 Dec-11 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Traditional product premium Premium from universal product Growth (%), excl. unviersal premium Growth (%) Source: CIRC, Credit Suisse estimates Sector growth normalises in 2017 Looking into 2017, we expect growth momentum to normalise due to the following factors: (1) tightened regulations on short-to-medium term products, (2) lower crediting rates of some products, and (3) high premium base built (+41% in 2016) on agency expansion. First, CIRC has strengthened regulation on universal products. Platform insurers, which grow rapidly by selling high rate universal products and contribute significantly to sector growth, are likely to face a challenging growth outlook next year. Second, the sluggish equity market of 2016 suppressed return of participating insurance products. We also see the crediting rate declining for some companies. With the return of substitute products improving (such as bank wealth management product), insurance products, particularly saving products, may become less attractive. Insurance Sector 7

8 Rmb bn Market Share (%) 24 January 2017 Lastly, the agency expansion (+3) was a key driver of life premium growth in However, we believe such strong growth levels may not be sustainable, especially in more developed urban areas. The strong growth is also partially attributed to the removal of CIRC agent qualification requirements in 2015, which created a one-off low base. As the agency base is getting larger (7mn agents), we expect a lesser, but sustainable, 5-1 p.a. growth in the long term. Figure 11: Listed names focus on traditional business Life insurance premiums and policyholders' inv. fund (Rmb mn) Listed Names Platform Insurers Policyholder s investment fund (universal) Premium Figure 12: Market share trend starts to reverse in 2H life insurance market share (%) Life Ping An Life Pacific PICC Life New Life Taiping Life Anbang Life Huaxia Life Sino Life Hexie Health Foresea Life Tianan Life Sunshine Life Evergrande Life 2 1 Jun-13 Dec-14 Jun-14 Dec-13 Listed insurers market share Nov-16 Jun-16 Dec-15 Jun-15 Platform insurers market share Sources for both charts: CIRC, company data, Credit Suisse, based on premium (including premium from universal life products) Platform insurers losing momentum Platform insurers, such as Anbang, Sinolife and Sunshine, grow aggressively by offering short-to-medium term products in the bancassurance channel. If we gauge market share by total gross written premium including income form universal products, small companies like Angbang, Huaxia, and Sinolife's market share is significant, with Anbang Life the same size as Ping An life by end of Nov However, given the short duration and low margin of bancassurance products and tightened regulations on universal life products, we expect some of these to struggle to sustain this momentum over the coming years. But strong and sustainable growth for listed companies Despite slowdown in sector growth momentum, we believe strong VNB growth (>2) of listed life insurance companies should be sustainable in 2017, since: Listed insurers earn premium income primarily from long-term saving and protection insurance products, and are less affected by investment return volatility than platform insurers, Unlike platform peers, listed companies have shifted focus to the agency channel, which contributes higher VNB margin and has strong growth potential. We see substantial upside in agent productivity as average wages in continue to rise, agency forces slowly become more professional, and Chinese insurers focus more on premium per contract/premium per client (up-sell). Listed insurers could focus on growing the high margin, long-term protection business, benefiting from tightened regulation on universal products, Insurance Sector 8

9 APE / VNB Mix (%) VNB Margin (% of NB APE) % of New Business APE 24 January 2017 Agency to fuel growth and value creation The agency channel is the most critical channel for life insurers in terms of both new business premium and value of new business, while bancassurance generates materially less value for life insurers due to the non-exclusive nature of this channel in and therefore, higher commissions and greater price competition. Bancassurance accounted for 60-7 annual premium equivalents (APE) in However, due to new bancassurance regulations and higher rates on competing products (bank deposits and wealth management products), the contribution from bancassurance to new business APE has reduced to On the other hand, agency contribution has risen to 60-9 of new business APE (Figure 14). Figure 13: Agency margins much higher New business (VNB) margins (% NB APE), 1H Figure 14: with % of new business from agency rising % of new business APE, % Life Ping An Pacific New Life PICC Group Taiping Life Ping An New PICC Group Pacific Life Agent VNB Margin Bancassurance VNB Margin Taiping 1H H H H H H H H 2016 Agency Bancassurance Others 1H H H H 2016 Note: APE = annual premium + 1 single premium. Source for both charts: Company data, Credit Suisse estimates Margins for the agency channel are significantly higher than those for bancassurance (in some cases, as high as ten-fold). We also highlight that agency margins are quite stable while bancassurance margins are falling due to increased competition. Agency channel's VNB contribution is disproportionately larger due to its high margins Agency volumes are more stable, in our view, with a much lower impact from macroeconomic factors. The problem is that agency channels are very difficult and costly to build and maintain. Figure 15: Agency channel VNB contribution significantly larger than bancassurance APE Mix (% of new business APE) vs Value of New Business (VNB) Mix, in %, 1H Life New Life PICC Group Taiping VNB Mix APE Mix APE Mix VNB Mix APE Mix Agency Bancassurance Others VNB Mix APE Mix VNB Mix Insurance Sector 9

