Financials / China 29 June 2015
El Niño approaching • We expect the occurrence of the El Niño effect in 2015 to hit the China P&C insurers’ combined ratio by some 2pp over 2H15-2016 • Property and auto insurance likely to be the most affected in terms of claims; plus, pricing pressure is mounting in auto insurance • We continue to prefer life insurers to P&C insurers; reiterate positive views on China Life, Ping An and PICC Group
China Insurance Sector Positive (unchanged) Neutral Negative
How do we justify our view?
See important disclosures, including any required research certifications, beginning on page 58
China Insurance Sector 29 June 2015
El Niño approaching.................................................................................................................... 6 The return of El Niño ............................................................................................................... 6 Adverse impact on P&C insurers ............................................................................................. 9 Property and agricultural insurance likely most affected ...................................................... 11 Minimal impact on life insurers ............................................................................................. 12 China P&C insurance sector: the next 12 months ...................................................................... 13 Auto insurance pricing reform creating pricing pressure ...................................................... 13 Extreme weather affecting both auto and non-auto businesses ............................................ 14 Premium volume growth slowing for most P&C products ..................................................... 15 China life insurance sector continues to recover ....................................................................... 17 Turnaround in life premium growth ...................................................................................... 17 Equity investment sensitivity ................................................................................................ 20 Valuation ................................................................................................................................... 22 Valuation methodology .......................................................................................................... 22 Valuation comparisons .......................................................................................................... 23 Risks ....................................................................................................................................... 26 Appendix .................................................................................................................................... 28 China insurers in charts ......................................................................................................... 28 Company Section China Life Insurance ...............................................................................................................35 Ping An Insurance .................................................................................................................. 39 PICC Group ............................................................................................................................ 43 PICC Property and Casualty ...................................................................................................47 China Pacific Insurance Group ............................................................................................... 51
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Financials / China 29 June 2015
El Niño approaching • We expect the occurrence of the El Niño effect in 2015 to hit the China P&C insurers’ combined ratio by some 2pp over 2H15-2016 • Property and auto insurance likely to be the most affected in terms of claims; plus, pricing pressure is mounting in auto insurance • We continue to prefer life insurers to P&C insurers; reiterate positive views on China Life, Ping An and PICC Group
Leon Qi, CFA (852) 2532 4381
[email protected]
Ailsa He (852) 2773 8745
[email protected]
Steve Xu (852) 2532 4383
[email protected]
■ What's new
El Niño conditions in 2015 are likely to weigh on P&C insurers’ profitability due to a spike in claims, especially for property and auto insurance. At the same time, China’s auto insurance reforms are starting to stoke pricing pressure in the sector. Meanwhile, China’s life insurers continue to see a turnaround in premium trends. ■ What's the impact
We expect the combination of El Niño effects and a low base of natural disasters for 2014 to lead to a spike in claims over 2H15-2016. The profitability of the China P&C insurers is always greatly affected by natural disasters, and property and auto insurance have historically seen the biggest increases in claims amid extreme weather conditions. In auto insurance, new policies started to be rolled out in early June as auto insurance pricing reforms
China Insurance Sector Positive (unchanged) Neutral Negative
How do we justify our view?
started in 6 areas. Around 78% of renewal policies (ie, those extended to the same customer with the same vehicle) in these areas have seen lower premium rates, which we take as a sign of mounting pricing pressure for the auto insurance segment. We also see substantial price-competition from our on-theground checks. Meanwhile, we continue to expect premium growth to moderate for most types of P&C insurance (except agriculture).
[3]), the largest and only listed pure P&C insurer in China, is fairly valued and offers less upside at a time when the P&C sector is facing challenges. We argue that CPIC P&C will be the most heavily impacted by El Niño and the auto insurance reform, and hence we remain cautious on CPIC (2601 HK, HKD35.85, Hold [3]).
We remain optimistic on the life insurers. After strong new-year sales in 1Q15, life premium growth continued to recover in 2Q15. And, according to our research, the agency FYP turnaround continued in 2Q15 at some major insurers under our coverage.
■ How we differ
■ What we recommend
Key stock calls
We reiterate our preference for the life insurers over the P&C insurers. While our investment recommendations are unchanged, we revise our earnings forecasts and target prices for the China insurance companies featured in this report. In our view, the market has yet to fully price in the strong life premium recovery and improving premium mix (which leads to strong VNB growth).
New Prev. China Life Insurance (2628 HK) Rating Buy Buy Target 44.00 42.00 34.8% Upside Ping An Insurance (2318 HK) Rating Buy Buy Target 130.00 125.00 26.8% Upside PICC Group (1339 HK) Rating Outperform Outperform Target 5.20 4.40 9.9% Upside PICC Property and Casualty (2328 HK) Rating Hold Hold Target 17.00 16.00 1.3% Downside China Pacific Insurance Group (2601 HK) Rating Hold Hold Target 37.00 38.00 3.2% Upside
Hence, we prefer insurers with substantial life insurance exposure, such as China Life (2628 HK, HKD32.65, Buy [1]), Ping An (2318 HK, HKD102.50, Buy [1]), and PICC Group (1339 HK, HKD4.73, Outperform [2]). We think PICC P&C (2328 HK, HKD17.22, Hold
The key downside risk for the sector: some insurers’ rising exposure to property investments. We argue that the market has been too optimistic on the profitability of the P&C insurers, and that it is too early to expect an improvement in the combined ratio based solely on the lower sector claim ratio YTD.
Source: Daiwa forecasts.
See important disclosures, including any required research certifications, beginning on page 58
China Insurance Sector 29 June 2015
Positive (unchanged)
How do we justify our view?
Neutral
Growth outlook
Negative
Valuation Earnings revisions
Growth outlook
China insurance sector: 12M trailing premium growth (YoY)
We expect a turnaround in life insurance premium growth (of >20% YoY) from 2015 onward, driven by falling interest rates (which make other competitive products like WMPs, term deposits, etc, less attractive to investors) and moderating minimal wage growth in China. Notably, we forecast China Life’s premium growth to jump to 16% YoY for 2015, from 1% YoY for 2014.
25% 20% 15% 10% 5% 0% (5%)
China insurance companies: valuation
The China insurance companies under our coverage are trading currently at a 1.8x 2015E PBR and a 1.3x 2015E P/EV (group) on average. On both metrics, the prevailing valuations are slightly lower than the sector’s past-5-year averages.
Company
Ticker
China Life Ping An CPIC PICC Group PICC P&C Sector
2628 HK 2318 HK 2601 HK 1339 HK 2328 HK
15E 1.3 1.3 1.3 1.3 n.a. 1.3
P/EV (x) 16E 1.2 1.2 1.2 1.1 n.a. 1.2
15E 2.0 1.7 2.1 1.2 1.7 1.8
PBR (x) 16E 1.7 1.5 1.9 0.9 1.4 1.6
15E 13.7 10.7 14.4 8.8 9.7 12.0
PER (x) 16E 14.0 12.0 19.2 9.6 11.7 13.4
Ping An PICC P&C
Source: Bloomberg Note: Rebased to 100 on 1 January 2014 consensus forecasts
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CPIC
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
China Life PICC Group
Aug-14
Jun-14
Apr-14
May-14
Mar-14
(Rebased to 100) 145 140 135 130 125 120 115 110 105 100 95 90 85 Jan-14
Revisions to the Bloomberg consensus earnings forecasts for the China insurance companies have been mixed since 2014. In general, the market has revised up its 2015 net profit forecasts for the 5 insurers under our coverage over the past 18 months.
Feb-14
China insurance companies: revisions to 2015E net profit consensus
Jun-15
Source: Daiwa forecasts Note: P/EV multiples refer to group embedded value; priced as of 29 June 2015
Earnings revisions
For the sector as a whole, we saw another round of upward revisions to the market’s forecasts in December 2014 and January 2015 amid positive sentiment toward A shares. The one exception was CPIC after it reported disappointing 2014 results.
May 15
Jan 15
Mar 15
Nov 14
Jul 14
Sep 14
Life insurance sector
Source: CEIC, Daiwa
Valuation
Among the stocks under our coverage, PICC Group currently has the least demanding P/EV multiple and the lowest PBR, while CPIC has the highest PBR multiple. Refer to the Valuation section of this report (page 22) for more on our valuation methodology and valuation comparisons.
May 14
Jan 14
P&C insurance sector
Mar 14
Nov 13
Jul 13
Sep 13
May 13
Jan 13
Mar 13
Nov 12
Jul 12
Sep 12
May 12
(10%)
We expect the growth rate for P&C insurance premiums to continue to decline slightly in 2H15 and 2016, because of pricing pressure resulting from the auto insurance reforms and a possible spike in claims due to extreme weather conditions.
China Insurance Sector 29 June 2015
Sector stocks: key indicators EPS (local curr.) Company Name
Stock code
Share Price
China Life Insurance
2628 HK
32.65
Rating
Target price (local curr.)
FY1
FY2
New
Prev.
New
Prev.
% chg
New
Prev.
% chg
New
Prev.
% chg
Buy
Buy
44.00
42.00
4.8%
1.903
1.481
28.5%
1.869
1.926
(3.0%)
China Pacific Insurance Group
2601 HK
35.85
Hold
Hold
37.00
38.00
(2.6%)
1.996
1.527
30.7%
1.496
1.672 (10.5%)
PICC Group
1339 HK
4.73
Outperform
Outperform
5.20
4.40
18.2%
0.430
0.327
31.5%
0.395
0.408
(3.3%)
PICC Property and Casualty
2328 HK
17.22
Hold
Hold
17.00
16.00
6.3%
1.419
1.031
37.7%
1.183
1.166
1.5%
Ping An Insurance
2318 HK
102.50
Buy
Buy
130.00
125.00
4.0%
7.663
7.874
(2.7%)
6.823
8.357 (18.4%)
Source: Daiwa forecasts
China Insurance Sector: key assumptions 2015E 20% 12% 22% 28% 99.0% 4.8%
Life premium growth (%) P&C premium growth (%) VNB growth (%) EV growth (%) Combined ratio (%) Net investment yield (%) Source: Daiwa forecasts
Please also see: China Insurance Sector: Why things are looking up 26 February 2015 Leon Qi, CFA (852) 2532 4381 (
[email protected]) Steve Xu (852) 2532 4383 (
[email protected])
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2016E 22% 10% 20% 20% 99.5% 5.0%
2017E 22% 8% 20% 20% 99.5% 5.2%
China Insurance Sector 29 June 2015
El Niño is a natural phenomenon that is associated with an unusually warm climate. During El Niño years, there is a greater possibility of natural disasters, such as floods, droughts and tornados. Because El Niño results from abnormal ocean flows and unusually high sea surface temperatures in the Pacific Ocean, the countries of the Pacific Ocean Rim tend to be most affected by the phenomenon and its effects.
El Niño approaching The meteorologists tell us 2015 is likely to see El Niño conditions, bringing extreme weather conditions and natural disasters to China. As such, P&C insurers in China may well see rises in claims, which would erode their profitability on various P&C products, especially property and auto insurance.
Suffice to say that the profitability of insurers, especially P&C insurers, can be substantially impacted by both the frequency and severity of natural disasters. El Niño usually increases the chance of floods and other natural disasters, which can result in large economic losses. Sea surface temperature anomalies (5 April - 2 May 2015)
The return of El Niño 2015 – another 1997? The view among weather experts is that 2015 will likely bring a significant occurrence of El Niño, perhaps similar to the one back in 1997-98. In March 2015, the US National Oceanic and Atmospheric Administration (NOAA) declared that 2015 would be an El Niño year and this summer might be the hottest in history. The Australian Bureau of Meteorology likewise flagged the arrival of El Niño conditions in May 2015. Closer to home, the Hong Kong Observatory notes that El Niño persisted over the past couple of months, with sea surface temperatures in the central to eastern equatorial Pacific warming significantly. It also expects El Niño to persist through the summer of 2015.
Source: National Oceanic and Atmospheric Administration, Hong Kong Observatory Note: anomalies measured in degree Celsius, base period is 1981-2010
Indicator of the significance of El Niño (MEI)* 4 3 2 1 0 (1) (2)
Source: National Oceanic and Atmospheric Administration (NOAA), Daiwa * Multivariate ENSO index (MEI index) measures the continuous large positive MEI values indicate the occurrence of El Niño conditions
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Jan-2015
Jan-2014
Jan-2013
Jan-2012
Jan-2011
Jan-2010
Jan-2009
Jan-2008
Jan-2007
Jan-2006
Jan-2005
Jan-2004
Jan-2003
Jan-2002
Jan-2001
Jan-2000
Jan-1999
Jan-1998
Jan-1997
Jan-1996
Jan-1995
Jan-1994
Jan-1993
Jan-1992
Jan-1991
Jan-1990
Jan-1989
Jan-1988
Jan-1987
Jan-1986
Jan-1985
Jan-1984
Jan-1983
Jan-1982
Jan-1981
Jan-1980
Jan-1979
Jan-1978
Jan-1977
Jan-1976
Jan-1975
Jan-1974
Jan-1973
Jan-1972
Jan-1971
Jan-1970
(3)
China Insurance Sector 29 June 2015
Over the past 2 decades, 1997-98 saw the strongest El Niño occurrence, one that led to at least USD34bn in economic losses globally, according to Weather China.
China: floods affected area and the occurrence of El Niño (000' hectares) 30,000 25,000
El Niño years: summary Southern Oscillation Index (SOI) Weak Moderate Moderate Very strong Moderate to strong Moderate to strong Moderate Strong Strong Weak Weak Weak to moderate
20,000 Sea Surface Temperature (SST) Weak Moderate to strong Weak Very strong Moderate to strong Moderate to strong Weak Weak to moderate Very Strong Weak to moderate Weak Moderate
15,000 10,000 5,000 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
El Niño years 1969-70 1972-73 1977-78 1982-83 1987-88 1991-92 1993-94 1994-95 1997-98 2002-03 2006-07 2009-10
El Nino Years Floods affected area 30-year average line of floods affected area Source: National Bureau of Statistics of China, Australian Bureau of Meteorology, Daiwa Note: 30-year average line of floods affected area covers the period 1985-2014
China: 1998 Yangtze River flood
Source: Australian Bureau of Meteorology, Daiwa Notes: SOI index (Southern Oscillation Index): an indicator of the significance of El Niño conditions
Big impact from natural disasters in China during El Niño El Niño is associated with a series of climatic anomalies and extreme weather conditions, and sometimes even natural disasters. Pacific Rim countries, especially those more reliant on the farming and fishery industries, tend to be the most affected by such events. When it comes to China, El Niño conditions can lead to a greater frequency of natural disasters in Eastern China compared with normal years. El Niño tends to bring warm weather, floods, droughts, and more severe typhoons.
Source: Xinhua Net
China: 1998 Yangtze River flood
Floods and rainstorms. El Niño tends to lead to flooding and rainstorms in South and Southeast China. Historically, El Niño has had a significant impact on floods in China, particularly in 1991 and 1998. According to historical data, China tends to be affected by severe flooding either in the year of El Niño or the year subsequent to it. In 1998, affected by El Niño, the Yangtze, Asia’s longest river, experienced unprecedented floods which affected hundreds of settlements along its banks. Persistent thunderstorms and rainfall that year resulted in severe flooding in other parts of the country as well, which led to substantial economic losses. Indeed, the total area affected by floods in China in 1998 was one of the largest in the country’s history.
