2018 Insurance Sector Outlook

Transcription

1 Equity Research Financials 2018 Insurance Sector Outlook Positive (maintained) Felix Luo SFC CE No. AQF GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Favorable regulatory and macro conditions for leading HK-listed life insurers Improved premium structure and new business margins in the life insurance sector The proportion of total business accounted for by single premiums has declined rapidly among China life insurance companies, with New China Life (NCI, 1336 HK, Buy) the most aggressive in shifting its premium structure. NCI s single premiums represented just ~2% of total FYP in 1H17, compared with ~31% in China Pacific (CPIC, 2601 HK, Buy) also has very low single premiums, not exceeding 1.3% of FYP since Protection-type products are becoming a key driver of sector growth. With these products making a larger contribution, new business margins at Ping An (2318 HK, Buy), CPIC and NCI had risen to ~34%, ~41% and ~40% respectively by 1H17. Enhanced regulation promoting protection-type life insurance The CIRC has issued a series of measures to enhance regulation, following the principle that insurance should be protection-oriented and that financial stability should be maintained. Among the series of measures, the No.134 Document is at the core of the CIRC s requirements. We think leading life insurance companies will benefit most from the enhanced regulation over the long term. Life insurance companies may benefit from rising 750D-MA 10Y government bond According to the 750-day Chinese government bond yield curve, the 10-year yield was 3.51% at the end of 2016, 3.35% in 1H17, and 3.30% in 3Q17. Since end-3q17, due to the rise in the 10Y government bond yield, the 750D-MA for the 10Y government bond has gradually risen, which will reduce required reserves and release accounting profit for life insurance companies. Assuming the current 750D-MA yield remains unchanged until end-2018, the expected 750D-MA 10Y government bond yield will rise steadily during Tax-deferred pension plan is a long-term positive for the sector Using US IRAs as an example, as of 1Q17, US individual retirement accounts had assets of US$8.2trn, equal to about half of US GDP. IRAs have been the main growth driver of pension funds for nearly 30 years in the US. For China s tax-deferred pension plan, we expect new premiums of Rmb96-288bn for China life insurance companies. Over the longer term, as the number of tax payers increases and as the percentage of tax payers willing to purchase plans increases, we expect tax-deferred pension plans to make a greater contribution in terms of premiums to the sector. Positive rating We see a positive outlook for the China life insurance sector, given: 1) concerns about performance in the 2018 jump-start season have been alleviated. 2) improved life insurance business quality in terms of premiums structure and NBM; 3) life insurance companies may benefit from the rising 750D-MA for the 10Y government bond, and; 4) the tax-deferred pension plan is a long-term positive. As discussed above, leading life insurance companies will benefit most from enhanced regulation. We have Buy ratings on all major China life insurance companies: Ping An (2318 HK, Buy), China Life (2628 HK, Buy), CPIC (2601 HK, Buy), and NCI (1336 HK, Buy).