10 Agent number ('000) Premium (RMB bn) 24 January 2017 Given the large margin differential, agency channel contribution is materially higher than the 6 contribution in terms of new business APE. Based on public disclosures and statements from the companies, we estimate that the agency channel represented ~ 9 (range: 72-97%) of the new business value for the insurers due to much higher margin. As such, we believe that the agent channel is strategically important for insurance growth and value creation, with key drivers including: (1) growth in number of agents, (2) growth in agent productivity, and (3) growth in product margins. Figure 16: Premium growth fuelled by agents Agent number (in thousand) and life insurance premium (Rmb bn) 8,000 2,400 7,000 2,100 6,000 1,800 5,000 1,500 4,000 1,200 3, , Figure 17: with differences in regions Agency number / Population, in % Developed Developing Emerging 1, * Agent number (thousand) Premium (RMB bn) Jiangsu Zhejiang Guangdong Tianjin Beijing Shanghai Shanxi Inner Mongolia Fujian Heilongjiang Hebei Jilin Shandong Liaoning Tibet Guizhou Gansu Yunnan Qinghai Anhui Jiangxi Sichuan Ningxia Shaanxi Xinjiang Guangxi Hunan Chongqing Hubei Henan Hainan National * Estimate based on Nov-2016 premium and Sep-2016 agent data. Source: PI Financial Services, Credit Suisse estimates Source: CIRC, PI Financial Services, Credit Suisse estimates Solid growth outlook for agent number Agent number growth has averaged 23% p.a. over the past five years, with strong growth in the last two years (33% and 56% for 2016 and 2015). The strong growth is partially attributed to the removal of the CIRC agent qualification exam in We see significant potential in agent productivity Strong agent number growth fuelled 29.7% increase in life premium (see Figure 16). However, we believe such strong growth levels may not be sustainable, especially in more developed urban areas. Further, the low base effect from the abolishment of the agency exam is unlikely to be replicated. As the agency base is getting larger (7 mn agents), we expect a lesser, but sustainable (5-1 p.a.), growth in the long term. Substantial upside in agent productivity Agency productivity continues to improve for listed players. We note that measuring productivity by premium volume can be deceptive as a switch to lower premium but higher margin 'protection' type insurance will show up as productivity reductions given premiums are lower. Therefore, looking at growth in value of new business is better, but this has only been disclosed by select insurers (Ping An and Pacific, Life). Still, listed players reported solid growth in productivity measured by premium amid restructuring of product mix. Apart from boosting agent productivity by selling more products, insurers increasingly emphasise on premium per contract and premium per client. Pacific disclosed that premium per client increased from Rmb11,713 in 2015 to Rmb 13,268 in Jun-2016 a 13% increase. We expect growth to return to healthy levels (above 1) in coming years (even as insurers focus on better margin products). We see substantial upside in agent productivity as average wages in continue to rise, agency forces slowly become more professional, and insurers focus more on premium per contract/premium per client (up-sell strategy). Figure 18 shows AIA has significantly higher agent productivity than its peers, outlining the growth potential for insurers. Insurance Sector 10

11 VNB margin (% NB APE) 24 January 2017 Plenty of margin improvement capacity insurers' VNB margin stayed relatively stable during 2016, ranging from 2 to 4. As highlighted in Figure 19, AIA 's new business margins are now double those of the Chinese insurers, but were similar to them in Thus, we believe achieving higher new business margin in is possible. Figure 18: Agency productivity increasing Agency productivity APE per agent per month (Rmb) Figure 19: AIA shows higher VNB margins Value of new business (VNB) margins (% NB APE) 25,000 F'cast 9 F'cast 20, AIA 15, Pacific 10,000 5, Ping An PICC Group 2 Life 0 9-Jun 10-Jun 16-Jun 15-Jun 14-Jun 13-Jun 12-Jun 11-Jun Life Ping An Pacific New Life PICC Group Taiping AIA 17-Jun 1 Dec-05 Jun-06 Dec-06 Jun-07 Taiping Jun-09 Dec-08 Jun-08 Dec-07 New Life Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 The key driver of improvement for AIA was to shift product mix to much higher levels of protection (as it does in other countries in Asia) and made possible by a better trained and more professional agency force relative to the larger Chinese insurers. The key drivers of margin enhancement for the insurers can be categorised as follows: Channel mix: The bancassurance channel in has much lower margins than the agency channel. Transition from bancassurance to agency channel was a key driver of growth and value creation in the past, and CPIC was a successful example. Higher protection mix: Chinese insurers are trying to increase the share of protection by: (1) increasing sales of protection products, including critical illness products and non-participating term life insurance; and (2) adding protection riders/protection coverage in bundled products. Progress has been painfully slow, but remains a key focus for better quality insurers. Product mix: Chinese insurers have also been lengthening the premium payment duration to improve margins. Life, for example, intends to promote long-term protection products after 2017 "jumpstart" premium reached Rmb40~50 bn, the level of last year. We see the key driver of margin improvement to be a greater percentage of the 'protection' type (i.e., insurance) business sold in. However, agents ability to increase the amount of protection business sold is limited by their training and sales skills in this area. Even very successful agents in may not have focussed on selling such protection products, noting also that the more protection is added to a savings product, the lower the future total return to the client will be, due to insurance charges. As such, we have seen new product launch momentums fade after a few months, as agents struggled to consistently sell such products, despite increased efforts from company managements to launch new products with additional 'protection' cover. We are Insurance Sector 11

12 Value of New Business (Rmb bn) 24 January 2017 of the view that the agency transformation needed to shift the product mix takes many years to execute. In addition, Chinese insurers have been constrained in their ability to sell more 'protection' type/riders by the lack of incentive for such sales. Typical commissions for 'savings' type products are 30-4 of the first-year premium. However, in many markets, the commission rate available for pure protection rider is well above 10. Skewing commission rates to encourage higher 'protection' sales was not possible in until regulatory changes in August 2013, but remains limited. Insurers can also incentivise these sales in other ways, but we are of the view that these need to be incentivised adequately, which is confirmed by Milliman Asia Rider survey. Figure 20: Growth opportunity from more riders NJA percentage of total VNB comes from riders Figure 21: Ping An has low reliance on "inv' spread" Value of New Business, in Rmb mn % 21% Other margins Interest margin Life combined Long-term protection Others Source: Milliman Asia Rider Survey, Jan 2015, figures based on H results under C-ROSS Agency channel undergoing fundamental change Agency channel is facing one of the most challenging periods since its inception due to a combination of (1) lack of competitiveness of saving products, (2) difficulties in agency recruitment and retention, and (3) lack of flexibility to pay higher commission on pure protection. The agency channel has had to adapt and change more than at any other period in history, in our view. As such, we are seeing very divergent trends among companies in recent years, driven to a large extent by insurers' ability to change. In our view, a key issue for the Chinese insurance industry is the lack of focus and urgency in transforming their agency forces to greater reliance on underwriting profit rather than relying on 'investment spread' as their main source of earnings. The problem with reliance on 'investment spread' is that this is highly reliant on both prevailing earnings rates (as asset and liabilities cannot be matched, with liabilities much longer in duration) and the level of crediting rates to customers, which can be impacted by rates available on competing products. While in a rising bond yield environment, companies that heavily rely on investment spread tend to outperform, we highlight that insurance companies with greater reliance on underwriting profits are more immune to investment market fluctuations, and as such, have much more stable and 'higher quality' earnings, in our view. We have seen companies shifting focus to underwriting profit from "investment spread". Ping An reported in 1H 2016 low contribution of spread income in VNB (39%), thanks to its consistent focus on the long-term protection business. Thus, it has lower reliance on interest spread and lower sensitivity to investment return assumption changes. New Insurance Sector 12