Source: Xinhua Net
According to the Hong Kong Observatory, El Niño also tends to have a big impact on the territory’s climate, most notably in terms of rainfall. In winter (DecemberFebruary) and spring (March-May), El Niño affects the atmospheric circulation over the northern part of the South China Sea, bringing generally more rainfall to the coastal region compared with normal years.
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China Insurance Sector 29 June 2015
Hong Kong: rainfall in winter and spring under normal conditions versus El Niño conditions
China: frequency and severity of typhoons and the occurrence of El Niño
(mm) 800
30 25
700
20
500
15
400
10
300
5
200
0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
600
100 0 Winter
Normal condition
El Nino
El Nino years Total number of typhoons Number of severe and super typhoons 30-year average number of typhoons 30-year average number of severe and super typhoons
Spring
Source: Hong Kong Observatory, Daiwa
Source: National Climate Centre of China, Australian Bureau of Meteorology, Daiwa Note: 30-year average number of typhoons and number of severe and super typhoons cover the period of 1985-2014
Drought is another phenomenon associated with El Niño conditions. In years in which El Niño conditions have been strong, including 1988, 1992, 1994 and 1997, larger areas of China experienced drought conditions than was the case in normal years.
Agricultural output is, of course, affected by extreme weather conditions. Globally, the total output of agricultural products such as corn, rice, soybean and wheat tends to decline during El Niño years. In China, agricultural output declines in most El Niño years, particularly output of rice, one of the core components in China’s food consumption.
China: drought affected area and the occurrence of El Niño (000' hectares) 50,000 40,000 30,000
China: total output of agricultural products and the occurrence of El Niño
20,000 10,000
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0 El Nino Years Dought affected area 30-year average line of drought affected area
Source: National Bureau of Statistics of China, Australian Bureau of Meteorology, Daiwa Note: 30-year average line of draught affected area covers the period of 1985-2014
15%
6,000
10%
5,500
5%
5,000
0%
4,500
(5%)
4,000
(10%)
3,500
(15%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Typhoons. Interestingly, fewer tropical cyclones hit China on average during El Niño years. But, the typhoons that do hit China in El Niño years tend to be stronger than in normal years. According to the National Climate Centre of China, over the past 30 years, the average number of severe and super typhoons affecting the country in El Niño years is 9.3, compared with 8.5 during normal years. Data from China’s Bureau of Climate shows that the maximum wind speed near the centre of typhoons in El Niño years is 2.6 metres/second higher than in normal years.
(mn kg) 6,500
El Nino Years
Output of total agricultural products
YoY (RHS)
Source: National Bureau of Statistics of China, Australian Bureau of Meteorology, Daiwa Note: total output of agricultural products includes cereals, potatoes and beans.
China: rice output and the occurrence of El Niño (mn kg) 2,500
15% 10%
2,000
5%
1,500
Besides, according to the Hong Kong Observatory, typhoons in El Niño years tend to hit Hong Kong later than usual (ie, after July), because wind conditions over the Northwest Pacific divert the path of some typhoons towards the north rather than the northwest. As a result, although the numbers of typhoons hitting South China declines during El Niño conditions, more tend to hit Eastern China, which in turn explains why the number of severe and super typhoons hitting China is higher during El Niño years.
0%
1,000
(5%)
500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(10%)
El Nino Years
Rice output
YoY (RHS)
Source: National Bureau of Statistics of China, Australian Bureau of Meteorology, Daiwa
-8-
China Insurance Sector 29 June 2015
As there is no available data on the China P&C sector’s historical combined ratio, we use the combined ratio of China’s largest P&C insurer, PICC P&C, as an illustration of the impact of natural disasters on profitability. Looking at the data since 2000, when PICC P&C first disclosed its combined ratio, the company had its highest-ever combined ratio in 2008 (1 year after El Niño conditions prevailed in 2007), which suggests poor underwriting profitability during disaster-prone years.
Adverse impact on P&C insurers Correlation between P&C claims and El Niño: 1-2pp higher combined ratio The frequency and magnitude of extreme weather conditions and natural disasters during El Niño conditions naturally leads to an increase in claims lodged with insurance companies. The rise in claims is mainly attributable to floods and droughts.
On average, the company’s combined ratios for 200608 were 3.7pp higher than its historical average figure of 97.7%. Including other El Niño years (2002, 2003, 2009, and 2010), PICC P&C’s combined ratio on average was 1.9pp higher than its historical average.
There is usually a lag of a few months between the occurrence of the natural disaster and the spike in related claims. For example, in 1998, 2003, 2008, the second years of the relevant El Niño periods, more insurance claims were filed compared with normal years. In turn, claim/gross written premium (GWP) ratios were on average 1.2pp higher in El Niño-affected years (including 1998, 2003, 2007, 2008, 2009 and 2010) than in normal years.
PICC P&C: combined ratio 104% 102% 100%
We note that the insurers’ expense ratios are not affected by natural disasters, such that there should be no correlation between them and El Nino conditions. Hence, fluctuations in claim/GWP ratios are also a reflection of insurers’ combined ratio.
98% 96% 94% 92%
PICC P&C combined ratio
70%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
China P&C insurance sector: annual claims / GWP ratio and the occurrence of El Niño
2001
2000
90%
Average line of PICC P&C combined ratio
Source: Company, Daiwa
And, as more detailed data has become available in recent years, we can see that the China P&C insurers’ claim/GWP level spiked in 2007 and 2008, after the El Niño conditions in 2006.
60%
50%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
40%
El Nino years Claims / GWP ratio of P&C insurance sector Average line of claims / GWP ratio of China P&C insurance sector Source: CEIC, Australian Bureau of Meteorology, Daiwa Note: average claims / GWP ratio are over period of 1998-2014
China P&C insurance sector: annual claims/GWP ratio by regions 2006 2007 2008 2009 2010 2011 2012 2013 Average
Beijing Tianjin 52% 43% 63% 61% 73% 63% 80% 68% 49% 43% 52% 46% 56% 46% 57% 52% 60% 53%
Hebei Shanxi Shandong North Liaoning 43% 35% 73% 49% 80% 63% 55% 76% 63% 100% 75% 64% 76% 70% 119% 58% 61% 68% 67% 91% 39% 45% 45% 44% 64% 43% 48% 51% 48% 59% 45% 48% 53% 50% 66% 53% 61% 62% 57% 75% 52% 52% 63% 56% 82%
Jilin HeiLongjiang Northeast Shanghai Jiangsu Zhejiang Anhui Fujian East Hunan 57% 65% 67% 47% 69% 50% 51% 58% 55% 60% 74% 125% 99% 61% 62% 64% 55% 68% 62% 76% 85% 112% 105% 73% 77% 68% 71% 76% 73% 80% 72% 89% 84% 61% 62% 58% 54% 68% 61% 60% 48% 56% 56% 53% 42% 43% 45% 54% 48% 43% 45% 54% 53% 58% 44% 43% 45% 55% 49% 47% 48% 51% 55% 52% 46% 50% 47% 58% 50% 51% 57% 71% 68% 55% 53% 56% 57% 62% 57% 57% 61% 78% 73% 57% 57% 54% 53% 62% 57% 59%
Source: Wind, Daiwa estimate
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Hubei Henan Jiangxi Middle 57% 56% 51% 56% 80% 81% 74% 78% 81% 86% 89% 84% 62% 79% 66% 67% 46% 59% 47% 49% 48% 54% 45% 49% 49% 53% 50% 51% 58% 61% 53% 57% 60% 66% 59% 61%
Guangdong Guangxi Hainan South 59% 50% 33% 47% 62% 54% 35% 51% 71% 55% 43% 56% 67% 46% 46% 53% 55% 36% 33% 41% 56% 39% 38% 44% 60% 42% 38% 47% 66% 42% 36% 48% 62% 45% 38% 48%
China Insurance Sector 29 June 2015
China P&C insurance sector: monthly claims/GWP ratio versus El Niño 120%
3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0
80% 40% 0% -40% -80%
El Nino years
MEI index
Oct-2014
Apr-2014
Oct-2013
Apr-2013
Oct-2012
Apr-2012
Oct-2011
Apr-2011
Oct-2010
Apr-2010
Oct-2009
Apr-2009
Oct-2008
Apr-2008
Oct-2007
Apr-2007
Oct-2006
Apr-2006
Oct-2005
Apr-2005
Oct-2004
Apr-2004
Oct-2003
Apr-2003
Oct-2002
Apr-2002
Oct-2001
Apr-2001
Oct-2000
Apr-2000
Oct-1999
Apr-1999
-120%
Monthly claims / GWP ratio of P&C insurance sector (RHS)
Source: National Oceanic and Atmospheric Administration (NOAA), CEIC, Daiwa Note: MEI index (Multivariate ENSO index): continuous large positive MEI values indicate the occurrence of El Niño conditions
Severe typhoons lead to big losses and large claims
China: total number of typhoons 25
Typhoons affecting China tend to be concentrated in the South and Southeast of the country, where the wealthiest provinces and cities are located. Hence, typhoon damage can lead to substantial insured losses for the country’s P&C insurers, typically with a lagged effect (ie, several months later).
20 15 10 5
2014
2012
2010
2008
2006
2004
2002
2000
1996
1994
1992
1990
1998
30-year average number of typhoons
Source: National Climate Centre of China, Daiwa Note: average number of typhoons covers the period of 1985-2014
China: number of severe and super typhoons 16 14 12 10 8
Claims / GWP ratio for P&C insurance sector Number of strong and severe typhoons (RHS)
6 4
Source: CEIC, National Climate Centre of China, Daiwa
2 2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
0 1984
2014 set a relatively low base in terms of the number of typhoons hitting China, and hence the value of claim ratios for P&C insurers. In other words, any normalisation in the number of typhoons hitting China could be expected to lead to higher claims for China’s P&C insurance sector.
1988
1984
Total number of typhoons
2014
2013
2012
2011
2010
2009
2008
0 2007
40% 2006
5 2005
45% 2004
10
2003
50%
2002
15
2001
55%
2000
20
1999
60%
1998
25
1997
65%
1986
0
China P&C insurance sector: claims/GWP versus number of severe typhoons
Number of severe and super typhoons Average number of severe and super ytphoons Source: National Climate Centre of China, Daiwa Note: average number of severe and super typhoons covers the period 1985-2014
Floods have a bigger impact than drought on claims, due to the wider scope of losses
The following maxim applies to the El Niño years in China: “drought in the North, floods in the South”. When affected by El Niño, areas along the Yangtze River typically experience more torrential rainfall than - 10 -
China Insurance Sector 29 June 2015
China P&C insurance sector: claims/GWP by product type 100% 80%
Indeed, South China has experienced severe rainfall and floods in the year-to-date, due likely to the effects of El Niño. According to some local media reports, 15 provinces have been affected by floods, and the direct economic losses now total CNY10.9bn.
40% 20% 0% 2004
Historical data suggests property insurance is hit the hardest Among the major types of P&C insurance products, commercial properties and household property insurance tend to see the most significant spikes in claims as a result of natural disasters. For example, due to the occurrence of El Niño conditions, China’s P&C insurance sector recorded higher claim/GWP ratios in 2008 than in normal years. Compared with 2006, commercial and household properties saw the most significant rises in this ratio (up 25-30pp between 2006 and 2008). Auto insurance ranked third on this measure, likely due to the much larger overall premium volumes in the segment, but the impact was still significant (7pp rise between 2006 and 2008).
2008
2009
2010
2011 2012 2013 Household properties Agriculture Others
Source: National Bureau of Statistics of China, Daiwa
China P&C insurance sector: claims / GWP by product (2008 vs. 2006) 84% 58%
61% 54%
70% 58%
52% 40%
2006
2008
Accident & health
Commercial properties
28%
43%
41%
Others
59%
Agriculture
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
From a geographic point of view, major floods usually impact the South, East, and Middle China, especially the Yangtze River and Pearl River areas, which are the most affluent regions in China. As a result, the economic losses caused by floods tend to have a greater impact than droughts on the profitability of the P&C insurers. A case in point: the El Nino-related floods of 1998, which, on PICC P&C’s estimates, caused direct economic losses of CNY255bn.
Property and agricultural insurance likely most affected
2005 2006 2007 Commercial properties Motor vehicle Accident & health
Motor vehicle
Compared with droughts, floods have a significantly larger impact on the profitability of P&C insurers. The effects of droughts tend to be concentrated on agriculture production and do not increase the probability of losses for other properties. By contrast, floods can damage houses, cars, and other properties, as well as farmland, and hence can cause more damage and greater economic losses.
60%
Household properties
in normal years, whereas in North China, places such as Hebei and Shanxi may suffer more severe droughts.
Source: National Bureau of Statistics of China, Daiwa estimates Note: 2007 was an El Niño year. Allowing for lagged impact, we compare 2006 and 2008.
Impact on agricultural insurance was negligible, but going to be more significant Although over the 2006-08 extreme weather episodes, the claims/GWP ratio for agricultural insurance in China did not show a strong correlation with the country’s agricultural production output over the 19992013 period), we believe that the impact of the extreme weather will have more of an impact on agricultural insurance going forward. Compared with other major insurance products in China, which were rolled as early as the 1950s, agricultural insurance took off much later in the 1980s. Before 2007, when the government launched the agricultural insurance subsidy scheme for farmers, agricultural insurance coverage (measured as agricultural insurance premiums divided by the gross output value of agricultural products) was low in China. After the reforms were implemented in 2007, agricultural insurance coverage started to pick up substantially.
- 11 -
China Insurance Sector 29 June 2015
China agricultural insurance: coverage
Minimal impact on life insurers
0.7% 0.6%
Compared with the P&C insurers, the life insurers are less affected by El Niño conditions. According to our analysis, there is no significant correlation between life-insurance claims and El Niño occurrences.
0.5% 0.4% 0.3% 0.2%
We think this is because if we look at: 1) demographic trends, and 2) normal variances in mortality and morbidity rates for the insured population, any increase in related deaths during times of more natural disasters accounts for only a small proportion of total deaths. In other words, the overall mortality rate doesn’t change significantly during El Niño years.
0.1% 2013
Source: Wind, CEIC, Daiwa Note: agricultural insurance coverage is calculated as agricultural insurance premiums divided by the gross output value of agricultural products in China
China life insurance sector: claims/GWP ratio vs. areas affected by natural disasters
Due to the narrow extent of coverage and limited areas of coverage in the past, the 2005-08 data might not have been indicative of the nationwide situation in terms of agricultural damage. In other words, the limited scope of data may not present a fair reflection of the correlation between the occurrence of natural disasters and agricultural insurance claims.
('000 hectares)
50%
Currently, hundreds of types of agricultural insurance product are available in China, including planting insurance (eg, for corn, rice, wheat, soybeans), livestock insurance and forest insurance. According to the China Insurance Regulatory Commission (CIRC), China’s agricultural insurance coverage was for 62% of the country’s total agricultural land area in 2014, of which coverage for wheat, corn and rice planting was 49%, 70% and 69%, respectively.
50,000
40%
40,000
30%
30,000
20%
20,000
10%
10,000 0
Claims / GWP ratio of life insurance Floods affected area (RHS)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0%
Drought affected area (RHS)
Source: CEIC, National Bureau of Statistics of China, Daiwa
China: mortality rate
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Claims / GWP ratio of agricultural insurance YoY growth of agricultural products output (RHS) Source: CEIC, National Bureau of Statistics of China, Daiwa
- 12 -
2012
(15%)
2009
40%
2006
(10%)
2003
50%
Source: CEIC, Daiwa
2000
(5%)
1997
0%
60%
1994
70%
1991
5%
1988
10%
80%
1985
15%
90%
1970
100%
1982
China agricultural insurance: claims/GWP ratio vs. annual growth of total agricultural products output
1979
Thus, given that there is now much wider agricultural insurance coverage, more extreme weather in China will result in rising agricultural insurance products claims.