2 9M17 key results review Improved premium structure and new business margin for the life insurance sector The proportion of total business accounted for by single premiums has declined rapidly among China life insurance companies, with NCI the most aggressive in shifting its premium structure. NCI s single premiums represented just ~2% of total FYP in 1H17, compared with ~31% in CPIC also has very low single premiums, which have not exceeded 1.3% of FYP since Protection-type products are becoming a key driver of sector growth. With these products making a larger contribution, new business margins at Ping An, CPIC and NCI had risen to ~34%, ~41% and ~40% respectively by 1H17 (from just ~15% in 2015 for NCI). Figure 1: Life insurance new business margin in terms of FYP H17 Ping An 2318 HK 24.3% 27.9% 30.8% 30.4% 38.8% 37.4% 34.4% CPIC 2601 HK 13.6% 17.8% 20.7% 24.5% 29.2% 32.9% 40.6% New China Life 1336 HK 10.5% 12.6% 10.6% 11.5% 15.0% 22.4% 39.7% AIA 1299 HK 37.2% 43.6% 44.1% 49.1% 54.0% 52.8% 54.2% Note: China Life is excluded from this comparison to maintain peer data comparability. Increased EV and residual margin Major life insurance companies embedded value increased by 7%-15.9% HoH in 1H17. As of end-1h17, Ping An had a remaining residual margin of Rmb545.3bn, up 20% YoY. China Life and CPIC have also disclosed their residual margins, which grew by ~12% and ~25% YoY respectively. Figure 2: Embedded value movement analysis (Rmb m) H17 Movement in embedded value China Life (5,245) 44,742 4, , ,371 91,780 45,463 Ping An 23,314 33,060 25,578 61,195 62,591 34,838 78,654 CPIC 2,379 12,274 12,032 28,439 28,161 29,685 25,515 New China Life 20,907 7,879 7,537 20,853 18,020 26,170 12,639 Movement in operating experience variances China Life (1,320) (879) (2,258) 563 2,685 (1,792) 827 Ping An (926) (1,051) (501) (259) 12,380 CPIC (190) (244) (97) 509 n.a. New China Life (501) (1,630) (2,083) 1, Note: Positive movement in operating experience variances in 1H17 indicates that mortality margin and expense margin likely improved. Good total investment yield By the end of 3Q17, total investment assets at major listed insurance companies was generally satisfactory. Ping An, China Pacific, China Life and NCI s investment assets grew by 16.9%, 14.1%, 5.65% and 14.1% compared with end-2016, respectively. Ping An, China Life and NCI registered total investment yields of ~5.4%, ~5.1% and ~5.2%, respectively in 3Q17. 2

3 Figure 3: Total investment yield for life insurers H17 3Q17 China Life 2.8% 4.9% 5.4% 6.2% 4.6% 4.6% 5.1% Ping An 2.9% 5.1% 5.0% 7.8% 5.3% 4.9% 5.4% CPIC 3.2% 4.8% 5.8% 7.5% 5.1% 4.9% n.a. New China Life 3.2% 5.0% 6.1% 7.3% 5.2% 4.7% 5.2% Ping An Insurance 3Q17 key results: 3Q17 EPS came in at Rmb3.72, and BVPS was Rmb Net profit totaled Rmb66.3bn, up 17.4% YoY, or up 41.1% YoY if one-off income in 3Q16 is excluded. Comprehensive income was Rmb83.7bn, up 65.7% YoY. ROE in 3Q17 was 15.7% (not annualized). Agency-channel first-year premiums grew just 11.1% YoY during the third quarter, resulting in slower NBV growth of 35.5% YoY in 3Q17, compared with 47.3% YoY in 1H17. Also NMB in the third quarter declined. Management thinks this is only temporary due to an adjustment to the No.134 Document. P&C insurance posted a good combined ratio of 96.1% in 3Q17, equal to the 96.1% in 1H17. China Life 3Q17 key results: 3Q17 net profit came in at Rmb26.8bn, with EPS of Rmb0.94 and BVPS of Rmb Comprehensive income totaled Rmb26.1bn in 3Q17 compared with a negative Rmb1.5bn in 3Q16. ROE (not annualized) was 8.6% in 3Q17. The increase in net profit and comprehensive income were mainly due to better investment incomes. There was accelerated growth in first-year regular premiums in the third quarter, especially in first-year regular premiums with durations of longer than ten years. First-year regular premiums with durations longer than ten years grew by 24.3% YoY in 3Q17, compared with 9.0% YoY in 1H17. We expect continued NBV growth in the third quarter. China Pacific Insurance 3Q17 key results: Comprehensive income totaled Rmb10.3bn, compared with Rmb6.8bn in 3Q16. Net profit came in at Rmb10.9bn, up 23.8% YoY. EPS was Rmb1.21, and 3Q17 BVPS was Rmb Agency-channel regular first-year premiums grew 4.3% YoY during the third quarter, resulting in slower agency-channel regular FYP growth of 38.0% YoY in 3Q17, compared with 51.3% YoY in 1H17. We think this was due to a temporary adjustment to the requirements in the No.134 Document. New China Life 3Q17 key results: Net profit was Rmb5.0bn, an increase of 5.3% YoY. Comprehensive income totaled Rmb6.0bn in 3Q17, compared with Rmb2.8bn in 3Q16. EPS was Rmb1.62, BVPS was Rmb20.39, and ROE (not annualized) was 8.18%. Agency-channel first-year regular premiums with durations longer than ten years increased by 59.3% YoY in the third quarter. First-year regular premiums with durations longer than ten years contributed 64% of total first-year regular premiums in 3Q17, equal to the 64% in 1H17. 3