13 VNB Growth (%) VNB Growth (%) 24 January 2017 Life also put increasing mortality margin and reducing reliance on its strategic development. Margin improving with better products With competition from high rate universal products from "platform" insurers alleviating (which we will discuss in detail in a later section), listed insurers should see margin improving by: (1) reducing the guaranteed rate of products and (2) shifting focus to L/T products. Figure 22: "Jumpstart" products quality improves Company Year "Jumpstart" products Type Payment terms Guarantee rate Coverage Policy loan Ping An 2016 Zun Hong Ren Sheng Participating 3yr 2.5 Whole of life 9 of cash value 2017 Ying Yue Ren Sheng Participating 3yr 2.5 Whole of life 8 of cash value 2016 Chang Xiang Shi Jia Participating Single/3/5/10yr 2.5 Whole of life 95% of cash value Taiping 2017 Sheng Shi Jin Xiang Participating 3/8/20yr 2.5 Whole of life 9 of cash value Pacific 2016 Xing Fu Xiang Ban Annuity 3/5/10yr 4.025% Until age of 80 9 of cash value 2017 Dong Fang Hong Participating 3/5/10yr 2.5 Whole of life 9 of cash value Life 2016 Xin Fu Nian Nian Annuity 5/10yr 4.025% Whole of life 8 of cash value 2017 Xin Fu Ying Jia Annuity 5/10yr 3.5 Whole of life 9 of cash value New 2016 Fu Xiang Yi Sheng Participating Single/3 /5/10yr 2.5 Whole of life 95% of cash value Life 2017 Fu Xiang Yi Sheng Participating 3/5/10yr 2.5 Whole of life 95% of cash value Note: Only major products and major payment terms used for "jumpstart., Figure 23: VNB growth is expected to be higher following margin expansion for Pacific Facing irrational competition from platform insurers, listed insurers had to offer higher guaranteed rate products in an effort to maintain market share at the expense of VNB margins in However, such pressures eased with tightened regulations. We compared the 2017 "jumpstart" sales products to those of 2016 and found the guaranteed rate generally declined. Life lowered its guaranteed rate to 3.5% from 4.025%, and Pacific cut the rate to 2.5% from 4.025%. We also find it positive that listed players are gradually shifting focus to L/T protection insurance, which provides higher VNB margins. For example, Life intends to switch to 10-year/20-year regular-pay, long-term protection products after achieving its sales target of a Rmb40 bn+ premium for "Xin Fu Ying Jia", the same as in Ping An put strategic focus on long-term protection business, which contributed 77% of VNB in 1H16. VNB growth (%) VNB growth (%) Figure 24: Life also sees the benefits 6 5 Forecast 6 5 Forecast H13 2H13 2H15 1H15 2H14 1H14 Revised Forecast 1H16 2H16F 1H17F Previous forecast 2H17F 1H18F 2H18F 1H13 2H13 1H14 2H15 1H15 2H14 Life New 1H16 2H16F 1H17F Life Old 2H17F 1H18F 2H18F Insurance Sector 13

14 24 January 2017 With VNB margin improving, we expect insurers VNB growth to accelerate: Life and CPIC, which offered high rate products in 2016, show higher VNB growth than previously estimated, as Figures 23 and 24 suggest. Insurance Sector 14

15 Life insurance premiums (US$mn) Life insurance premiums (US$mn) 24 January 2017 Sector structural growth to continue in long term The life insurance market is the fastest growing market in Asia over the past ten years, materially outpacing the developed world as shown in Figure 26. s life insurance premiums grew at a compound growth rate of 18.2% p.a. (in US$ terms) for the past ten years, according to Swiss Re data, the highest growth rate in the region, followed by Indonesia and India. Figure 25: NJA growth of 10.1% over past 10 years Global life insurance premiums (US$ mn/cagr % p.a.) Figure 26: driven by growth of 18.2% p.a. NJA life insurance premiums (US$ mn/10-yr CAGR % p.a.) 1,000, , ,000 10yr CAGR (%pa) 4.4% 250, ,000 Developed Developing Emerging % 10yr CAGR (%pa) 700, , % 150, , ,000 (1.) 100, % 7.5% 300, , ,000 - (1.5%) (0.) 0.8% 2.9% 3.9% USA Canada UK France Germany Italy Japan ASIA NJA , % Hong Kong 8.5% Singapore South Korea Taiwan 4.7% Australia 5.8% New Zealand 15.3% 7.9% Thailand Malaysia 9. India 17.5% 17.2% 12.1% Vietnam Philippines Indonesia Source: Swiss Re, Credit Suisse estimates Source: Swiss Re, Credit Suisse estimates In 2015, the Asia-Pacific (ex-japan) market was around 171% the size of Japan, whereas it was only around one-third of the Japanese market in market is the same size of the UK s, whereas it represented just around 9% of the UK market in Given this strong growth rate, the NJA market has grown from representing 8.3% of total global life insurance premiums in 2001, to nearly triple that in 2015 (23.3%). Within NJA, has increased from 1% of global life insurance premiums in 2000, to 8.3% in Figure 27: NJA s 8.3% of global premiums in 2001 Global life insurance premiums (% by region) Figure 28: almost tripled to 23.3% in 2015 Global life insurance premiums (% by region) NJA 8.3% Middle East 0.3% 2001 Middle East 0.5% 2015 North America 32. NJA 23.3% North America 23.8% Japan 24.6% Latin America 2.6% Central/East Europe 0.6% Western Europe 32. Latin America 0.9% Japan 13.6% Central/East Europe 0.6% Western Europe 33.9% Source: Swiss Re, Credit Suisse estimates Source: Swiss Re, Credit Suisse estimates Insurance Sector 15