1976
(%) 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50
1973
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0.0%
China Insurance Sector 29 June 2015
In this light, we believe China’s domestic stock market rally has encouraged, albeit in the short term, some of these small players to make up any underwriting losses (from the price war) with investment gains.
China P&C insurance sector: the next 12 months
Premium rates for majority of renewal policies in pilot areas are falling According to the preliminary data from the CIRC, by 10 June 2015, auto insurers taking part in the trial run recorded auto premium income of CNY1.56bn. Of all the renewal business happening since the pilot started in June 2015 (ie, the shift to the new pricing model), 77.6% of the policies have had lower premium rates, 22.2% have had higher premium rates, and the remaining 0.2% have recorded flat rates.
We think the next 12 months (mainly 2H15 & 1H16) will be bumpy for China’s P&C insurance segment, on the back of pricing pressure due to auto insurance reforms, rising claims caused by extreme weather, and a slowdown in premium growth. CPIC P&C is likely to be the most affected
In a word, the majority of the auto insurance policies offered under the new system came with lower premium rates when they were sold to the same customers. China auto insurance segment: changes in premium rates after the auto insurance pricing reforms started in June 2015
Auto insurance pricing reform creating pricing pressure
80%
77.6%
70%
Near-term pricing pressure; long-term market discipline and transparency
60% 50%
China’s auto insurance pricing reforms were implemented in April 2015. After 2 months of further regulatory approval of insurance policies under the new pricing model, insurers in the 6 provinces/cities (Heilongjiang, Shandong, Guangxi, Chongqing, Shaanxi, and Qingdao) running the pilot started to offer new policies to their customers in early June.
40% 30% 10%
0.2%
0% % of policies with lower premium rates
% of policies with flat premium rates
% of policies with higher premium rates
Source: CIRC, Daiwa Note: 1) data for 1 June 2015 to 10 June 2015 and 6 provinces/cities in the pilot run 2) Premium rate changes are for renewal business where comparable precious insurance price under the old system is available.
In China, c.77% of 2014 P&C premiums came from the auto business. The 6 provinces/cities involved in the trial run accounted for 15% of the industry’s auto premiums for the same year. The new pricing model for auto insurance now depends on the car model rather than relying mostly on the price paid for the auto. It also leaves more room for insurers to compete on price, based on their cost structures and customers (for more details on auto insurance pricing reform, see page 21 of our report China Insurance Sector: Why things are looking up). While we hail the regulator for its focus on: 1) pricing transparency in auto insurance policies, 2) cost efficiencies, and 3) technological innovation (in order to improve risk identification), we think it takes time for small insurers to recognise these benefits and give up the price war.
22.2%
20%
CPIC P&C has the highest exposure to the 6 pilot areas among its listed peers As the pilot areas derive around 15% of China’s total auto premiums, an)d the other areas are not yet seeing any effects from the auto insurance pricing reform, the auto insurer with the relatively largest exposure to the pilot areas is likely to see a significant and early impact on profitability. Among the 3 P&C listed players, CPIC had the highest geographic exposure to the 6 areas (14.3% of its total P&C premiums) in 2014. This was followed by Ping An P&C and PICC P&C, with 13.8% and 13.7%, respectively.
- 13 -
China Insurance Sector 29 June 2015
Insurers with greater relative exposure to property insurance likely to be more vulnerable
China P&C insurers: % of total P&C premiums derived from the 6 pilot provinces (2014) 16% 14% 12%
0.9% 2.1%
10%
1.9%
8%
2.7%
1.9%
2.8%
1.7%
5.6%
4.4%
1.3%
1.5%
1.0%
PICC P&C
Ping An P&C
CPIC P&C
2% 0%
As we have discussed, property insurance claims are likely to go up the most (vs. other insurance products) when there is extreme weather. Hence, the P&C insurers that have the greatest proportion of property insurance in their premium portfolios are likely to be the most vulnerable.
2.7%
2.3%
6% 4%
1.3% 1.1%
1.2%
Heilongjiang
Shandong*
Guangxi
5.4%
Chongqing
Shaanxi
CPIC P&C had a much greater exposure to property insurance than PICC P&C and Ping An P&C in 2014. In 2014, 6.4% of CPIC P&C’s total premium income came from commercial property insurance, while the numbers for PICC P&C and Ping An P&C were 5.1% and 3.6%, respectively. Furthermore, CPIC P&C has the largest relative exposure to the auto insurance business, which is also affected in times of natural disasters.
Qingdao
Source: Bloomberg, Daiwa * Note: exposure to Shandong Province for PICC, Ping An and CPIC is based on data for 11M14
Extreme weather affecting both auto and non-auto businesses
China P&C insurers: GWP mix by product type (2014)
El Nino poses a downside risk to the 2H15 underwriting profitability of P&C insurers
100%
60%
Others
50% 45% 40% 35% 30% 2012
May
Jun
Jul 2013
Aug
Sep
Oct 2014
Nov
PICC P&C
Ping An P&C
CPIC P&C
Accidents & health
Source: Company, Daiwa
55%
Apr
78.7%
0%
60%
Mar
77.4%
20%
China P&C insurance sector: monthly cumulative claims/GWP ratio
Feb
73.1%
40%
According to CIRC data, the overall claims/GWP for the China P&C insurance sector stood at 47.0% for 5M15 vs. 48.0% for 5M14. Although the overall level of claims so far this year is slightly lower vs. 2014, we expect this to go up for the rest of the year on the back of the expected more extreme weather and the lower premium rates due to the start of the auto insurance pricing reforms.
2011
6.4%
80%
As elaborated earlier in this report, the number of claims/GWP for the P&C insurers tends to spike when there is extreme weather, especially during El Nino years. And as 2015 is an El Nino year, we think this poses a downside risk to China P&C insurers’ underwriting profitability in 2H15.
Jan
3.6%
5.1%
Dec 4M15
Source: CEIC, Daiwa
- 14 -
Liability
Auto
Commercial properties
China Insurance Sector 29 June 2015
Premium volume growth slowing for most P&C products According to CIRC data, the China P&C insurance sector’s premium income growth for 5M15 slowed to 11.5% YoY (vs. 16.1% for 5M14), falling from the c.16% top-line premium growth for the past 3 years (201214). China P&C insurance sector: premium growth rate (YoY) 40%
The main reason we expect top-line premium growth to decline for 2015-17 is that auto sales growth in China is slowing as a result of the country’s austerity campaign (officials are being told to buy cheaper sedans and not luxury models) and because the domestic economy is slowing. We forecast China’s auto sales growth to decelerate to 6% YoY for 2015-16, from 7-14% YoY for 2013-14. By extension, we forecast the expansion in the balance of autos (the cumulative number of cars sold minus those scrapped) to decline to 11-13% YoY for 2015-16, from 15-16% YoY for 2013-14. China autos market: new auto sales growth and auto balance growth (YoY)
35% 30%
50%
25%
40%
20%
30%
15%
20%
10% 5%
10% 2017E
New auto sales
China P&C insurance sector: 12-month trailing premium growth
2017E
2016E
2014
2013
2012
2011
2015E
Source: CIRC, Daiwa forecasts
2010
2009
2008
2007
2006
0% 2005
2016E
2014
2015E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0%
Auto balance
Source: China Association of Automobile Manufacturers, Ministry of Transportation Note: assuming 10% demolition rate for outstanding cars every year
40%
We believe that auto insurance premium growth is more closely correlated to new auto sales growth than to the outstanding autos balance, as new car owners are more inclined to purchase fully comprehensive insurance to ensure that their vehicles are sufficiently insured. In addition, there is no premium-rate discounts offered for new cars.
30%
20%
10%
0% May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Source: CEIC, Daiwa
China P&C insurance sector: premium income mix (2014) Commercial Liability Cargo 3.5% 1.3% Property 5.4%
Others 4.0%
We determine the potential insurance market base for auto insurance by adding the number of new autos sold in a given year to 10% of the number of cars already on the road. The following chart shows there is a strong correlation between our estimates of the total auto insurance base and growth in auto insurance premiums since 2004.
Accident & Health 4.7% Agriculture 4.5%
Auto 76.6% Source: CEIC
- 15 -
China Insurance Sector 29 June 2015
China auto insurance segment: insurance base and premium growth 45% 40% 35% 30% 25% 20% 15% 10% 5%
Total auto insurance base
2017E
2016E
2015E
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
Auto premium growth
Source: China Associate of Automobile Manufactures, Ministry of Transportation, CIRC, Daiwa forecasts
China auto insurance segment: insurance base Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
New autos sales Old autos equivalent (m) (m) 5.1 2.4 5.8 2.7 7.2 3.2 8.8 3.7 9.3 4.4 13.6 5.1 18.1 6.3 18.5 7.8 19.3 9.4 22.0 10.9 23.5 12.7 24.9 14.6 26.1 16.5 27.2 18.3
Total auto insurance base (m) (%, YoY) 7.5 15.7% 8.5 13.5% 10.4 22.6% 12.5 20.4% 13.7 9.7% 18.7 36.9% 24.3 29.9% 26.3 8.1% 28.7 9.0% 32.9 14.8% 36.2 9.9% 39.5 9.2% 42.6 7.9% 45.5 6.8%
Source: China Association of Automobile Manufacturers, Ministry of Transportation, Daiwa forecasts
We expect the growth of non-auto P&C insurance premiums to decline slightly going forward (with the exception of agriculture insurance). This is because most non-auto products, such as property insurance, liability insurance, cargo insurance, are closely correlated to a country’s economic activities in general, which are weak in China currently.
- 16 -
China Insurance Sector 29 June 2015
China insurance companies: 5M15 premium growth (CNYbn) Life China Life Ping An * CPIC Life PICC Group *
China life insurance sector continues to recover
P&C Ping An P&C CPIC P&C PICC P&C
We are pleased to see the turnaround in life insurance premium growth since the beginning of 2015, and expect the momentum to continue due to the waning of other investment products and recovery in terms of the number of agents.
Turnaround in life premium growth High teen YTD life premium growth at major insurers … The China life insurance sector registered 23% YoY premium growth for 5M15. Major insurance companies, especially China Life and Ping An, saw high-teen percentage growth. We understand that FYP rose even more strongly than the insurers’ top-line premium growth, implying that VNB growth could be over 20% for 5M15. China Life Insurance Sector: 12M trailing premium growth 2,000
30%
(CNYbn)
20%
1,600
10%
1,200
0% 800
-10%
Rolling 12M premium
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
-30% Nov-12
0 Aug-12
-20% May-12
400
May-15
YoY %
5M15
YoY%
24.6 15.5 7.6 3.0
29.9% 23.2% 8.7% -19.8%
198.4 114.9 51.5 74.8
19.0% 17.7% 1.5% 12.6%
13.0 7.9 23.4
16.0% -2.1% 11.2%
68.0 40.4 117.3
18.5% 1.0% 10.4%
Source: Companies, Daiwa Note: Life premium figures for Ping An Life include Ping An Life, Ping An Health and Ping An Annuity, and those for PICC Group include PICC Life and PICC Health.
… driven by other competing investment products waning … We believe reduced competition from competing products, such as time deposits, WMPs and trusts, have helped pave the way for a sustainable distribution model and product mix for the China Life Insurance Sector. Over the past 2 decades, the nascent stages of the life insurance industry in China, life products were largely seen as alternatives to savings given the dearth of other options offered by banks. With the advent of WMPs in recent years, the protection element of life insurance products is arguably still largely being overlooked by potential investors. Hence, premium growth for the China Life Insurance Sector was weak due to the lower yields on life products compared with WMPs during the 2 major waves of WMP growth (2003-07 and 2010-13). Falling yields. In mid-2014, the PBOC launched its so-called selective monetary easing and injected liquidity into the market through various monetary instruments, such as reverse repo, short-term liquidity operations (SLO), standing lending facility (SLF) pledged supplementary lending (PSL), medium-term lending facilities (MLF), selective RRR cuts, and rediscount loans. On 21 November 2014, the PBOC began its benchmark interest-rate cuts, which marked another stage of the current round of liquidity easing. As a result, yields on products competing with insurance policies, such as time deposits, WMPs, money-market funds, and time deposits, all declined by 75-90bps compared with June 2014.
YoY (RHS)
Source: CEIC, Daiwa
- 17 -
China Insurance Sector 29 June 2015
China interest rates: WMPs, money market funds, and time deposits (%) 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
5-year benchmark time deposit rate
Jul-13
Oct-13
Jan-14
5-year financial bond
Apr-14
Jul-14
Oct-14
WMP weighted average return
Jan-15
Apr-15
Typical MMF return
Source: CEIC, WIND, Daiwa
China Banks Sector: WMP sales (number of products) 8,000
80%
7,000
70%
6,000
60% 50%
5,000
40%
4,000
30%
No. of WMP sold Source: WIND, Daiwa
YoY (3M rolling, RHS)
Ma y-15
Feb-15
Nov-14
Aug -14
Ma y-14
Feb-14
Nov-13
Aug -13
Ma y-13
Feb-13
0% Nov-12
10%
1,000 Aug -12
20%
2,000 Ma y-12
3,000
20%
18%
17% 17%
15% 13% 10% 10%
10%
5%
9%
8% 8% 7%
6%
7% 4%
3%
3%
Mar-15
Dec-14
Jun-14
Sep-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
0% Dec-11
This increased risk awareness among investors is likely to lower the returns they demand from relatively less risky products, such as deposits and insurance products, compared with the returns they require from trusts, trash bonds, and WMPs, in our view. The latest data shows that trailing 3-month WMP sales growth (in terms of the number of products) slowed to 33% YoY in May 2015. Also, the trust sector saw AUM growth slow to a low single-digit rate of 3% QoQ in 1Q15.
China Trust Sector: AUM QoQ growth
Sep-11
Rising risks perceived. Recently, we saw an increase in the number of defaults and frauds on WMPs, trusts, and bonds. The media reported more than a dozen cases of WMP frauds, in which sometimes investors lost the principal from these products (as the subsequent table shows). Further, the PBOC’s Vice Governor warned that “the default risks on repayment of high-yield WMPs are rising” and will “allow some defaults to happen”.
Source: China Trustee Association, CEIC, Daiwa
Smaller market in competition due to “NAVtype” WMPs. In order to address the wide misperception on the “expected return” of WMPs (many retails investors see it as guaranteed returns), China’s banking regulator (the CBRC) began pushing “NAV” WMPs around a year ago. Such WMPs do not provide an explicit expected return when sold, but only provide an NAV on a daily basis. We argue that “NAV” WMPs are competing with mutual funds rather than life insurance products. With the WMP market gradually shifting from “expected return” products to NAV products, there are fewer WMPs offering explicit expected returns, which many retail investors have come to regard as guaranteed returns. We estimate that NAV products now account for around 10% of total outstanding WMPs, up from less than 1% at end-2013. We forecast the proportion of NAV products to rise to 15-20% by end-2015 and 3040% by end-2016, driven by the regulator’s efforts to encourage this shift in the market, together with the short duration of many WMPs.
- 18 -
China Insurance Sector 29 June 2015
acceleration to 19% YoY in 2010, life premium sales declined by 10% YoY in 2011, and many insurance agents switched jobs that year.