4 Figure 4: Key life insurance premiums by channel Ping An Life (Rmb m) 9M17 9M16 YoY Q3/17 Q3/16 YoY Gross written premiums 381, , % 94,878 62, % Agency channel FYP 114,678 82, % 22,528 20, % Bancassurance channel FYP 7,512 10, % 1,521 1, % Including: first-year regular premiums 4,540 2, % 1, % Other channel - FYP 11,933 6, % 4,471 2, % China Life (Rmb m) 9M17 9M16 YoY Q3/17 Q3/16 YoY Gross written premiums 449, , % 104,025 83, % First-year regular premiums 102,066 85, % 24,355 15, % First-year regular premiums with durations longer than 10 years 57,480 46, % 20,438 12, % CPIC Life (Rmb m) 9M17 9M16 YoY Q3/17 Q3/16 YoY Gross written premiums 154, , % 44,440 35, % Agency channel FYP 46,790 33, % 10,350 9, % Including: first-year regular premiums 44,860 32, % 9,621 9, % Group channel 4,990 3, % 1, % New China Life (Rmb m) 9M17 9M16 YoY Q3/17 Q3/16 YoY Gross written premiums 89,840 93, % 28,601 22, % First-year regular premiums - agency channel 19,462 14, % 6,925 4, % Including: First-year regular premiums with durations longer than 10 years 16,316 11, % 5,638 3, % First-year regular premiums - bancassurance channel 6,014 4, % 1,900 1, % Figure 5: Key P&C insurance financial figures 1H16 1H17 9M16 9M17 P&C Premium income PICC P&C (2328 HK, Accumulate) 80,111 90, , ,633 Ping An P&C 40,233 49, , ,507 CPIC P&C 4,939 5,858 16,320 19,065 Growth YoY PICC P&C 13% 12% Ping An P&C 24% 24% CPIC P&C 19% 17% P&C Net profit PICC P&C 6,401 7,462 13,728 17,623 Ping An P&C 3,431 3,505 10,359 10,456 CPIC P&C 1,094 1,235 3,461 3,133 Growth YoY PICC P&C 17% 28% Ping An P&C 2% 1% CPIC P&C 13% (9%) 4