16 Life premium per capita (Rmb) Premium per capita (US$) Life insurance premiums / GDP (%) Protection Gap (USD bn) Protection Gap Growth (%pa) 24 January 2017 However, insurance penetration (premiums as a percentage of GDP) and insurance density (premium per capita) are still significantly below more developed markets, and we expect structural growth momentum to continue in the long term. Figure 29: has low insurance penetration NJA insurance penetration (premium as % of GDP) Developed Developing Emerging Figure 30: with the largest protection gap Protection Gap (in USD bn) and 10 yr CAGR (% pa) 35,000 30,000 25,000 20,000 15,000 10,000 Developed Developing Emerging 35% 3 25% 2 15% ,000 5% Hong Kong Singapore South Korea Taiwan Australia New Zealand Thailand Malaysia India Indonesia Philippines Vietnam -5,000 Hong Kong Singapore South Korea Japan Australia Taiwan Protection Gap Indonesia India Malaysia Thailand Protection Growth (10yr CAGR) Philippines Vietnam -5% Source: CEIC, CIRC, Credit Suisse estimates Source: Swiss Re, 2014, Credit Suisse estimates is the most under-insured country in Asia with low insurance penetration and the largest protection gap (the difference between resources needed and available to maintain living standards). It has a US$32 tn mortality protection gap, which widened by 17.2% p.a. from , highlighting the large demand for life insurance products. We estimate the potential new annual premium to be US$96 bn, 29% of 2016 sector insurance premiums. Figure 31: Most of has a low insurance density life insurance prem. vs GDP per capita by region (Rmb) 2015 Figure 32: with even Beijing below developed NJA Life insurance prem. vs GDP per capita by region (US$) ,000 6,000 Hong Kong 5,000 Beijing 5,000 4,000 3,000 2,000 1,000 - Growth potential Guangdong Jiangsu See chart below for detail Fujian Chongqing Liaoning Zhejiang Sichuan Jiangxi Hebei Jilin Shandong Anhui Inner Mongolia Gansu Hainan Xinjiang Qinghai Guizhou Yunnan Guangxi Tibet Shanghai Tianjin 0 20,000 40,000 60,000 80, , ,000 GDP per capita (Rmb) 4,000 3,000 2,000 1,000 - NJA Taiwan Beijing Shanghai Developing Guangdong Jiangsu Tianjin Zhejiang South Korea Growth potential Italy Japan Developed Asia France New Zealand UK Canada Germany Singapore Australia USA 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP per capita (US$) Source: Swiss Re, Credit Suisse estimates Source: CIRC, Credit Suisse estimates Insurance density in is significantly below that of more developed markets and material differences exist between regions. Municipalities, such as Beijing and Shanghai, are 3x higher than the national average while developing regions are half of the average. Given the low insurance penetration and insurance density, 's life insurance sector has substantial upside over the next few decades, especially in less developed areas. The "New Nation Ten" insurance reform plan by the State Council targets insurance density to reach Rmb3,500 by 2020, implying a 15-2 CAGR. We expect life insurance to maintain solid growth in 2017 and beyond, with mid-teen growth over the next decade achievable. Insurance Sector 16

17 % of population over 60 Number of employees, in mn 24 January 2017 Long-term growth driver from pension reform Given rapid ageing and insufficient pension protection in, we believe the introduction of the much-anticipated tax-deferred commercial pension scheme will create a large commercial individual pension market and drive insurance premium growth. Figure 33: is ageing rapidly % of population over 60 Figure 34: with working population growth slowing Number of people, in mn and growth (%p.a.) 4 35% 3 Developed Developing and emerging % 1.6% 1.4% 25% % % % % 5% % Hong Kong Singapore South Korea Taiwan Australia New Zealand Thailand Malaysia India Indonesia Philippines Vietnam Asia Average Urban Area Rural Area Growth (%p.a.) 0.2% 0. Source: UN World Population Aging report 2015 Source: CEIC, Credit Suisse estimates has been an ageing society since 2000 with the largest aged population growing at the highest rate in the world. In 2015, 209 mn or 15.2% of 's population was aged above 60. The number is expected to rise to 358 mn (25.3%) in However, the working population is stagnating with growth down to 0.3% p.a. in Meanwhile, pension protection in is insufficient. Within its three-pillar system, mandatory social insurance, pillar 1 dominates the total pension balance with enterprise annuities (pillar 2) and commercial individual pensions (pillar 3) being negligible. The mandatory social security was Rmb5.95 tn at the end of 2015 (Rmb4,300 per capita), with withdrawals growing almost at the same pace as contributions, a situation that will continue to deteriorate as the population ages. As such, the president of the PBoC Research Institute, Yao Yudong, proposed targeting the three pillars weighting to 4:1:3, implying the balance of commercial individual pensions to be at least Rmb4.5 tn. This estimate highlights the substantial upside for commercial individual insurance, compared with Rmb2.3 tn life premium income for Currently, there are hardly any commercial individual pensions in, given the lack of tax benefits. It is anticipated that a tax-deferred commercial pension scheme will be carried out in 2017 with Rmb500-1,000 individual pension per person being tax deferrable every month. We estimate that initially the scale would be limited, but with great development potential. If we assume that 5% of the working population has the incentive to buy the minimum Rmb500 commercial pension per month, the total annual premium will exceed Rmb232 bn or 1 of 2016's total life premiums. Insurance Sector 17