We argue that insurance product sales are also being supported by an increasing awareness of risks among investors in China. The increase in cases of default or near-default on trust products and bonds that occurred last year is gradually leading to a shift in perceptions of insurance products among investors who used to regard them as “risk-free” investments.
… and recovery of agent growth We believe general wage levels in China, especially minimum wage levels, have a major influence on the size and quality of insurance agency sales forces, and hence that relatively moderate wage increases generally help to expand the sizes of insurers’ agency forces.
The rate of minimum wage growth then moderated to 11% YoY in 2012 and 13% YoY in 2013, and life premium sales growth recovered by 5.8% YoY in 2013 and 15.7% YoY in 2014. In view of the further moderation in the minimum wage increase to 8% YoY in 2014, we expect life premium sales to see a higher growth rate for 2015 versus last year, of about 20%. China: minimum wage increases vs. life insurance premium sales growth (YoY) 60% 50%
For China’s urban residents, average annual wage increases were elevated back in 2010-11, ranging from 13-17%, but moderated gradually to 8-12% in 2013 and 2014.
40% 30% 20% 10% 0%
China: average wage growth for urban residents (YoY)
(10%)
25%
(20%) 20 06
20%
20 07
20 08
20 09
2010
2011
2012
2013
20 14
Minimu m wage in creases
15%
Life insuran ce premium gro wth (laggin g one year) Source: National Bureau of Statistics, CEIC, Daiwa Note: life premium sales data is shown with a 1-year lag in order to compare it with the impact of the previous year’s minimum wage increase. Minimum wage data is calculated as the simple average of China’s 10 major provinces/municipalities, ie, Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, Guangxi, and Sichuan.
10% 5%
Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
0%
All urban residents
China: minimum monthly wage in 10 major provinces/ municipalities (CNY) 3,000
Urban residents employed by private entities
Source: National Bureau of Statistics, CEIC, Daiwa
2,000
In addition, we note that premium growth in the life insurance segment has a negative correlation with increases in China’s minimum wage, reflecting the fact that insurance agents’ income levels are close to the country’s minimum wage. In order to provide agents with a strong incentive to sell life insurance products, on which they earn a commission, insurance companies usually pay their agents low basic monthly salaries. According to the China Insurance Association, the monthly salary level for 63% of agents was less than CNY1,333 in 2013. This was lower than the average minimum wage level of CNY1,412 in China’s 10 major provinces/municipalities (Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, Guangxi, and Sichuan).
1,000
Beijing Jiangsu Shandong Sichuan
Tianjin Zhejiang Guangdong
Source: National Bureau of Statistics, CEIC, Daiwa
Our analysis shows that the decline in China’s minimum wage growth rate during 2007-09 led to robust growth in life premium sales over 2008-10. Conversely, following the minimum wage growth - 19 -
Shanghai Fujian Guangxi
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
China Insurance Sector 29 June 2015
China CPI (YoY)
Equity investment sensitivity
(%) 10
China’s domestic equity market had a rollercoaster 1H15. As at 29 June, the benchmark Shanghai Composite Index had rallied by 25% YTD. We assume 40% annual equity market gain in 2015.
8 6 4 2 0 (2)
Jan 00 Sep 00 May 01 Jan 02 Sep 02 May 03 Jan 04 Sep 04 May 05 Jan 06 Sep 06 May 07 Jan 08 Sep 08 May 09 Jan 10 Sep 10 May 11 Jan 12 Sep 12 May 13 Jan 14 Sep 14 May 15
(4)
Source: Wind, Daiwa
Our sensitivity analysis shows that the EV for PICC Group (including both PICC Life and PICC Health) has the highest sensitivity to equity investment. Every 10% change in China’s A share market leads to 2.5% change in PICC Group’s EV. Ping An Life has the sensitivity of 2.3%, followed by CPIC and China Life at 2.0% and 1.9%, respectively.
China life insurers: EV sensitivity to every 10% change in stock market index Investment portfolio (end-2014) 2,100,870 2,087,182 761,886 691,169
(CNYm) China Life Ping An CPIC PICC Group
% of equity investment (end-2014) 11.2% 11.6% 10.6% 10.0%
PAR policyholder dividend 70% 75% 70% 75%
Embedded Value (end2014) * 454,906 264,223 125,737 47,414
Investment variance for 10% equity market movement 8,733 6,174 2,525 1,170
as % of EV (life) 1.9% 2.3% 2.0% 2.5%
Source: Daiwa estimates Note: EV here includes Life and Health segments of the companies where applicable.
China life insurers: EV sensitivity to a 10% change in stock returns
Ping An: investment portfolio mix (end-2014) Equity 12.9%
5%
Trusts and WMPs 6.6%
4% 3% 2%
Bonds 46.9%
2.5%
2.3%
2.0%
1.9%
Debt schemes 8.0% Cash and equivalents 4.8% Others 4.7%
1%
Term deposits 16.0%
0% China Life
Ping An
CPIC
PICC Group
Source: Company
Source: Daiwa estimates
CPIC: investment portfolio mix (end-2014) China Life: investment portfolio mix (end-2014) Equity 11.2%
Bonds 44.8%
Trusts and WMPs 5.3% Debt schemes 3.0% Cash and equivalents 2.8%
Bonds 55.2%
Others 0.1%
Equity Trusts 10.6% and WMPs 1.2% Debt schemes 6.2% Cash and equivalents 1.8% Others 3.2%
Term deposits 21.7%
Term deposits 32.9% Source: Company Source: Company
- 20 -
China Insurance Sector 29 June 2015
CPIC: investment portfolio mix (end-1Q15) Equity 12.4%
PICC P&C: investment portfolio mix (end-2014) Equity 13.9%
Trusts and WMPs 2.5% Debt schemes 6.3%
Bonds 36.5%
Cash and equivalents 2.2% Others 3.2%
Bonds 51.8%
Trusts and WMPs 7.4% Debt schemes 0.0% Cash and equivalents 8.2% Others 4.1%
Term deposits 21.6%
Term deposits 29.9%
Source: Company
Source: Company
PICC Group: investment portfolio mix (end-2014)
Bonds 34.1%
EquityTrusts and 10.0% WMPs 0.0% Debt schemes 12.0% Cash and equivalents 5.7% Others 14.3%
Term deposits 23.8% Source: Company
China Insurance Sector: allocation of investment assets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%
Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
0%
Deposit
Bond
Source: CIRC, Daiwa
- 21 -
Equity
Others
China Insurance Sector 29 June 2015
P&C insurance We value the P&C insurance business using a PBR method given the short-term nature of most P&C insurance policies and the P&C business’s correlation with the consumer sector.
Valuation We use SOTP methodology to value the China insurers (P/EV for life insurers and PBR for P&C insurers). Most are trading near their long-term average P/EVs and at slight discounts to their long-term average PBRs. Their rising PBRs look justified by their recovering long-term ROE and ROEV outlook.
Valuation methodology SOTP methodology Given that a number of H-share listed insurers are conglomerate companies by nature, we use SOTP methodology to value those under our coverage. We apply a 10-20% holding company discount in our SOTP method depending on the nature and complexity of the business mix. For details of the SOTP breakdown for each insurance company under our coverage, please refer to the company sections associated with this report. Life insurance We use a price to embedded value (P/EV) method to value the life insurance business. We believe EV is the most appropriate method to value life insurers’ future value of business as it captures the long-term nature of the life insurance business. We use the Gordon Growth Model to determine our sustainable ROEV forecasts for the life insurance business of different insurance companies. We assume a 5.0% terminal growth rate and 11.0% cost of capital (except for PICC Life, for which we assume a 14.0% cost of capital because its non-P&C business is still in the emerging stage). We use a higher terminal growth rate for life insurers than P&C insurers as we are more optimistic on the long-term growth trend of life insurance given that most of the sector’s deregulation is focused on the life insurance business. We then obtain our target prices from our Gordon Growth Model-derived 2015E P/EV multiples.
We use a Gordon Growth Model to determine our sustainable ROE forecasts for the companies’ P&C insurance businesses. We assume a 3.0% terminal growth rate and 11.0% cost of capital to derive our Gordon Growth Model-based 2015E PBRs. Banks We use PBRs to value the insurers’ bank businesses. We assume a 15.0% sustainable ROE, 3.0% terminal growth and 14.0% cost of capital. Our relatively low sustainable ROE takes into account the structural headwinds in asset quality and long-term NIM contraction trends. We cross-check our target PBR alongside the implied valuation from consensus forecasts at the bank’s current market price. Securities We use PBRs to value the securities business, derived from a Gordon Growth Model. We assume a 20.0% sustainable ROE, 5.0% terminal growth and 11.0% cost of capital. The relatively high terminal growth rate that we assign takes into account the China Securities Sector’s long-term structural growth opportunity delivered by its business model transformation. (See Great transformation-stage 2:capital is key for details, 6 January 2014.) We cross-check our target PBRs alongside the implied valuations of H-share listed securities firms based on consensus forecasts and their current market prices. Others We assume a 1.0x PBR for excess capital at the group level for the conglomerate insurers. Out of conservativeness, we have not yet assigned any value to the China insurers’ nascent Internet finance businesses, which are not generating meaningful profit for the listed group companies at this stage. Holding company discount We apply a 20% holding company discount to Ping An due to that insurer’s highly complex business mix. We apply a 10% holding company discount to derive our target prices for PICC Group and CPIC given that their market values comprise 2 major segments: life insurance and P&C insurance.
- 22 -
China Insurance Sector 29 June 2015
Valuation comparisons Current valuations
The following table summarises the implied P/EV multiples and PBRs of the insurance companies under our coverage based on our target prices. The sector is trading currently at an average 1.3x 2015E P/EV or 1.8x PBR, based on our forecasts.
Among all the stocks under our coverage, PICC Group has the most undemanding P/EV valuation and the lowest PBR. CPIC and China Life have relatively rich valuations in terms of both P/EV and PBR multiples.
China insurance companies valuations Company
Ticker
China Life Ping An CPIC PICC Group PICC P&C Sector
Market cap (USDm) 128,499 116,009 41,387 25,884 32,937 344,717
2628 HK 2318 HK 2601 HK 1339 HK 2328 HK
Rating
Share price (HKD) 32.65 102.50 35.85 4.73 17.22
Buy Buy Hold Outperform Hold
Target price (HKD) 44.0 130.0 37.0 5.2 17.0
Upside (%) 34.8% 26.8% 3.2% 9.9% -1.3%
P/EV (x) 15E 1.3 1.3 1.3 1.3 n.a. 1.3
PBR (x) 16E 1.2 1.2 1.2 1.1 n.a. 1.2
15E 2.0 1.7 2.1 1.2 1.7 1.8
PER (x) 16E 1.7 1.5 1.9 0.9 1.4 1.6
15E 13.7 10.7 14.4 8.8 9.7 12.0
16E 14.0 12.0 19.2 9.6 11.7 13.4
Source: Bloomberg, Daiwa forecasts Note: priced as of 29 June 2015
Current valuations are similar to 2012 levels
Ping An: 12-month rolling P/EV Rolling P/EV (x) 3
We argue that the sector’s valuation is still attractive, as current PBRs are similar to those back in 2012, while in 2012 the sector lacked fundamental drivers and the favourable macro environment that it enjoys now.
Price (HKD) 140 120 100
2
80 60
1
40 20
Most China insurers under our coverage are currently trading slightly lower than their past-5-year average P/EV multiples, with PICC Group at a positive 0.3SD from its average P/EV multiple since its IPO in December 2012..
Rolling P/EV -1SD
Average P/EV Price
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
0 Jun-10
0
+1SD
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
China Life: 12-month rolling P/EV Rolling P/EV (x) 4
Price (HKD) 50
CPIC: 12-month rolling P/EV Rolling P/EV (x) 3
40
3
Price (HKD) 50
30
2
40
20
1
2
30
10
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
- 23 -
Average P/EV Price
+1SD
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-14
Jun-14
Jun-15
Rolling P/EV -1SD
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
Dec-12
Jun-12
Dec-11
Price
0
0
+1SD
Jun-11
-1SD
10 Jun-10
Average P/EV
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Dec-10
Jun-10
Jun-11
Rolling P/EV
20
1
0
Dec-10
0
China Insurance Sector 29 June 2015
CPIC: 12-month rolling PBR Rolling PBR (x) 4
Price (HKD) 6 5
2 1
Average PBR
-1SD
Price
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
Among our covered insurers, CPIC is trading currently near its past-5-year average PBRs. China Life is trading at 0.6SD below its historical average PBR in the past 5 years. Ping An is trading at 0.8SD below its past-5-year average PBR, which we attribute to the increasingly substantial valuation drag from Ping An Bank. PICC Group and PICC P&C are trading at 0.4SD and 0.8SD below their historical PBR in the past 5 years, respectively.
PICC Group: 12-month rolling PBR
1
Average PBR Price
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
0 Jun-12
20
0 Dec-11
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
0
0
+1SD
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
- 24 -
Average PBR Price
+1SD
Jun-15
5
Dec-14
1
Jun-14
10
Dec-12
2
Jun-10 40
1 Jun-11
15
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
60
2
Rolling PBR -1SD
3
Rolling PBR -1SD
80
3
+1SD
Price (HKD) 20
Jun-12
Jun-15
Dec-14
Jun-14
100
4
Price
Rolling PBR (x) 4
Price (HKD) 140 120
Average PBR
-1SD
PICC P&C: 12-month rolling PBR
Ping An: 12-month rolling PBR
5
Rolling PBR Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
+1SD
Rolling PBR (x) 6
Aug-13
Apr-13
Jun-13
0 Feb-13
0
Dec-11
Price
Jun-15 2
Jun-11
-1SD
Dec-14
3 1
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
Dec-10
4
Dec-10
Average PBR
Jun-14
5 2
Dec-12
Rolling PBR
Dec-13
0 Jun-13
0 Dec-12
10 Jun-12
1 Dec-11
20
Jun-11
30
2
Dec-10
3
Jun-10
40
Jun-10
Price (HKD) 6
Price (HKD) 50
4
+1SD
Rolling PBR (x) 3
China Life: 12-month rolling PBR Rolling PBR (x) 5
Dec-13
Jun-13
Dec-12
Jun-10
Apr-15
Jun-15
Oct-14
Feb-15
Rolling PBR
Dec-13
Price
+1SD
Aug-14
-1SD
0
Jun-13
Average P/EV
Dec-14
Jun-14
Aug-14
Apr-14
Feb-14
Oct-13
Dec-13
Aug-13
Apr-13
Feb-13
Dec-12
Jun-13
Rolling P/EV
10
0
0
0.5
20
1
Jun-12
1.0
30
2
3
1.5
40
3
4
Dec-11
2.0
Price (HKD) 50
Jun-11
Rolling P/EV (x) 2.5
Dec-10
PICC Group: 12-month rolling P/EV
China Insurance Sector 29 June 2015
Currently, CPIC’s A and H shares are trading at similar valuations. However, China Life’s H shares are trading at a 10% discount to their A shares while Ping An’s are trading at a 7% premium.
Comparing A-share and H-share valuations The 3 large-cap China insurers under our coverage are dual-listed in Hong Kong and Shanghai. We note that their H shares have tended to trade at an 8% discount to a 10% premium to their A shares.