5 Positive outlook for the China life insurance sector We prefer life insurance to P&C insurance The CIRC has been pushing forward motor insurance marketization. Under the new tariff system, the discount rate for customers can be reduced to as low as 0.294, down from Such reductions have previously led to a slight drop in GWP per car. Also, if inflation is to rise in the next year, higher material costs and labor costs may have a negative impact on combined ratios. We prefer the life insurance sector to P&C insurance. The China life insurance sector is becoming more protection oriented under strict regulation, and may benefit from a rising government bond yield as well as from the proposed taxdeferred pension policy. Enhanced regulation to promote protection-type life insurance The CIRC has issued a series of measures to enhance regulation, following the principle that the insurance business should be protection-oriented and that financial stability should be maintained. Among the series of measures, the No.134 Document is at the core of the CIRC s requirement. According to the No.134 Document, universal insurance and investment-linked insurance should not be sold as a rider of a basic insurance contract, and initial survival benefit payouts from endowment insurance and pensions should be at least five years after the contract is made, among other measures. Figure 6: Key regulatory policies Policy Focus area Purpose Universal insurance and investment-linked insurance should not be sold as rider Product design Be protection-oriented of main insurance contracts Initial survival benefit payouts from endowment insurance and pensions should Product design Be protection-oriented be at least five years after the contract is made Headquarters to bear joint responsibility for severe sales misconduct at the Product sales Be protection-oriented provincial branch level and face suspension of new business Encouraging insurance companies to invest in debt investment schemes that Investment have been authorized by the State Council Encouraging insurance companies to invest in projects that are in-line with Investment national stratergy An examination of China s Risk Oriented Solvency System Risk control Maintain fincancial stability Requirement of self-inspection of solvency credibility Risk control Maintain fincancial stability Sources: CIRC, GF Securities (Hong Kong) Leading life insurance companies to benefit most from the enhanced regulation We see two major benefits for leading life insurance companies under the enhanced regulation: a more protection-based (higher-margin products) sector and increasing market shares. The main theme of insurance products has been changed from a wealth-management based approach to a protection-based approach. For example, according to the CIRC s statistics, health insurance premiums saw a CAGR of 47% during In 2017, as a result of the tightened regulation, wealth-management type products which were previously sold as health products were greatly reduced across the sector. In comparison, long-term health insurance premiums of leading companies such as Ping An and NCI increased by 53% and 44% YoY in 1H17, respectively. As second-tier life insurance companies are no longer able to sell wealth-management products aggressively at the cost of business quality, we believe the aggregate market share of leading life insurance companies in terms of GWP has been consolidating during

6 Figure 7: Sector-wide health insurance premiums growth % 41% 52% 68% 80% 70% 60% 50% 40% 30% 20% 10% M16 3% 8M17 4% 3% 3% 2% 2% 1% 1% 0% % Health insurance premiums (Rmb bn) Health insurance premiums (Rmb bn) YoY YoY Sources: Wind, GF Securities (Hong Kong) Figure 8: Aggregate market share of China Life, Ping An, CPIC and NCI in terms of GWP 80% 70% 60% 50% 40% 30% 20% Aggregate market share Sources: Wind, GF Securities (Hong Kong) No significant impact from the relaxation of the foreign ownership rule The Chinese government has announced it will relax foreign ownership limits in the life insurance industry to 51% after 3 years, and will allow 100% foreign ownership after five years. As major China life insurers have already established extensive sales network in the China market, for example China Life and Ping An each have over 1 million exclusive sales agents, we do not think the relaxation of the foreign ownership rule will have any significant short-term impact on the China life insurance sector. Growing number of agents to support 2018 new premium growth The number of life insurance agents has increased rapidly across the sector since As a result, we have also seen strong growth in individual channel FYP in According to senior management of some insurance companies, there is still room for the industry to increase the number of life insurance agents. We think the growing number of agents will support new premiums growth in the near future. 6