18 New money yield (%) 24 January 2017 Macro: Benefit from rising yield and stock An inflection point of new money yields Insurance companies are concerned with bond yield as (1) a significant portion of investment (+8) is in fixed-income assets, and (2) bond yields affect the valuation of insurance contract liabilities and (3) confidence of Embedded Value (EV) assumptions. Figure 35: Bond yield improved marginally 10-yr bond yield (%) and 750 day average (%) Figure 36: New money yield at an inflection point insurance New money yield (% p.a.) % Forecast Taiping Pacific New Life F'cast % Ping An Life PICC Group % Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 10yr Bond Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 10yr bond 750 day average Jan %, Oct 2018 Jan-19 Jan Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Dec-17 Source: Reuters, Credit Suisse estimates, assume bond yield stay unchanged after Jan 2017 The bond yield bounced back from Oct-2016, and our simulated new money yield has reached an inflection point after declining for three years, and improving marginally thereafter (see Figure 36). While falling bond prices may raise concerns over insurers' balance sheet strengths, we expect the impact to be limited, as most bonds are classified as HTM, a one-off negative adjustment in EV. We believe rising bond yields are positive for EV in long term. 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. 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 performance for years and a low yield environment, investors became sceptical about Chinese insurers' long-term return assumption of 5.5%. Thus, rising bond yield helps alleviates concerns over investment return assumptions, thus building up investors' confidence on EV and boosting valuation for the insurance sector. In addition, the implementation of C-ROSS and tightening regulations on short-to-medium term products will benefit companies with majority premium from regulator pay products, positive to EV. Companies with better quality products will see larger improvement. We will discuss the impact of regulation in the following sections. Insurance Sector 18

19 Crediting Rate (%p.a.) 24 January 2017 A positive move of falling liability costs We note that sector-wide liability cost declined during In "jumpstart" sales of 2016, several companies launched high guaranteed rate, long-term annuity products to boost sales ( Life's Xin Fu Nian Nian s 4.025% guarantee rate, Pacific's Xin Fu Xiang Bang s 4.025% guarantee rate). For 2017 "jumpstart" sales, the guarantee rate has generally declined to 2.5%, with the exception of Life launching 3.5% guarantee rate products but with a sales quota of Rmb40 bn. The crediting rate of universal products generally declines. Life, for example, lowered the crediting rate for its popular universal product, Rui An, product from 5.05% to 3.9%. PICC Life adjusted the rate for its Xin Wang universal product from 4.9% to 4%. Smaller companies, which offered high crediting rate for universal products to boost their premium base, have seen a bigger decline in rates. Sino Life cut its crediting rate by 2.65 pp for its Zhao Cai Bao universal products. We believe the downward trend of crediting rates resulted from the lack of quality assets with high yields and investment pressures amid a low yield environment. In addition, regulations on equity investment weaken platform insurers' ability to earn high investment returns, leading to larger decline of crediting rate. We will discuss the impact of regulations in later sections. Smaller insurance companies like Sino Life see larger decline of crediting rate Figure 37: Crediting rate for universal products declining 8% 7% Life - Rui'an Taiping - Ju Jin Li Cai 6% PICC Life - Xin Wang Sino Life - Zhao Cai Bao 5% 4% 3% Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16 May-16 Apr-16 Mar-16 Feb-16 Jan-16 We think the decline in crediting rate could alleviate investment pressure for the insurance sector. Listed players benefit from the reducing rate as crediting rate differences are narrowing between their universal products and those offered by platform insurers. Companies with a larger portion of long-term savings/protection products benefit most as overall competition from universal products declines. Insurance Sector 19

20 24 January 2017 Lower earnings pressures from additional reserves According to the 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 Bond website with consideration of liquidity spreads, taxation and other factors. Put in plain language, life reserve, a liability item on the 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 Bond and applies to all insurers, while the spread is at the actuarial judgement of each insurer. Figure 38: Bond yield bounces back 10-yr bond yield (%) and 750-day average (%) Figure 39: 750-day average yield continues to decline 20-yr bond yield (%) and 750-day average (%) 5. Forecast 5.5% Forecast 4.5% % 3.5% % 3.1%, Oct % %, Oct 2018 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 10yr Bond Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 10yr bond 750 day average Jan-18 Jan-19 Jan-20 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 20yr Bond Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 20yr bond 750 day average Jan-18 Jan-19 Jan-20 We assume bond yield stays unchanged after Jan Source: Reuters, Credit Suisse estimates We assume bond yield stays unchanged after Jan Source: Reuters, Credit Suisse estimates While the government bond yield increased recently, it is still below its three-year average level. The 750-day average bond yield curve continues to trend down (see Figure 38). If we assume the bond yield stays at current level and thereafter, the 750-day average yield will continue to decline by ~40 bp until 2H18. Stripping out all other factors, a downward trending bond yield curve should lower the discount rate used in reserve calculation. A lower discount rate pushes up policyholders' reserves, and thus reduces insurers' profit on P&L. 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. Looking into 2017, the 750-day bond yield curve, which is used as the benchmark for discount rate, is expected to trend down, but at a slower pace. Thus, insurers would face continuous earnings pressures from additional reserving pressures. However, most insurers still have decent room to increase the liquidity spread, which partially offsets the negative effect from lower bond yield curve movements. Insurance Sector 20