China Life, Ping An, and CPIC: H-share premium/discount to A-shares 60% 40% 20% 0% (20%) (40%) (60%) Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
China Life
Jun-11
Dec-11
Ping An
Source: Bloomberg, Daiwa forecasts Note: Priced as at 26 June 2015
Compared with global valuations, more expensive because of the growth story For US and European insurers, it is more common to look at PBR and ROE as they operate in mature markets with limited growth potential, and hence are more sensitive to investment performances. We argue that the China insurers’ higher PBRs are justified by their much higher ROEs vs. their US and European peers. In terms of PERs, China insurers are trading near to global insurers.
- 25 -
Jun-12 CPIC
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
China Insurance Sector 29 June 2015
Global insurance companies valuations Company CHINA / HK - H SHARE China Life Ping An CPIC PICC Group PICC P&C New China Life Taiping AIA Group Sector CHINA - A SHARE China Life Ping An CPIC New China Life Sector GLOBAL Berkshire Hathaway Allianz American International Group AXA MetLife Inc. Zurich Insurance Group AG Prudential Financial Munich RE ACE Ltd Swiss Reinsurance The Travelers Companies, Inc. Manulife Financial Generali Samsung Life Insurance Cathay Financial Holding Tokio Marine Holdings Dai-ichi Life Insurance Sector
Ticker
Current Target Upside price price (%)
PBR FY15 FY16
FY15
FY16
ROE (%) FY15 FY16
1.7 1.5 1.9 0.9 1.4 1.6 1.5 2.1 1.7
13.7 10.7 14.4 8.8 9.7 12.3 17.9 19.9 13.5
14.0 12.0 19.2 9.6 11.7 11.1 16.1 18.2 14.2
16.5 18.9 15.1 16.1 20.3 14.8 9.3 12.2 16.2
13.2 12.9 10.4 10.9 13.3 14.1 9.4 12.5 12.6
2.2 1.6 2.1 2.2 5.3 1.3 1.0 2.3 2.2
1.9 1.2 1.4 1.8 3.9 1.2 1.0 2.3 1.8
7.4 11.9 7.3 7.3 3.8 11.7 8.9 5.3 8.2
6.9 10.7 7.5 5.9 3.4 11.6 9.3 5.3 7.6
2.2 1.5 2.1 2.9 2.0
1.9 1.4 1.9 2.5 1.7
15.2 10.0 14.1 19.7 13.5
15.5 11.2 18.8 17.9 14.5
16.5 18.9 15.1 14.8 17.1
13.2 12.9 10.4 14.1 12.8
2.2 1.6 2.1 1.3 1.9
1.9 1.2 1.4 1.2 1.5
7.4 11.9 7.3 11.7 9.4
6.9 10.7 7.5 11.6 8.7
1.3 1.0 0.7 0.9 0.8 1.3 0.9 0.9 1.1 0.9 1.2 1.3 16.2 0.8 1.4 1.0 0.8 1.5
1.2 0.9 0.7 0.8 0.8 1.2 0.9 0.8 1.0 0.9 1.1 1.2 16.9 0.8 1.3 0.9 0.8 1.5
17.7 9.9 12.7 10.3 9.7 11.5 8.9 9.4 11.2 9.4 10.5 13.4 10.6 17.5 17.5 14.5 18.4 13.7
16.6 9.9 11.2 9.8 9.2 10.9 8.7 9.6 10.9 10.1 10.3 11.6 9.9 16.8 15.6 12.8 15.0 12.8
7.4 10.5 6.8 8.8 10.7 11.1 14.1 9.3 9.9 9.4 11.9 10.2 9.9 5.3 10.5 7.0 4.5 8.8
7.2 10.2 7.2 8.8 10.5 11.4 13.1 8.5 9.9 8.4 11.7 10.7 9.9 5.2 10.3 7.5 5.2 8.7
3.3 0.9 1.7 0.6 4.9 0.9 4.1 1.0 2.9 1.7 2.8 0.6 0.6 0.6 0.7 1.7 0.3 2.3
n/a 0.9 1.7 0.6 4.8 0.9 3.9 1.0 2.9 1.1 2.9 0.6 0.5 0.6 0.7 1.8 0.4 1.1
2.2 11.7 4.1 14.4 2.2 11.9 3.4 8.9 3.4 5.5 4.3 18.4 17.8 9.4 15.5 4.2 14.2 6.5
n/a 10.9 4.2 14.4 2.2 12.2 3.3 8.6 3.5 7.4 4.0 16.7 19.0 9.3 15.6 4.1 13.9 5.7
Market cap (USDbn)
Rating
2628 HK 2318 HK 2601 HK 1339 HK 2328 HK 1336 HK 966 HK 1299 HK
128 116 41 26 33 25 13 78 460
Buy Buy Hold Outperform Hold N/A N/A N/A
32.7 102.5 35.9 4.7 17.2 44.2 27.4 50.1
44.0 130.0 37.0 5.2 17.0 n/a n/a n/a
34.8% 26.8% 3.2% 9.9% -1.3% n/a n/a n/a
2.0 1.7 2.1 1.2 1.7 1.8 1.6 2.3 1.9
601628 CH 601318 CH 601601 CH 601336 CH
128 116 41 25 311
N/A N/A N/A N/A
29.0 76.5 28.2 57.0
n/a n/a n/a n/a
n/a n/a n/a n/a
BRK/B US ALV GR AIG US CS FP MET US ZURN VX PRU US MUV2 GR ACE US SREN VX TRV US MFC US G IM 032830 KS 2882 TT 8766 JT 8750 JT
345 71 84 62 64 46 41 30 34 33 31 38 28 19 22 31 23 1,002
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
N/A 139.8 N/A 141.0 N/A 62.7 N/A 22.9 N/A 57.4 N/A 287.5 N/A 90.7 N/A 160.7 N/A 103.5 N/A 83.5 N/A 97.9 N/A 19.4 N/A 16.4 N/A 108,000 N/A 53.2 Buy 5,031 Outperform 2,388
PER
ROA (%) FY15 FY16
Leverage (x) FY15 FY16
Source: Bloomberg, Daiwa Note: Daiwa forecasts for China Life, Ping An, China Pacific, PICC Group, PICC P&C H-share; Bloomberg consensus for other stocks Priced as of 29 June 2015
Risks The rise of the “liability-driven” business model led by a few mid-sized insurers points to potential liquidity risk for the sector, as “liability-driven” insurers might turn themselves into “financing platforms”.
“Financing platform” risk 2014 witnessed the rise of a few mid-sized insurers adopting a “liability-driven” business model. Unlike traditional leading insurers, which allocate their investments according to the size and duration of the insurance policies they sell (ie, asset-driven), those liability-driven insurers attract large amounts of insurance premiums and deposits by the high expected returns of the insurance products they sell (usually with short durations), and invest in long-term projects through related transactions with their major shareholders. In essence, the insurance company
becomes a financing platform, raising funds through insurance product sales on the one hand and investing them in related parties on the other. Most of the major shareholders of “liability-driven” insurers have property or LGFV backgrounds. Take for example, a few property developers for Foresea Life Insurance in Shenzhen, and Guangdong localgovernment-related entities for Pearl River Life Insurance in Guangzhou. The former has recorded CNY4.8bn in related transactions with its major property shareholder versus its registered capital of CNY3.5bn within 2 years of its establishment. The latter has engaged in CNY7.1bn of related transactions with its major shareholders and related parties in the past 2 years versus its registered capital of CNY2.85bn. The aggressive investment style and short-term funding nature of these insurers has led to the issue of a maturity mismatch given that the funding cost of such insurance products is quite high (c.5-7%) and the - 26 -
China Insurance Sector 29 June 2015
duration of those insurance product liabilities (usually less than 3 years) is shorter than that for the assets (usually more than 3 years). Below is an excerpt of the key insurance provisions of a high cash-value product sold through bancassurance. The product is almost a pure investment product as it has minimal protection value. For household fire incidents, the claim amount is only 10 times the insured amount and the compensation is limited to home decoration and basic indoor facilities. However, it provides a guaranteed return of no less than 4.85%, which is more attractive than time deposits when it is sold in bank branches. Key provisions of a high cash-value insurance product Item Name of the insurance product Extent of insurance Unit insurance premium Maximum claim amount Duration of insurance Investment return (annualised)
Details Household fire insurance Home decoration and basic indoor facilities such as pipelines and sewages. Indoor properties are excluded. CNY10,000 CNY100,000 3 years Max {current PBOC benchmark 3-year time deposit rate, PBOC benchmark 3-year time deposit rate during the insured period} + 0.85%, ie, at least 4.85%.
Source: Daiwa
Besides, according to our on-the-ground research, a number of local government financing companies are trying to acquire small-to-medium sized insurers, especially life insurers, with an aim to acquire additional funding sources. Though the large insurance companies under our coverage have not adopted such a business model so far, problems from small insurers could mean contagion risk for the whole sector. In the worst case, if a few small insurers fail due to liquidity issues, insurance customers would become sceptical about all insurance products. As a result, there would be more hesitation in buying insurance products, and possibly even waves of surrenders, which would create cashflow pressure for large insurers as well.
Regulator raising criteria for majority shareholding of insurance companies The CIRC has drafted amendments to the insurance law that would raise the criteria for investors aiming to be majority shareholders of an insurance company and expand the business scope of insurers. Under the current law, major shareholders of an insurance company are required to have: 1) sustainable profitability, 2) a good reputation, 3) net assets of not less than CNY200m, and 4) no record of a significant breach of any laws or regulations in the 3 years immediately preceding becoming a shareholder of the insurance company. The proposed amendments require those companies which aim to be major shareholders to meet the following conditions: “for the most recent three years, the main operating revenue must not be less than CNY1 billion; the asset-liability ratio must not be more than 50% and net assets must not be less than CNY200 million and must be at least 10 times more than the amount to be invested”. CIRC: criteria to become a majority shareholder of an insurance company Item 1 2 3 4 Plan to be added Plan to be added Plan to be added
Details Sustainable profitability Good reputation Net assets of no less than CNY200m no record of significant breach of any laws and regulations in the three years immediately preceding becoming a shareholder of the insurance company The main operating revenue must be no less than CNY1bn in the most recent three years The asset-liability ratio must be no more than 50% Net assets must be at least 10 times more than the amount to be invested
Source: CIRC, Daiwa
The reason for raising the requirements is because in recent years, investors of different backgrounds have become shareholders of insurance companies. Some private investors, especially those with high financial leverage, regard insurance companies as financial platforms through which they can raise easy funds. And the authorities believe this represents a risk that cannot be ignored and, hence, plan to add leverage and revenue requirements and raise net asset requirements for major shareholders of insurance companies.
- 27 -
China Insurance Sector 29 June 2015
Appendix China insurers in charts China Life (2628 HK) China insurance sector: life premium market share (4M15)
China Life: 12-month rolling life premium growth vs industry (YoY) 40% 30%
China Life 24.1%
Others 31.0%
20% 10% 0% (10%) (20%) Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 China Life
Taikang Life 3.8% Taiping Life 5.6%CPIC Life 6.1%
Industry
Ping An Life 13.1%
New China Life 8.0%
PICC Life 8.4%
Source: Company, Daiwa
Source: CIRC, Daiwa
China Life: FYP by distribution channel
China Life: total premiums by distribution channel
100%
5%
9%
11%
9%
15%
17%
80% 60%
53% 75%
69%
64%
58%
3%
80%
40%
5%
6%
4%
6%
8%
50%
46%
40%
33%
30%
45%
49%
56%
61%
62%
2010
2011
2012
2013
2014
60%
55%
40% 20%
100%
40% 42%
0% 2009
16%
20%
26%
28%
28%
2010
2011
2012
2013
2014
Individual
20%
57%
0%
Bancassurance
2009
Group
Individual
Source: Company
Source: Company
China Life: investment performance
China Life: solvency margin
(CNYbn) 120
6%
300%
100
5%
250%
80
4%
200%
60
3%
150%
40
2%
20
1%
0
0% 2010
2011 Total investment income
Source: Company
2012
2013
Bancassurance
Group
294.5% 226.2%
100% 50%
2014
0% 2013
Total Investment yield (RHS) Source: Company
- 28 -
2014
China Insurance Sector 29 June 2015
Ping An (2318 HK) Ping An: 12M rolling life premium growth vs. industry (YoY)
China Insurance Sector: life premium market shares (4M15)
40% China Life 24.1%
30% Others 31.0%
20% 10% 0% (10%) (20%)
Taikang Life 3.8% Taiping Life 5.6%CPIC Life 6.1%
(30%) Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Ping An Life
Industry
Ping An Life 13.1% PICC Life 8.4%
New China Life 8.0%
Source: Company, Daiwa
Source: CIRC, Daiwa Note: Data is based on total premiums
Ping An: FYP breakdown by distribution channel
Ping An: total premiums by distribution channel
100% 22% 80%
100%
13%
11%
14%
15%
15%
26%
27%
22%
13%
13%
13%
5% 11%
5% 13%
5% 10%
5% 7%
5% 8%
84%
83%
85%
88%
87%
2010
2011
2012
2013
2014
80% 32% 60%
60% 53% 40% 62%
62%
64%
40%
72%
72%
20%
20%
55%
24% 0%
0% 2009 2010 Individual
2011 2012 Bancassurance
2013 Group
2009
2014
Individual
Bancassurance
Source: Company
Source: Company
Ping An: investment portfolio’s performance
Ping An: solvency margin
(CNYbn) 90 80 70 60 50 40 30 20 10 0
250%
6%
204.7%
5%
200%
4%
150%
3%
2011 Total investment income
Source: Company
2012
2013
219.9%
174.4% 171.9% 167.1%
164.5%
100%
2%
2010
Group
1%
50%
0%
0%
2014
2013
Total Investment yield (RHS)
Group Source: Company
- 29 -
Life
2014 P&C
China Insurance Sector 29 June 2015
Ping An: 12M rolling P&C premium growth vs. industry (YoY)
China Insurance Sector: P&C premium market shares (4M15)
70% Others 18.2%
60% 50%
PICC P&C 33.3%
Sunshine 3.0% China Continent 3.0%
40% 30%
China United Property 5.3%
20% 10%
China Life P&C 5.9% CPIC P&C 11.6%
0% Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Ping An P&C
Industry
Ping An P&C 19.5%
Source: Company, Daiwa
Source: CIRC, Daiwa
Ping An: premium mix
Ping An: P&C combined ratio 120%
100% 20.9%
22.0%
23.0%
22.1%
22.7%
100%
80%
80%
60%
37.3%
35.7%
35.9%
36.9%
37.6%
55.4%
57.8%
59.4%
60.4%
57.7%
2010
2011 Loss Ratio
2012
60% 40%
79.1%
78.0%
77.0%
77.9%
77.3%
40%
20%
20%
0% 2010
2011 Auto
2012
2013 Non-auto
0%
2014
Source: Company
Source: Company
Ping An Bank: NPL ratio
Ping An Bank: NIM composition
2013 Expense Ratio
2014
14%
1.2%
12%
1.0%
10%
0.8%
8%
0.6%
6%
0.4%
4%
0.2%
2%
0.0% 2010
2011
2012
2013
0%
2014
2010
2011 NIM
Source: Company
Source: Company
- 30 -
2012 Deposit cost
2013
2014 Loan yield
China Insurance Sector 29 June 2015
Ping An Bank: Tier-1 & total CAR
Ping An Bank: fee income & growth (YoY)
14% 12%
11.5% 10.2%
10% 8%
11.4%
8.5%
9.9% 8.6%
8.6%
(CNYbn) 25
10.9%
350% 300%
20
8.6%
7.1%
6%
250%
15
200%
10
150%
4%
100%
5
2%
50%
0
0% 2010
2011 Tier-1
2012
2013 Total CAR
0% 2010
2014
2011
2012
2013
Fee income
Source: Company
2014
YoY growth (RHS)
Source: Company
CPIC (2601 HK) CPIC: rolling 12-month life premium growth vs. industry (YoY)
China insurance sector: life premium market share (4M15)
50% China Life 24.1%
40% Others 31.0%
30% 20% 10% 0%
Taikang Life 3.8% Taiping Life 5.6%CPIC Life 6.1%
(10%) Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 CPIC Life
Industry
Source: Company, Daiwa
7%
7%
12%
100% 20%
16%
76%
65%
49%
5%
5%
6%
48%
45%
8%
7% 27%
80%
46% 73%
PICC Life 8.4%
CPIC: total premiums by distribution channel
80% 60%
New China Life 8.0%
Source: CIRC, Daiwa
CPIC: FYP by distribution channel 100%
Ping An Life 13.1%
55%
48%
37%
32%
60%
40%
40% 54%
20% 20%
17%
23%
2009
2010
2011
31%
20%
38%
0% Individual
2012
Bancassurance
2013
48%
40%
46%
55%
61%
73%
0%
2014
2009 2010 Individual
Group
2011 2012 Bancassurance
2013 Group
2014
Source: Company
Source: Company
Note: CPIC does not disclose the data of Bancassurance separately since 2014. The data of Bancassurance is integrated into individual segment and group segment.