7 Figure 11: Number of exclusive agents ('000) H17 3Q17 China Life ,495 1,578 1,635 Ping An Life ,111 1,325 1,434 NCI n.a. China Pacific Life n.a. Growth YoY Growth HoH Growth 3Q17/2016 China Life -6% 14% 32% 53% 6% 9% Ping An Life 9% 14% 37% 28% 19% 29% NCI -1% -13% 48% 27% 2% n.a. China Pacific Life -3% 20% 40% 35% 33% n.a. Note: CPIC Life s 1H17 data indicate monthly average agents. China Life s data refers to individual channel agents. Life insurance companies may benefit from rising 750D-MA 10Y government bond According to the 750-day Chinese government bond yield curve, the 10-year yield was 3.51% at the end of 2016, 3.35% in 1H17, and 3.30% in 3Q17. As a result of the declining 750D-MA 10Y government bond yield in 1H17, Ping An, NCI, China Life, and CPIC increased their reserve funds by Rmb15.4bn, Rmb2.0bn, Rmb13.2bn, and Rmb4.4bn, respectively. Since end-3q17, due to the rise in the 10Y government bond yield, the 750D-MA for the 10Y government bond has gradually risen, which will reduce required reserves and release accounting profit for life insurance companies. Assuming the current 750D-MA yield remains unchanged until end-2018, the expected 750D-MA 10Y government bond yield will rise steadily during 2018, meaning a turning point for China life insurers accounting profit in Figure 9: 750D-MA for the Chinese government bond yield Y government bond yield 750D-MA Sources: Wind, GF Securities (Hong Kong) Note: Assuming that the government bond yield remains consistent after 1 Nov Tax-deferred pension plan to be launched On July 4, 2017, the State Council issued guidance on speeding up the development of commercial pension insurance, for the first time clearly indicating that a pilot tax-deferred pension plan will be launched by end Recently, according to public reports, the CIRC life insurance department has issued a notice, asking China insurance institutions to prepare paper work for the development of commercial pension insurance, including the tax-deferred pension plan. Tax-deferred pension plan is a long-term positive for the China insurance sector Using US IRAs as an example, as of 1Q17, US individual retirement accounts had assets of US$8.2trn, 7

8 equal to about half of US GDP. IRAs have been the main growth driver of pension funds for nearly 30 years in the US. For China s tax-deferred pension plan, assuming 40m tax payers, in the medium term 20%-60% purchase a tax-deferred pension plan with monthly payments of Rmb1,000 per individual, we would expect new premiums of Rmb96-288bn for China life insurance companies. Over the longer term, as the number of tax payers increases and as the percentage of tax payers willing to purchase plans increases, we expect tax-deferred pension plans to make a greater contribution in terms of premiums to the sector. Figure 10: Assumed new premiums from the tax-deferred pension plan Assumed total tax payers (million) Percentage of taxdeferred pension plan purchaser Monthly payment per individual Total annual premiums (billion) Bear case 40 20% Base case 40 40% Bull case 40 60% Concerns about performance in the 2018 jump-start season alleviated As discussed above, the No.134 Document forbid the structure of a basic insurance plan plus a universal/investmentlinked rider. However, the CIRC has recently approved a dual main policy structure, such as an annuity product with a separately-sold universal product, which has eased short-term concerns on premium growth. For example, Ping An (2318 HK, Buy) has released 14 new products which are in line with the No.134 Document, and it will push a short-ppp saving type annuity product (with a separately sold universal type main policy) for the 2018 jump-start season, with expected NBM similar to or slightly higher than ~15%. Positive rating on the sector We see a positive outlook for the China life insurance sector, given: 1) concerns about performance in the 2018 jump-start season have been alleviated. 2) improved life insurance business quality in terms of premiums structure and NBM; 3) life insurance companies may benefit from the rising 750D-MA for the 10Y government bond, and; 4) the taxdeferred pension plan is a long-term positive. As discussed above, leading life insurance companies will benefit most from enhanced regulation. We have Buy ratings on all major China life insurance companies: Ping An (2318 HK, Buy), China Life (2628 HK, Buy), CPIC (2601 HK, Buy), and NCI (1336 HK, Buy). Figure 12: Peer valuation comparison Company Ticker Price (HK$) Rating Target price (HK$) 2016 P/E 2017E P/E 2018E 2017E P/E ROE (%) 2017E P/B China Life 2628 HK Buy % 2.0 Ping An 2318 HK Buy Under review % 2.4 China Pacific 2601 HK Buy Under review % 2.1 New China Life 1336 HK Buy % 2.1 Weighted Average % 2.2 Sources: Bloomberg, GF Securities (Hong Kong) Note: Calculated based on closing prices on Nov 8,

9 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) 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(s) 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 this research report. 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