21 24 January 2017 Impact of falling bond prices manageable Bond prices started to fall since end of Oct-2016 as bond yield recovers. Investors are concerned about the implications of falling bond prices. Long term bonds see larger price drop Figure 40: Bond price declined since end of Oct-2016 Bond Price Index, excluding interest Bond Composite Price Index Bond Long Term Bond Price Index Bond Short-to-Medium Term Price Index Dec-16 Sep-16 Jun-16 Mar-16 Dec-15 Sep-15 Jun-15 Mar-15 Dec-14 Sep-14 Jun-14 Mar-14 Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Source: Wind, Credit Suisse estimates We believe the impact is limited. While bond investment is significant to insurance companies, amounting to 33% of sectors' total investment, the majority of bonds are classified as Held to Maturity (HTM) (see Figure 42). From a financial accounting perspective, the impact on equity is limited as HTM bonds are measured at an amortised cost instead of fair value. Investment income is locked when insurers purchase a bond. Figure 41: 33% of insurance investment is in bonds insurance sector investment balance (Rmb bn) and % Figure 42: with majority of bonds classified as HTM Bond classification composition (%) , 35% 2352, 18% 8 Cash and bank deposit Bond investments Equities and fund investments Other investments , 14% 4305, 33% Note: As of Nov Source: CIRC, Credit Suisse estimates Life Ping An Pacific New PICC Group Life HTM Bond AFS Bond FVTPL Bond Taiping In EV calculation, lower bond prices could cause a negative adjustment, but this is one-off and small losses are partially (7) absorbed by policyholders of participating policies, a major product line. In long run, insurers tend to outperform in a rising yield cycle, given (1) higher reinvestment yield, (2) easing concern over reserving charges and so earnings, and (3) enhanced credibility of EV assumptions. Insurance Sector 21

22 24 January 2017 A good proxy of better A-share market From a stock market perspective, CS strategy team maintains a positive view on the A- share market in 2017 (prefer A-shares to H-shares) on the back of strong earnings rebound despite short-term headwinds from regulatory storm on universal products and deleveraging pressure. CS strategist Li Chen has revised up the 12-month forward SHCOMP index to 3,800, implying 22% upside from the current level. We view that the government's supportive stance towards the equity market is unchanged because a healthy capital market is needed to prepare for IPO registration regime, SOE hybrid reform and debt-to-equity swap (DES) scheme. The government is also introducing institutional investors into the equity market in the hope of these professional investors being a bigger force ahead. We expect that the key measures this year will include: (1) promoting pension fund investments in A-share, (2) re-trying MSCI inclusion, and (3) accelerating market connection (i.e. SH-London connection). The State Council revised the regulation on pension fund investment in 2015, allowing up to 3 of their investible assets into stocks, equity funds and bond funds. Most recently, the government speeded up the formulation of related policies, including the review method of custodian institutions and appointed investment management institutions (#21 financial institutions). Figure 43: The milestone of pension fund equity investment reform Date Mar-12 Mar-15 Aug-15 Dec-16 Jan-17 The milestone of pension fund equity investment reform Guangdong province entrusted SSF to invest Rmb100 bn employee pension funds into equity market (achieved 6.73% return in 2012 Shandong province entrusted SSF to manage Rmb100 bn employee pension insurance. Within that, Rmb50 bn funds were ready The State Council revised the regulation on pension fund investment in 2015, allowing up to 3 of their investible assets into stocks, equity funds and bond funds SSF announced that the review method of custodian institutions has been finalised and it has appointed 21 investment management institutions responsible for pension fund investment SSF initiated the bidding procedure of investment portfolio to appraise the products Source: SSF, Hexun Finance, Credit Suisse researches We expect the pension funds' equity investment will be launched in 2017 at the earliest. The cumulative balance of pension funds came in at Rmb3.8 tn in Assuming 6 pension funds to be allocated into special accounts of social securities on provincial basis, the total size of investable pension assets would be ~Rmb2.4 tn, implying the pension investment will bring in ~Rmb700 bn new incremental funds into A-share market at most if reaching 3 equity investment upper limit, equal to 2% of free float market cap in We forecast around Rmb240 bn pension funds equity investment within the first trial batch in 2017, close to ~1% of A-share free float market cap. Figure 44: The cumulative balance of pension fund came in at Rmb3.8 tn in ,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Balance of pension insurance (Employees) Balance of pension insurance (urban & rural residents) 3,844 % of free float market cap (RHS) 3,423 3,000 2,505 1,969 1,431 1, % 3 25% 2 15% 1 5% Source: Wind, Credit Suisse estimates Insurance Sector 22

23 Sensitivity (%) Sensitivity (%) 24 January 2017 We see a high correlation between insurers' share price performance and stock market as investors tend to trade insurers as market proxies. As such, the upcoming A-share market rebound would be a catalyst for insurers' performance. From a shareholder equity perspective, our sensitivity analysis suggests that New Life is most leveraged to an equity market rebound, followed by Life and Ping An. Figure 45: insurance shareholder value to listed equity sensitivity by company 8. Figure 46: insurance embedded value to listed equity sensitivity by company % % Life Ping An Pacific Taiping New Life PICC Group PICC P&C 1.5% % 0. Life Ping An Pacific Taiping New Life PICC Group Note: we assume the value of listed equities increased by 1. Note: we assume the value of listed equities increased by 1. Insurance Sector 23