Note: CPIC does not disclose the data of Bancassurance separately since 2014. The data of Bancassurance is integrated into individual segment and group segment.
- 31 -
China Insurance Sector 29 June 2015
CPIC: investment performance
CPIC: solvency margin
(CNYbn) 50
5%
30
4%
20
3%
0 2010
2011
2012
Total investment income
2013
218.4% 191.4%
200%
177.3%
162.2%
150% 100%
2%
10
280.0%
250%
6%
40
283.0%
300%
7%
1%
50%
0%
0% 2013
2014
Total Investment yield (RHS)
Group
2014 Life
P&C
Source: Company
Source: Company
CPIC: rolling 12-month P&C premium growth vs. industry (YoY)
China insurance sector: P&C premium market share (4M15)
50% Others 18.2%
40%
PICC P&C 33.3%
Sunshine 3.0% China Continent 3.0%
30% 20%
China United Property 5.3%
10%
China Life P&C 5.9% CPIC P&C 11.6%
0% Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 CPIC P&C
Industry
Source: Company, Daiwa
Source: CIRC, Daiwa
CPIC: premium mix
CPIC: P&C combined ratio 100%
100% 80%
23.2%
23.1%
22.0%
21.9%
21.3%
80%
36.3%
34.5%
34.6%
57.4%
58.6%
61.2%
2011
2012
33.5%
35.8%
66.0%
68.0%
2013
2014
60%
60% 40%
Ping An P&C 19.5%
76.8%
76.9%
78.0%
78.1%
40%
78.7%
20%
20%
0% 2010
2011 Auto
Source: Company
2012
2013
0%
2014
2010
Non-auto
Loss Ratio Source: Company
- 32 -
Expense Ratio
China Insurance Sector 29 June 2015
PICC Group (1339 HK) PICC Group: 12M rolling life premium growth vs. industry (YoY)
China Insurance Sector: life premium market share (4M15)
100% China Life 24.1%
80% Others 31.0%
60% 40% 20% 0% (20%)
Taikang Life 3.8% Taiping Life 5.6%CPIC Life 6.1%
(40%) Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 PICC Group Life
Industry
Source: Company, Daiwa
1%
1%
2%
PICC Life 8.4%
PICC Group: total premiums by distribution channel 9%
11%
100%
14%
80%
1%
1%
2%
94%
88%
85%
72%
4% 2009
11%
13%
18%
2010
2011
2012
10%
8%
13%
66%
63%
26%
24%
2013
2014
80%
60% 96%
89%
87%
66%
73%
60%
63%
40%
40%
20% 0%
New China Life 8.0%
Source: CIRC, Daiwa
PICC Group: FYP by distribution channel 100%
Ping An Life 13.1%
3% 2009
9%
16%
2010
2011
2012
Individual
Bancassurance
20%
25%
11%
23% 0%
2013
2014
Group
Individual
Bancassurance
Source: Company
Source: Company
PICC Group: investment performance
PICC Group: solvency margin
(CNYbn) 40
7%
35
6%
30
5%
Group
350%
25
200% 150%
3%
15 10
2%
5
1%
0 2011 Total investment income Source: Company
2012
2013
201.8%
182.0%
180.2%
148.0%
100% 50% 0%
0% 2010
238.6%
250%
4%
20
300.6%
300%
2013
2014
2014 Group
Total investment yield (RHS) Source: Company
- 33 -
Life
P&C
China Insurance Sector 29 June 2015
PICC P&C (2328 HK) PICC P&C: 12M rolling P&C premium growth vs industry (YoY)
China insurance sector: P&C premium market share (4M15)
40% Others 18.2%
30%
PICC P&C 33.3%
Sunshine 3.0% China Continent 3.0%
20%
China United Property 5.3%
10%
China Life P&C 5.9% CPIC P&C 11.6%
0% Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 PICC P&C
Industry
Source: Company, Daiwa
Source: CIRC, Daiwa
PICC P&C: premium mix
PICC P&C: combined ratio
100% 80%
100% 25.0%
26.4%
26.7%
26.9%
27.0%
80%
60% 40%
Ping An P&C 19.5%
30.3%
28.2%
67.4%
65.8%
63.6%
66.2%
64.4%
2010
2011
2012
2013
2014
31.6%
30.5%
32.1%
60% 75.0%
73.6%
73.3%
73.0%
40%
73.1%
20%
20%
0%
0% 2010
2011
2012 Auto
2013
2014
Loss Ratio
Non-auto
Source: Company
Source: Company
PICC P&C: investment performance
PICC P&C: solvency margin
(CNYbn) 16
280%
6.0%
14
200%
4.0%
10 8
120%
2.0%
4
80%
1.0%
2 0
40%
0.0% 2010
2011
2012
Total investment income Source: Company
2013
180.2%
160%
3.0%
6
238.6%
240%
5.0%
12
Expense Ratio
2014
0% 2013
Total Investment yield (RHS) Source: Company
- 34 -
2014
Financials / China 2628 HK
Financials / China 29 June 2015 China Life Insurance
China Life Insurance
Target (HKD): 42.00 44.00 Upside: 34.8% 29 Jun price (HKD): 32.65
2628 HK
Leading the life premium turnaround • China Life overtook Ping An Life in 5M15 premium growth (19% vs. 17.7% YoY) and now leads our coverage on this measure • New management is focusing on the “value” of business; look for VNB upside in the interim results announcement • Remains our top pick within the sector. Reaffirming Buy (1) rating and lifting 12-month target price to HKD44.0
Leon Qi, CFA (852) 2532 4381
[email protected]
Ailsa He (852) 2773 8745
[email protected]
Steve Xu (852) 2532 4383
[email protected]
■ What's new
China Life’s YTD premium figures suggest a continuing recovery. As a pure life insurance company and China’s largest life insurer, China Life is well placed to benefit from the sector’s strong momentum, in our view. (See also China Insurance sector: Why things are looking up) ■ What's the impact
China Life registered 19.0% YoY life premium growth in the first 5 months of 2015 (vs. 1.4% YoY in fullyear 2014). In doing so, it overtook Ping An’s YTD premium growth and on this measure became the leader among the life insurers under Daiwa’s coverage.
We believe there are a few reasons for China Life’s turnaround in premium growth: 1) strong expansion in its agency team since late-2014, 2) low interest rates on competing products, 3) robust newyear sales, partly driven by a 4% guaranteed-rate product, and 4) high-cash-value products sold in the bancassurance channel, due to the surrender peak for similar products sold in previous years. ■ What we recommend
We see China Life continuing to lead China life insurance sector’s premium growth recovery. As such, we reaffirm our Buy (1) rating and increase our 12-month target price to HKD44.0 (from HKD42.0), based on a 2015E P/EV of 1.8x (from 1.9x), implying a 2015E PBR of 2.8x (unchanged). The -3%-29% revisions to our 2015-17E net profit forecasts mainly reflect stockmarket gains. Catalysts: Besides the monthly premium figures, we think China Life’s interim results (late-August) will be a share-price catalyst, as they should provide more details on the quality side of its premium. China Life’s new president and life CEO are focusing more on the value of business relative to last year. The key risk to our call: a decline in the productivity of its agency force.
Buy (unchanged) Outperform Hold Underperform Sell
1 2 3 4 5
How do we justify our view?
■ How we differ
We are above the consensus on 2015-16E EV and VNB growth, as we are more upbeat on China Life’s premium structure and growth. Forecast revisions (%) Year to 31 Dec Net premiums change Net profit change Core EPS (FD) change
15E 5.5 28.5 28.5
16E 5.5 (3.0) (3.0)
17E 5.5 1.4 1.4
Source: Daiwa forecasts
Share price performance (%)
(HKD) 40
170
35
150
30
130
25
110
20
Jun-14
90
Sep-14
Dec-14
China Life (LHS)
Mar-15 Relative to HSI (RHS)
12-month range 20.25-40.00 Market cap (USDbn) 119.04 3m avg daily turnover (USDm) 241.20 Shares outstanding (m) 28,265 China Life Insurance (Group) (68.4%) Major shareholder
Financial summary (CNY) Year to 31 Dec Net premiums (m) Net investment income (m) Net profit (m) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) ROE (%)
15E 382,922 104,762 53,782 1.903 67.0 18.9 13.7 2.5 0.666 2.0 16.5
Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 58
16E 440,360 124,337 52,826 1.869 (1.8) 2.1 14.0 2.5 0.654 1.7 13.2
17E 506,414 138,822 64,839 2.294 22.7 13.2 11.4 3.1 0.803 1.6 14.3
China Insurance Sector 29 June 2015
1 2 3 4 5
Buy (unchanged) Outperform Hold Underperform Sell
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook China Life’s strong new-year sales momentum continued into 2Q15 and the company registered 19.0% YoY premium growth for 5M15. As a result, its premium growth overtook that of Ping An and was the highest among the life insurers under our coverage.
China life insurers: premium growth (YoY) 2012 1.4% 8.7% 0.3% -4.4%
China Life Ping An Life CPIC Life PICC Life
2013 1.1% 13.7% 1.8% 15.6%
2014 1.4% 19.5% 3.8% 14.2%
5M15 19.0% 17.7% 1.5% 12.6%
Source: Company, Daiwa Note: Ping An Life here includes Ping An Life, Ping An Health and Ping An Annuity, and PICC Life includes PICC Life and PICC Health.
We forecast 15-16% pa premium growth for China Life over 2015-17E.
Rolling P/EV (x) 4
Price (HKD) 50 40
3
30
2
20
1
10
Rolling P/EV
Average P/EV
-1SD
Price
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Jun-12
Jun-11
China Life’s H shares are trading at a 8% discount to its A shares, the largest such discount among the A/H dual-listed insurers under our coverage.
Dec-12
0 Dec-11
0 Dec-10
China Life is trading currently at a 12-month forward P/EV of 1.3x, lower than its past-5-year average. Its current valuation is similar to what it was in 2012. We believe the operating environment for the life insurers in China is better now than in 2012 in terms of the structural and cyclical opportunities the sector offers. In this context, China Life’s valuation looks undemanding to us.
China Life: 12-month forward P/EV
Jun-10
Valuation
+1SD
Source: Bloomberg, Daiwa forecasts
110 105 100 95 90 85
Source: Bloomberg, Daiwa
- 36 -
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
Apr-14
May-14
80 Mar-14
We believe the consensus has not yet fully factored in China Life’s turnaround in agency FYP growth and the overall better underwriting environment in China’s life insurance industry. Hence, we see the potential for further modest upward revisions to the market’s 2015E net profit forecast.
(Rebased to 100)
Feb-14
The market cut its net profit forecasts for China Life by some 10% in 1H14 due to its loss of insurance agents. But, since late-2014, the Bloomberg consensus forecast for China Life’s 2015E net profit has been rising on the back of the A-share market’s strong performance.
China Life: 2015E net profit consensus-forecast revisions
Jan-14
Earnings revisions
China Insurance Sector 29 June 2015
Key assumptions Year to 31 Dec Life premium growth (%) VNB growth (%) Investment assets growth (%) Net investment yield (%) Embedded Value growth (%) Solvency ratio - Group (%) Payout ratio (%)
2010 15.3 12.0 14.2 3.8 4.5 212 33.6
2011 0.0 1.8 10.4 4.3 (1.8) 170 35.5
2012 1.4 3.1 19.8 4.4 15.3 236 35.8
2013 1.1 2.2 3.2 4.5 1.4 226 34.2
2014 1.4 9.2 13.6 4.7 32.9 294 35.1
2015E 16.0 21.1 10.0 4.7 22.4 314 35.0
2016E 15.0 22.5 10.0 5.1 12.5 322 35.0
2017E 15.0 19.7 10.0 5.2 13.1 343 35.0
2010 318,052 318,088 (281,582) 0 (27,256) (20,285) (13,224) (1,497) (25,756) 48,872
2011 318,020 318,276 (292,748) 0 (27,434) (21,549) (6,125) (1,971) (31,551) 60,722
2012 322,358 322,126 (302,594) 0 (27,754) (23,283) (3,435) (3,183) (38,123) 73,243
2013 325,734 324,813 (314,106) 0 (25,690) (24,805) (18,423) (4,209) (62,420) 82,816
2014 330,495 330,105 (317,252) 0 (27,147) (25,432) (24,866) (5,393) (69,985) 93,548
2015E 383,204 382,922 (384,729) 0 (36,477) (29,123) (13,510) (7,497) (88,415) 104,762
2016E 440,684 440,360 (425,044) 0 (42,832) (32,611) (15,317) (8,058) (83,501) 124,337
2017E 506,787 506,414 (478,925) 0 (50,272) (36,489) (17,361) (8,727) (85,360) 138,822
16,121
(10,871)
(27,189)
5,930
12,928
47,452
21,551
23,879
1,771 0 41,008 (7,197) (185) 33,626 33,626 1.190 1.190 1.190 0.400 10.547
2,213 0 20,513 (2,022) (160) 18,331 18,331 0.649 0.649 0.649 0.230 10.361
3,037 0 10,968 304 (211) 11,061 11,061 0.391 0.391 0.391 0.140 11.944
3,125 0 29,451 (4,443) (243) 24,765 24,765 0.876 0.876 0.876 0.300 12.108
3,911 0 40,402 (7,888) (303) 32,211 32,211 1.140 1.140 1.140 0.400 16.094
4,107 0 67,906 (13,581) (543) 53,782 53,782 1.903 1.903 1.903 0.666 19.694
4,312 0 66,700 (13,340) (534) 52,826 52,826 1.869 1.869 1.869 0.654 22.148
4,527 0 81,868 (16,374) (655) 64,839 64,839 2.294 2.294 2.294 0.803 25.059
2011 0.0 0.1 n.a. n.a. 24.2 (45.5) (45.5) (45.5) (45.5) (45.5) (42.5) (1.8) (9.9) 6.4 5.8
2012 1.4 1.2 n.a. n.a. 20.6 (39.7) (39.7) (39.7) (39.7) (39.7) (39.1) 15.3 (11.8) 3.4 3.4
2013 1.1 0.8 n.a. n.a. 13.1 123.9 123.9 123.9 123.9 123.9 114.3 1.4 (19.2) 9.1 7.6
2014 1.4 1.6 n.a. n.a. 13.0 30.1 30.1 30.1 30.1 30.1 33.3 32.9 (21.2) 12.2 9.8
2015E 16.0 16.0 n.a. n.a. 12.0 67.0 67.0 67.0 67.0 67.0 66.5 22.4 (23.1) 17.7 14.0
2016E 15.0 15.0 n.a. n.a. 18.7 (1.8) (1.8) (1.8) (1.8) (1.8) (1.8) 12.5 (19.0) 15.1 12.0
2017E 15.0 15.0 n.a. n.a. 11.6 22.7 22.7 22.7 22.7 22.7 22.7 13.1 (16.9) 16.2 12.8
Profit and loss (CNYm) Year to 31 Dec Net written prem. & policy fees Net earned premiums Net claims incurred Deferred policy acq. cost amort. Underwriting & policy acq. cost G&A expenses P'holders' div. & profit particip. Other underwriting inc./(exp.) Underwriting profit/(loss) Net investment inc./(exp.) Net realised & unrealised gains/(losses) on inv. Associates' profits Other inc./(expenses) Profit before tax Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (CNY) EPS (adjusted) (CNY) EPS (adjusted, fully-diluted)) (CNY) DPS (CNY) EV/share (CNY)
Change (YoY %) and margins (%) Year to 31 Dec Gross premium growth Net premium growth Net claims incurred Underwriting profit/(loss) Net investment income Net profit (reported) Net profit (adjusted) EPS (reported) EPS (adjusted) EPS (adjusted, fully-diluted) DPS EV/share Underwriting margin (%) PBT margin (%) Net-profit margin (%)
2010 15.3 15.6 n.a. n.a. 25.7 2.3 2.3 2.3 2.3 2.3 (42.9) 4.5 (8.1) 12.9 10.6
Source: FactSet, Daiwa forecasts
- 37 -
China Insurance Sector 29 June 2015
Balance sheet (CNYm) As at 31 Dec Cash & bank balances Total investment Loans and advances Deferred acquisition costs Investment in associates Net fixed assets Goodwill & other intangibles Assets under management Reins. recov. on unpaid losses Receivables Other assets Total assets Customer deposits Technical reserves Unearned premium reserves Payables Borrowing Other liabilities Total liabilities Share capital Reserves & others Shareholders' equity Minority interests Total equity & liabilities
2010 54,007 1,300,431 0 0 20,892 18,946 0 0 830 7,274 8,199 1,410,579 0 1,088,306 0 63,177 0 48,621 1,200,104 28,265 180,445 208,710 1,765 1,410,579
2011 62,138 1,432,831 0 0 24,448 20,231 0 0 878 8,253 35,128 1,583,907 0 1,269,170 0 62,187 29,990 29,172 1,390,519 28,265 163,265 191,530 1,858 1,583,907
2012 75,605 1,715,233 0 0 28,991 22,335 0 0 948 8,738 47,066 1,898,916 0 1,451,176 0 63,868 67,981 92,790 1,675,815 28,265 192,820 221,085 2,016 1,898,916
2013 27,483 1,821,198 0 0 34,775 23,393 0 0 1,069 9,876 55,147 1,972,941 0 1,559,584 0 79,204 67,985 43,583 1,750,356 28,265 192,066 220,331 2,254 1,972,941
2014 53,187 2,047,683 0 0 44,390 25,348 0 0 1,032 11,166 63,761 2,246,567 0 1,675,721 0 116,435 67,989 99,091 1,959,236 28,265 255,856 284,121 3,210 2,246,567
2015E 115,548 2,195,409 0 0 48,829 26,615 0 0 1,550 11,519 184,081 2,583,552 0 1,817,266 0 119,518 67,989 209,163 2,213,937 28,265 337,597 365,862 3,753 2,583,552
2016E 127,103 2,414,950 0 0 53,712 27,946 0 0 1,736 13,247 254,884 2,893,578 0 1,966,613 0 138,297 67,989 284,571 2,457,470 28,265 403,557 431,822 4,287 2,893,578
2017E 139,813 2,656,445 0 0 59,083 29,343 0 0 1,910 15,234 281,108 3,182,936 0 2,133,044 0 159,163 67,989 343,021 2,703,217 28,265 446,513 474,778 4,942 3,182,936
2010 16.0 152.4 5.1 net cash 17.6 33.6
2011 9.2 166.2 3.5 net cash 9.9 35.5
2012 5.4 145.7 2.8 net cash (2.8) 35.8
2013 11.2 147.4 5.0 18.2 15.1 34.2
2014 12.8 116.2 5.4 5.2 19.5 35.1
2015E 16.5 104.7 6.9 net cash 20.0 35.0
2016E 13.2 102.0 6.0 net cash 20.0 35.0
2017E 14.3 106.7 6.1 net cash 20.0 35.0
Key ratios (%) Year to 31 Dec ROAE (adjusted) Net earned premium/equity Total investment return Net debt to equity Effective tax rate Dividend payout Source: FactSet, Daiwa forecasts
Company profile China Life was established in June 2003 through the restructuring of China Life Insurance Company. The company is the largest life insurer in China, with a distribution network that spans the whole of China.
- 38 -
Financials / China 2318 HK
Financials / China 29 June 2015 Ping An Insurance
Ping An Insurance
Target (HKD): 125.00 130.00 Upside: 26.8% 29 Jun price (HKD): 102.50
2318 HK
Sound life business, resilient P&C business • Ping An Life is still seeing strong premium growth momentum, especially first-year premiums, which should bode well for VNB • For 5M15, Ping An P&C led its peers in premium growth, despite the industry slowdown • Reiterating our Buy (1) rating and raising SOTP-based 12-month target price to HKD130
Leon Qi, CFA (852) 2532 4381
[email protected]
associated with El Nino, we believe Ping An P&C should be less affected than its peers in 2015, especially CPIC P&C, due to Ping An’s relatively lower exposure to property insurance and auto insurance (4% and 77% of premiums vs. 6% and 79% for CPIC P&C).
Ailsa He
■ What we recommend
(852) 2773 8745
[email protected]
We still see Ping An’s conglomerate financials business model as undervalued by the market, and the stock’s current valuation (1.3x 2015E P/EV) already prices in many of the risks, in our view.
Steve Xu (852) 2532 4383
[email protected]
■ What's new
Ping An has seen robust premium growth momentum for both its life and P&C businesses in the YTD. We see its life and P&C premium growth tracking well, and in line with our respective c.20% YoY and high-teen percentage YoY growth forecasts for 2015. (See also our report: Ping An: conglomerate business model undervalued) ■ What's the impact
For 5M15, Ping An’s life business (including its health and annuity businesses) reported 17.7% YoY premium growth. Ping An P&C saw 18.5% YoY premium growth for the same period, the fastest among the peers that we cover. In terms of the potential impact of extreme weather
Accordingly, we raise our SOTPbased 12-month target price to HKD130 (from HKD125), which implies a 1.8x P/EV (group) (from 1.7x) or 2015E PBR of 2.2x (from 2.2x). We are cutting 2015-17E net profit by 3-19%, mainly as we now expect lower profit for Ping An Bank over the period due to the sectorwide spike in provisions for micro credit and contracting NIMs. The key risk to our call: Ping An’s relatively high exposure to nonstandard credit assets and property investments. ■ How we differ
We are more confident than the market that Ping An will deliver higher-than-peers’ VNB and EV growth for 2015 due to its effective
Buy (unchanged) Outperform Hold Underperform Sell
1 2 3 4 5
How do we justify our view?
conglomerate financial service model.
Forecast revisions (%) Year to 31 Dec Net premiums change Net profit change Core EPS (FD) change
15E (1.3) (2.7) (2.7)
16E (1.0) (18.4) (18.4)
17E (1.0) (18.9) (18.9)
Source: Daiwa forecasts
Share price performance (%)
(HKD) 125
170
106
150
88
130
69
110
50
Jun-14
90
Sep-14
Dec-14
Ping An In (LHS)
Mar-15 Relative to HSI (RHS)
12-month range 58.15-122.50 Market cap (USDbn) 120.85 3m avg daily turnover (USDm) 372.08 Shares outstanding (m) 9,140 Charoen Pokphand Group (12.4%) Major shareholder
Financial summary (CNY) Year to 31 Dec Net premiums (m) Net investment income (m) Net profit (m) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) ROE (%)
15E 344,924 118,058 69,989 7.663 64.5 23.6 10.7 0.9 0.766 1.7 18.9
Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 58
16E 417,173 139,110 62,361 6.823 (11.0) 2.4 12.0 0.8 0.682 1.5 12.9
17E 503,813 159,455 67,592 7.395 8.4 0.9 11.1 0.9 0.740 1.3 12.3
China Insurance Sector 29 June 2015
1 2 3 4 5
Buy (unchanged) Outperform Hold Underperform Sell
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook
Ping An Life: trailing 12-month premium growth
Ping An’s life business (including its health and annuity businesses) saw 17.7% YoY premium growth for 5M15, higher than the 15.2% average for the life insurers that we cover. Ping An P&C’s premium growth for 5M15 of 18.5% YoY was also higher than the 10.8% YoY average for the P&C insurers under our coverage.
(CNYbn) 250
40% 20%
200
0% (20%)
150
(40%) (60%)
100
(80%)
Rolling 12M premium
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
(100%)
May-12
50
YoY (RHS)
Source: Companies, Daiwa
Valuation
Ping An: SOTP valuation
We use an SOTP methodology to value Ping An due to the conglomerate nature of its business. There are 5 components in our SOTP valuation: life insurance, P&C insurance, securities, bank and others. We apply a 20% holding company discount to Ping An.
Others 14.2% Securities 1.5% Bank 9.2%
Ping An’s life insurance business accounts for about 65% of our SOTP valuation, while its P&C insurance business and Ping An Bank account for about 10% and 9%, respectively.
P&C 9.8%
Life 65.3%
Source: Daiwa estimates
Earnings revisions
Ping An: 2015E net profit consensus-forecast revisions
Source: Bloomberg, Daiwa
- 40 -
Jun-15
Apr-15
May-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Jan-14
We expect to see further upward revisions to the consensus 2015-16 net profit forecasts on robust life and P&C premium growth.
(Rebased to 100) 140 135 130 125 120 115 110 105 100 95 90
Feb-14
The Bloomberg consensus 2015E net profit forecasts for Ping An have been on an upward trend since early 2014, rising more after the company announced better-thanexpected 2014 results in late-March 2015.
China Insurance Sector 29 June 2015
Key assumptions Year to 31 Dec Life premum growth (%) VNB growth (%) P&C premium growth (%) Combined ratio (%) Investment assets growth (%) Net investment yield - Group Embedded value growth (%) Solvency ratio - Group (%) Payout ratio (%)
2010 89.4 31.4 61.2 93.2 29.1 4.2 29.5 198 24.3
2011 28.1 8.5 33.9 93.5 32.2 4.5 17.2 167 16.3
2012 8.7 (5.4) 18.4 95.3 42.0 4.7 21.3 186 17.8
2013 13.7 14.1 16.7 97.3 25.3 5.1 15.3 174 18.3
2014 19.5 20.9 23.8 95.3 13.2 5.3 39.2 205 16.7
2015E 20.6 28.6 19.1 96.3 15.0 5.3 22.7 183 10.0
2016E 24.5 22.6 15.1 96.6 8.0 5.6 15.5 198 10.0
2017E 24.5 22.6 14.1 96.6 8.0 5.9 16.0 189 10.0
2010 151,203 141,124 (115,077) 0 (14,545) (34,385) 0 2,544 (20,339) 25,972
2011 196,832 186,662 (145,764) 0 (17,767) (50,575) 0 2,829 (24,615) 34,285
2012 221,089 213,144 (165,994) 0 (20,437) (68,477) 0 5,626 (36,138) 41,598
2013 248,017 240,199 (198,002) 0 (25,390) (81,753) 0 6,675 (58,271) 54,310
2014 301,763 288,779 (228,326) 0 (34,941) (102,565) 0 5,427 (71,626) 70,337
2015E 360,999 344,924 (280,352) 0 (50,548) (113,218) 0 (4,079) (103,272) 118,058
2016E 435,672 417,173 (328,020) 0 (60,933) (132,180) 0 (11,430) (115,390) 139,110
2017E 524,917 503,813 (392,686) 0 (73,244) (154,069) 0 (20,493) (136,679) 159,455
5,111
(5,020)
(14,220)
1,273
1,201
31,203
3,120
3,577
1,465 (730) 22,347 (4,409) (627) 17,311 17,311 2.265 2.265 2.265 0.550 26.293
1,068 (2,138) 30,026 (7,444) (3,107) 19,475 19,475 2.503 2.503 2.503 0.407 29.766
(46) (2,793) 32,338 (5,588) (6,700) 20,050 20,050 2.533 2.533 2.533 0.450 36.113
(264) (7,090) 46,224 (10,210) (7,860) 28,154 28,154 3.557 3.557 3.545 0.650 41.644
(62) (14,805) 62,353 (14,423) (8,651) 39,279 39,279 4.933 4.933 4.659 0.823 51.598
0 (23,744) 113,619 (26,132) (17,497) 69,989 69,989 7.663 7.663 7.663 0.766 61.635
0 (28,438) 101,235 (23,284) (15,590) 62,361 62,361 6.823 6.823 6.823 0.682 71.133
0 (31,274) 109,727 (25,237) (16,898) 67,592 67,592 7.395 7.395 7.395 0.740 82.519
2011 30.4 32.3 n.a. n.a. 32.0 12.5 12.5 10.5 10.5 10.5 (26.0) 13.2 (13.2) 16.1 10.4
2012 12.6 14.2 n.a. n.a. 21.3 3.0 3.0 1.2 1.2 1.2 10.6 21.3 (17.0) 15.2 9.4
2013 15.0 12.7 n.a. n.a. 30.6 40.4 40.4 40.4 40.4 40.0 44.4 15.3 (24.3) 19.2 11.7
2014 21.3 20.2 n.a. n.a. 29.5 39.5 39.5 38.7 38.7 31.4 26.6 23.9 (24.8) 21.6 13.6
2015E 19.9 19.4 n.a. n.a. 67.8 78.2 78.2 55.3 55.3 64.5 (6.8) 19.5 (29.9) 32.9 20.3
2016E 20.4 20.9 n.a. n.a. 17.8 (10.9) (10.9) (11.0) (11.0) (11.0) (11.0) 15.4 (27.7) 24.3 14.9
2017E 20.2 20.8 n.a. n.a. 14.6 8.4 8.4 8.4 8.4 8.4 8.4 16.0 (27.1) 21.8 13.4
Profit and loss (CNYm) Year to 31 Dec Net written prem. & policy fees Net earned premiums Net claims incurred Deferred policy acq. cost amort. Underwriting & policy acq. cost G&A expenses P'holders' div. & profit particip. Other underwriting inc./(exp.) Underwriting profit/(loss) Net investment inc./(exp.) Net realised & unrealised gains/(losses) on inv. Associates' profits Other inc./(expenses) Profit before tax Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (CNY) EPS (adjusted) (CNY) EPS (adjusted, fully-diluted)) (CNY) DPS (CNY) EV/share (CNY)
Change (YoY %) and margins (%) Year to 31 Dec Gross premium growth Net premium growth Net claims incurred Underwriting profit/(loss) Net investment income Net profit (reported) Net profit (adjusted) EPS (reported) EPS (adjusted) EPS (adjusted, fully-diluted) DPS EV/share Underwriting margin (%) PBT margin (%) Net-profit margin (%)
2010 42.0 40.6 n.a. n.a. 36.2 24.7 24.7 19.8 19.8 19.8 19.0 24.4 (14.4) 15.8 12.3
Source: FactSet, Daiwa forecasts
- 41 -
China Insurance Sector 29 June 2015
Balance sheet (CNYm) As at 31 Dec Cash & bank balances Total investment Loans and advances Deferred acquisition costs Investment in associates Net fixed assets Goodwill & other intangibles Assets under management Reins. recov. on unpaid losses Receivables Other assets Total assets Customer deposits Technical reserves Unearned premium reserves Payables Borrowing Other liabilities Total liabilities Share capital Reserves & others Shareholders' equity Minority interests Total equity & liabilities
2010 118,928 775,390 131,960 0 39,601 8,170 9,902 0 6,178 50,789 30,709 1,171,627 214,785 639,096 30,842 34,189 7,540 128,292 1,054,744 7,644 104,386 112,030 4,853 1,171,627
2011 285,500 1,043,104 611,731 0 11,837 16,027 33,584 0 7,892 220,374 55,375 2,285,424 1,031,744 748,927 42,288 45,953 24,638 220,532 2,114,082 7,916 122,951 130,867 40,475 2,285,424
2012 480,103 1,449,577 709,402 0 9,960 17,539 37,536 0 9,341 65,095 65,713 2,844,266 1,407,251 866,461 50,801 59,974 36,795 213,335 2,634,617 7,916 151,701 159,617 50,032 2,844,266
2013 410,208 1,813,646 861,770 0 12,081 18,873 43,896 0 13,839 73,605 112,394 3,360,312 1,700,981 1,007,578 60,987 79,591 54,757 216,713 3,120,607 7,916 174,793 182,709 56,996 3,360,312
2014 538,992 2,045,128 1,053,882 0 12,898 28,341 43,032 0 15,587 130,881 137,170 4,005,911 1,966,601 1,171,022 74,124 94,333 81,232 264,783 3,652,095 8,892 280,672 289,564 64,252 4,005,911
2015E 393,106 2,352,254 1,243,581 0 14,188 31,175 45,184 0 19,228 95,473 612,905 4,807,093 2,087,739 1,324,904 88,609 106,932 70,977 593,791 4,272,951 9,140 443,253 452,393 81,749 4,807,093
2016E 431,456 2,540,434 1,417,682 0 15,607 34,293 47,443 0 22,113 114,455 904,675 5,528,157 2,217,214 1,507,174 143,844 126,370 70,977 848,314 4,913,894 9,140 507,784 516,924 97,339 5,528,157
2017E 473,565 2,743,669 1,616,158 0 17,167 37,722 49,815 0 24,987 137,124 1,146,610 6,246,818 2,355,672 1,737,815 196,281 147,774 70,977 1,044,182 5,552,700 9,140 570,740 579,880 114,237 6,246,818
2010 17.6 126.0 4.9 net cash 19.7 24.3
2011 16.0 142.6 4.0 net cash 24.8 16.3
2012 13.8 133.5 2.9 net cash 17.3 17.8
2013 16.4 131.5 5.1 net cash 22.1 18.3
2014 16.6 99.7 5.1 net cash 23.1 16.7
2015E 18.9 76.2 6.7 net cash 23.0 10.0
2016E 12.9 80.7 5.7 net cash 23.0 10.0
2017E 12.3 86.9 6.0 net cash 23.0 10.0
Key ratios (%) Year to 31 Dec ROAE (adjusted) Net earned premium/equity Total investment return Net debt to equity Effective tax rate Dividend payout Source: FactSet, Daiwa forecasts
Company profile Ping An Insurance is a diversified financial group, with life and non-life insurance businesses, a bank subsidiary, and a few diversified financial subsidiaries. The company was founded in 1988 as a P&C insurance company, shifted its focus to life insurance in 1994, and was listed in 2004. Ping An is China’s second-largest life and non-life insurer based on total premiums, with market shares of 13.7% and 18.9%, respectively, for 2014.