24 Target Price Upside / Downside (%) 24 January 2017 The sensitivity of TPs to investment assumptions government bond (CGB) yield has been recovering since 4Q16 and CS rate strategist recently raised s ten-year government bond yield forecast to 3.75% from 3.25%, suggesting the upward trend of yields should be sustainable. Rising government bond yield improves insurers investment returns, given a significant portion of investment in fixed income products. Our new money yield simulation shows a significant improvement to 4.5% by end of 2017 from current 3.8%, boosting investors confidence on investment assumptions EV and VNB. Given the rising trend of government bond yield and new money yield, we have lifted the investment assumptions to 4.5% (build on CS forecast of 3.75% ten-year government bond yield) from 4. in deriving the target price for insurers. We highlight the substantial upside for most Chinese insurers, as Figure 47 shows. Figure 47: Substantial upside under 4.5% investment return Target price upside / downside (%) 8 Figure 48: EV/VNB sensitive to investment return assumptions % of EV and VNB change if investment return assumption up 50bps % 24.6% % 18.2% 2 15% 1 9.3% 8.3% 15.4% 7.7% Upside under 5. investment return Upside under 4.5% investment return Downside under 3. investment return New Life Life Taiping Pacific Ping An 5% 4.8% 4.4% NCL Life CTIH CPIC Ping An % of VNB increase % of EV Change Given the importance of investment return assumption to EV and VNB, and ultimately target price, we have conducted a sensitivity analysis for target price under various investment assumptions. Figure 49 to Figure 53 suggest that the market prices of insurers has not fully priced in the rising government bond yield, with implied investment return assumptions varying from 3.2% to 4.3%. Pure life companies, such as Life and New Life, are most sensitive to investment return, due to greater asset-liability mismatches and significant earning contributions from investment spread. Ping An insurance, due to the inclusion of the P&C business and the bank, is more defensive to rate changes. Insurance Sector 24

25 Target Share Price (HK$) Target Share Price (HK$) Target Share Price (HK$) Target Share Price (HK$) Target Share Price (HK$) 24 January 2017 Figure 49: Life implies ~3.8% investment return Life target price (HK$) under various investment assumptions Figure 50: ~3.2% for Ping An Ping An target price (HK$) under various investment assumptions Current Price Current Price Investment return assumptions (%) Investment return assumptions (%) Figure 51: Pacific implies ~3.4% Pacific target price (HK$) under various investment assumptions Figure 52: ~3.3% for Taiping Taiping target price (HK$) under various investment assumptions Current Price Current Price Investment return assumptions (%) Investment return assumptions (%) Figure 53: NCL implies ~4.3% New Life target price (HK$) under various investment assumptions Figure 54: Pure life is more sensitive % Change of target price if investment return assumption up 50bps to 5., based on our model Current Price % 16% Pure Life 18.6% 17.6% Diversified % 12% 13.4% 12.4% % Investment return assumptions (%) 8% New Life Life Taiping Pacific Ping An Note: Priced as at 17 Jan Source: Reuters, Company data, Credit Suisse estimates Insurance Sector 25

26 24 January 2017 Regulations: Multiple tailwinds The implementation of C-ROSS To enhance the solvency supervision and line-up with international practices on risk based dynamic monitoring, CIRC has implemented Risk Oriented Solvency System (C- ROSS), the Chinese version of Solvency II. C-ROSS aims to introduce risk-based capital and improved risk management and governance, adopting the international "Three Pillar" framework: capital adequacy requirement, risk management requirements, and information disclosure requirements. Figure 55: C-ROSS three pillar framework Figure 56: Listed insurers see solvency position improving Solvency margin ratio (%) and core solvency ratio (%) at Dec Life Ping An Pacific New Life PICC Group Solvency I - Solvency Margin Ratio Regulatory Requirement for Solvency I C-ROSS - Core Solvency Ratio Regulatory Requirement for C-ROSS Source: Oliver Wayman C-ROSS report Change in solvency ratio calculation and minimum requirement C-ROSS requires insurers to adopt a risk-oriented approach in calculating minimum capital for solvency ratio. Under solvency I, minimum capital = a% x statutory reserves + b% x net amount at risk, a straightforward and volume-based approach. Under C-ROSS, companies need to incorporate a basket of factors including market risk, credit risk, risk factors for each P&C business line, and scenario calculation for life business. We expect the solvency position to remain stable for listed insurers at Dec As a result, we see different results from insurance companies in the transition to C- ROSS. However, listed insurers generally see mild improvement in solvency position (see Figure 56). Also, the regulatory requirement differs: 10 for solvency margin ratio under Solvency I, 5 and 10 for core solvency ratio and comprehensive solvency ratio under C-ROSS respectively. Given the mild change, a reduction of requirement (from 10 to 5) effectively further strengthens insurers' solvency position and provides more flexibility. The solvency position for listed players remains strong, well above the regulatory requirement. Ping An has the lowest solvency position among listed insurers at around 20, possibly due to the inclusion of Ping An banks, but the solvency position is improving. Others see solvency ratios declining in 2016, but still above 25. We expect the solvency position to remain stable for listed insurers in Dec Insurance Sector 26

27 24 January 2017 Figure 57: Solvency position well above regulatory requirement for listed insurers Core solvency ratio (%) and comprehensive solvency ratio (%) Figure 58: New EV rule positive to insurers due to earlier release of profit Illustration of profit stream and Solvency I and C-ROSS Life Ping An Pacific New Life Taiping (Life) PICC P&C PICC Group Undiscounted distributable profit under Solvency I Undiscounted distributable profit under C-ROSS Dec 15 Jun 16 Dec 15 Jun 16 Dec 15 Jun 16 Dec 15 Jun 16 Dec 15 Jun 16 Dec 15 Jun 16 Dec 15 Jun 16 0 Core Solvency Ratio Min Req. for Core Solvency Comprehensive Solvency Ratio Min Req. for Comprehensive Solvency y 6-10y 11-15y 16-20y 21-25y 26-30y 30y+ Source: Ping An Investor Day 2016 New EV rules under C-ROSS are positive for listed names Association of Actuaries released New EV Rule under C-ROSS, replacing existing life EV guidelines. The New EV Rule follows traditional embedded value methodology (TEV), which is the same as the one under Solvency I. It still has four major components, namely value inforce (VIF), adjusted net worth (ANW), value of new business (VNB) and sensitivity analysis. Five major improvements include: (1) reflecting latest regulatory requirement on insurance liability valuation, (2) embodying accrual accounting principle, (3) standardising insurance assumptions such as mortality, (4) specifying EV valuation for groups with noninsurance business, and (5) adjusting VNB disclosure requirement. The New EV Rule is generally positive for listed insurers due to earlier release of profit, however, the impact for different products varies: (1) Traditional insurance policies with high protection elements would see a bigger increase in VNB, (2) participating products generally benefit, but not to the same degree. Those with a high percentage of protection show a better VNB result, (3) VNB of universal products declines, especially short-tomedium term products sold by "platform" insurers. Therefore, we see both the EV and VNB of listed insurance companies improving given their focus on traditional products. We believe the favourable impact provides an opportunity to address investors' concerns by adjusting EV assumptions (i.e., lower investment returns). Insurers with better product mix of protection/long-term saving would see a bigger boost in VNB under C-ROSS (i.e., Ping An). We examine the impact to Ping An in the section below. Insurance Sector 27

28 Value of New Business (RMB bn) Solvency Ratio (%) 24 January 2017 Case Study: Impact of C-ROSS to Ping An Ping An released its Jun-2016 key results in both Solvency I and C-ROSS. We see Ping An benefits from C-ROSS. Its life insurance business adjusted net worth increased by 34.5%, leading to 1.1% increase in group EV after netting 9.5% decline of value of in-force business. The increase in adjusted net asset value is mainly due to earlier release of profit under C-ROSS (see Figure 60). Figure 59: Ping An's EV and VNB improve Value of new business (Rmb bn) and change (%), Jun 2016 in Rmb mn Solvency I C-ROSS Change Adjusted net asset value 352, , Including: life insurance business 92, , % Value of in-force business 262, , % Group embedded value 614, , % Including: life embedded value 354, , % Value of one year's new business Individual Business 37,639 46, % Group Business % Total 38,030 47, % Profit margin of new business Individual Business 37.7% 46.8% 9.1% Group Business 1.6% 1.4% -0.2% Total 30.7% % Figure 60: due to earlier release of profit Illustration of profit stream under Solvency I and C-ROSS Undiscounted distributable profit under Solvency I Undiscounted distributable profit under C-ROSS 1-5y 6-10y 11-15y 16-20y 21-25y 26-30y 30y+ Note: EV at Jun 2016, VIF and Profit margin for 12M ended Jun 2016 Source: Ping An Investor Day 2016 VNB posts 23.9% increase under C-ROSS, driven by positive impact on the individual business channel. Figure 61 shows that increase is mainly contributed by traditional protection business. The long-term protection business, which contributes 65% of Ping An's VNB, saw a 37% increase in VNB. The VNB of investment type insurance products, represented by short and medium duration universal life products, shows a decline. Solvency position for Ping An is more resilient under C-ROSS. Loss absorbing capacity of participating and universal life products reduces the impact of falling interest rate and equity prices on actual capital. A 100 bp decline in bond yields and 3 decline in equities only reduces solvency by 16% and 9% respectively. Figure 61: Growth contributed by L/T protection business Value of new business (Rmb bn) and change (%), Jun % *PPP = Premium payment period Figure 62: Resilient solvency position under C-ROSS Solvency ratio under C-ROSS (%) 221% 205% 221% 212% % -2% 2% 9% 0 Long term protection Saving (short Saving (long Short term PPP) PPP) Solvency I C-ROSS Non-agency Base case Decline of 100bp in 750-day avg bond yield Base case Decline of 3 in equities Source: Ping An Investor Day 2016 From the above case, we can see that the new EV rule encourages insurers to focus on the long-term protection business and move away from short-to-medium term products. It helps create a benign competitive environment for listed insurers when platform insurers aggressively took market share by selling short-to-medium term universal products. Insurance Sector 28

29 24 January 2017 Global/domestic systemically important insurers To address the systemic and moral hazard risks associated with systemically important financial institutions, Financial Stability Board identified a list of nine Global Systemically Important Insurers (G-SIIs). The G-SIIs are required to have (1) enhanced supervision, (2) effective resolution (wind-up), and (3) higher loss absorbency. Ping An is the only Asian (and emerging market) insurer to have been designated a Global Systematically Important Insurer (G-SII), with three from the US (AIG, Metlife, Prudential Financial) and five from Europe (AXA, Allianz, Aegon, Prudential and Aviva) in By comparison, four Chinese banks (ICBC, ABC, BoC, and CCB) made it to the list of 30 Global Systemically Important Banks in The key assessment methodologies for insurers are: size (5%), global activity (5%), interconnectedness (49%), asset liquidation (36%) and substitutability (5%). As such, Ping An's bank exposure is key to it making the G-SII list. Figure 63: CIRC is developing D-SII Source: Ping An Presentation, 2014 A key negative of Ping An's inclusion will likely include higher capital charges such as contingent capital and bail-inable debt. Ping An needs to upgrade its risk management framework, so it has set up a large project to upgrade all its risk management systems. CIRC has initiated procedures for Domestic Systemically Important Insurer (D-SII) assessment on May 2016, collecting data from 16 insurance companies including all listed life insurers. The regulator has issued second exposure draft for opinion, with six regulatory elements: (1) corporate governance, (2) holistic risk management, (3) systemic risk management plan, (4) liquidity risk management plan, (5) recovery plan, and (6) resolution plan. We expect CIRC to release D-SII list and regulatory requirement next year likely to include at least Life, Pacific, and PICC. Insurance companies need to upgrade risk management practices including corporate governance, risk management policies and procedures, and IT infrastructures to comply with the coming regulation. Insurance Sector 29