- 42 -
Financials / China 1339 HK
Financials / China 29 June 2015 PICC Group
PICC Group
Target (HKD): 4.40 5.20 Upside: 9.9% 29 Jun price (HKD): 4.73
1339 HK
Sound investment return profile in a rate cut cycle • Unlike most China peers, PICC Life’s assets have a longer duration than its liabilities; should benefit from interest-rate cuts • VNB growth trend likely to turn around from 1H15 • Raise target price to HKD5.2 and reiterate Outperform (2) rating
Buy Outperform (unchanged) Hold Underperform Sell
1 2 3 4 5
How do we justify our view?
Leon Qi, CFA (852) 2532 4381
[email protected]
Ailsa He (852) 2773 8745
[email protected]
Steve Xu (852) 2532 4383
[email protected]
■ What's new
PICC Group’s robust life premium growth, sound investment return profile, and undemanding valuation lead us to expect further share-price upside over the next 12 months after the 24% gain over the past 3 months (see our report PICC Group: Time to revisit life). ■ What's the impact
Unlike most life insurers in China, PICC Life has a positive duration gap, which has a positive impact on its earnings growth in a low interestrate environment. We understand that PICC Life’s asset duration is c.4.5 years and its liability duration is c.3.7 years.
On the underwriting side, we argue that PICC Life’s efforts in building its agency team should start to deliver double-digit VNB growth from 1H15 onwards after a disappointing VNB performance in 2014. PICC Life’s premium growth accelerated to 17.7% YoY for 5M15, from 4.6% YoY for 2014. ■ What we recommend
PICC Group’s current valuation, trading at a 1.2x 2015E PBR, looks undemanding to us, especially when compared with PICC P&C’s, at 1.7x 2015E PBR (see page 47 for details). We lift our SOTP-based target price to HKD5.2 (from HKD4.4), assigning a 1.0x P/EV multiple (life) (from 1.1x) and implying a 1.5 P/EV (group) (from 1.4x) multiple and a 1.4x PBR (from 1.2x) for 2015E. Our earnings revisions are mainly a result of the boom in China stock markets and the company’s sound investment profile. We reiterate our Outperform (2) rating on PICC Group. The key risk to our call: the need to raise capital, as PICC Life’s solvency ratio is likely to decline under Solvency II. ■ How we differ We are more positive than the market on PICC’s EV growth as we think the market hasn’t fully factored in PICC’s large investment gains YTD from the
A-share market and non-standard investments.
Forecast revisions (%) Year to 31 Dec Net premiums change Net profit change Core EPS (FD) change
15E (1.2) 31.5 31.5
16E (1.0) (3.3) (3.3)
17E (0.8) (10.2) (10.2)
Source: Daiwa forecasts
Share price performance (%)
(HKD) 6.0
160
5.3
143
4.5
125
3.8
108
3.0
Jun-14
90
Sep-14
Dec-14
PICC Group (LHS)
Mar-15 Relative to HSI (RHS)
12-month range Market cap (USDbn) 3m avg daily turnover (USDm) Shares outstanding (m) Major shareholder
3.06-5.77 25.88 67.89 42,424 MOF (70.5%)
Financial summary (CNY) Year to 31 Dec Net premiums (m) Net investment income (m) Net profit (m) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) ROE (%)
15E 337,851 36,958 18,245 0.430 39.2 22.9 8.8 0.3 0.013 1.2 16.1
Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 58
16E 375,737 42,255 16,748 0.395 (8.2) 5.0 9.6 0.3 0.012 0.9 10.9
17E 416,891 48,979 22,345 0.527 33.4 20.3 7.2 0.4 0.016 0.7 11.4
China Insurance Sector 29 June 2015
1 2 3 4 5
Buy Outperform (unchanged) Hold Underperform Sell
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook After an arduous 2H14 when the company went through the process of reducing its reliance on bancassurance, we expect PICC Life to see doubledigit premium growth over 2015-17E. In 5M15, PICC Life saw 17.7% YoY premium growth.
PICC Life: trailing 12M premium growth (CNYbn) 120
90 %
110
70 %
100
50 % 30 %
90
10 %
80
(10%)
70
(30%)
Ma y-15
Jan-15
Ma r-15
Nov-14
Jul-1 4
Rolling 12M premium
Sep -14
Ma y-14
Jan-14
Ma r-14
Nov-13
Jul-1 3
Sep -13
Ma y-13
Jan-13
Ma r-13
Nov-12
Jul-1 2
(70%)
Sep -12
(50%)
50
Ma y-12
60
YoY (RHS)
Source: Company, Daiwa
Value of PICC Group’s stake in PICC P&C vs. PICC Group’s market cap
We use SOTP methodology to value PICC Group, given it is a holding company. There are 3 components in our SOTP valuation: the life insurance business, the P&C insurance business and others. We apply a 10% holding company discount to PICC Group. In our SOTP valuation, its P&C business contributes 72% of the value, while the life business accounts for 25%.
110%
Currently, PICC Group’s stake in PICC P&C represents 88% of PICC Group’s market cap. Namely, its non-P&C businesses are only 12% of the market value, which is low, in our view.
40%
Earnings revisions The Bloomberg consensus 2015 net profit forecast for PICC Group has been rising since late-2014 on the back of management’s regular first year premium target of 50% YoY and double-digit VNB growth YoY for 2015.
100% 90% 80% 70% 60%
Jun-15
Apr-15
Feb-15
Oct-14
Dec-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Apr-13
Jun-13
Dec-12
50%
Feb-13
Valuation
Source: Bloomberg, Daiwa
PICC Group: 2015E net profit consensus-forecast revisions (Rebased to 100) 125 120 115 110 105
Our 2015E EPS is 23% above the consensus forecasts, we believe reflecting our outlook for better-thanconsensus investment gains and top-line premium growth.
100 95 90
Source: Bloomberg, Daiwa
- 44 -
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
85
China Insurance Sector 29 June 2015
Key assumptions Year to 31 Dec Life premium growth (%) VNB growth (%) P&C premium growth (%) Combined ratio (%) Investmnet assets growth (%) Net investment yield - Group (%) Embedded value growth (%) Solvency ratio - Group (%) Payout ratio (%)
2010 54.9 n.a. 28.8 97.8 55.7 3.6 n.a. 117 0.0
2011 (2.4) n.a. 12.7 94.0 29.6 4.3 n.a. 169 0.0
2012 (9.0) 4.5 11.2 95.1 23.9 4.6 193.7 161 2.5
2013 17.6 (2.5) 15.5 96.7 9.5 5.1 20.1 187 4.3
2014 4.6 (9.9) 13.2 96.5 5.9 5.8 51.3 182 3.1
2015E 11.0 11.4 9.8 97.8 10.0 5.1 1.1 234 3.0
2016E 14.0 14.3 9.3 98.2 10.0 5.3 14.5 236 3.0
2017E 14.0 15.5 8.8 97.9 10.0 5.6 12.5 249 3.0
2010 211,285 197,081 (155,606) 0 (11,689) (36,497) 0 n.a. (6,711) 9,654
2011 209,850 206,348 (160,287) 0 (4,805) (43,424) 0 n.a. (2,168) 16,367
2012 233,810 224,817 (170,411) 0 (9,767) (48,945) 0 n.a. (4,306) 22,019
2013 272,610 263,260 (208,290) 0 (10,182) (55,932) 0 n.a. (11,144) 27,248
2014 316,381 305,614 (238,760) 0 (16,355) (63,678) 0 n.a. (13,179) 31,843
2015E 359,614 337,851 (258,845) 0 (31,455) (56,307) 0 n.a. (8,755) 36,958
2016E 405,638 375,737 (285,505) 0 (37,802) (60,058) 0 n.a. (7,628) 42,255
2017E 449,487 416,891 (313,323) 0 (43,612) (64,057) 0 n.a. (4,101) 48,979
4,551
(2,568)
(1,976)
581
1,583
12,929
4,186
4,605
741 (707) 7,528 (1,681) (1,860) 3,987 3,987 0.130 0.130 0.130 0.000 0.000
828 (2,249) 10,210 (2,313) (2,712) 5,185 5,185 0.159 0.159 0.159 0.000 0.658
571 (2,988) 13,320 (3,176) (3,312) 6,832 6,832 0.195 0.195 0.195 0.004 1.570
2,971 (3,986) 15,670 (3,615) (3,934) 8,121 8,121 0.191 0.191 0.191 0.008 1.885
5,845 (2,672) 23,420 (4,705) (5,606) 13,109 13,109 0.309 0.309 0.309 0.009 2.853
2,739 (7,815) 36,057 (7,932) (9,879) 18,245 18,245 0.430 0.430 0.430 0.013 2.884
2,893 (8,796) 32,911 (7,240) (8,923) 16,748 16,748 0.395 0.395 0.395 0.012 3.302
3,056 (9,908) 42,630 (9,379) (10,907) 22,345 22,345 0.527 0.527 0.527 0.016 3.715
2011 8.5 4.7 n.a. n.a. 69.5 30.0 30.0 22.3 22.3 22.3 n.a. n.a. (1.1) 4.9 2.5
2012 6.5 9.0 n.a. n.a. 34.5 31.8 31.8 22.6 22.6 22.6 n.a. 138.8 (1.9) 5.9 3.0
2013 15.5 17.1 n.a. n.a. 23.7 18.9 18.9 (2.0) (2.0) (2.0) 103.5 20.1 (4.2) 6.0 3.1
2014 14.0 16.1 n.a. n.a. 16.9 61.4 61.4 61.4 61.4 61.4 14.2 51.3 (4.3) 7.7 4.3
2015E 10.6 10.5 n.a. n.a. 16.1 39.2 39.2 39.2 39.2 39.2 36.2 1.1 (2.6) 10.7 5.4
2016E 11.0 11.2 n.a. n.a. 14.3 (8.2) (8.2) (8.2) (8.2) (8.2) (8.2) 14.5 (2.0) 8.8 4.5
2017E 10.7 11.0 n.a. n.a. 15.9 33.4 33.4 33.4 33.4 33.4 33.4 12.5 (1.0) 10.2 5.4
Profit and loss (CNYm) Year to 31 Dec Net written prem. & policy fees Net earned premiums Net claims incurred Deferred policy acq. cost amort. Underwriting & policy acq. cost G&A expenses P'holders' div. & profit particip. Other underwriting inc./(exp.) Underwriting profit/(loss) Net investment inc./(exp.) Net realised & unrealised gains/(losses) on inv. Associates' profits Other inc./(expenses) Profit before tax Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (CNY) EPS (adjusted) (CNY) EPS (adjusted, fully-diluted)) (CNY) DPS (CNY) EV/share (CNY)
Change (YoY %) and margins (%) Year to 31 Dec Gross premium growth Net premium growth Net claims incurred Underwriting profit/(loss) Net investment income Net profit (reported) Net profit (adjusted) EPS (reported) EPS (adjusted) EPS (adjusted, fully-diluted) DPS EV/share Underwriting margin (%) PBT margin (%) Net-profit margin (%)
2010 36.1 39.2 n.a. n.a. n.a. 259.8 259.8 259.8 259.8 259.8 n.a. n.a. (3.4) 3.8 2.0
Source: FactSet, Daiwa forecasts
- 45 -
China Insurance Sector 29 June 2015
Balance sheet (CNYm) As at 31 Dec Cash & bank balances Total investment Loans and advances Deferred acquisition costs Investment in associates Net fixed assets Goodwill & other intangibles Assets under management Reins. recov. on unpaid losses Receivables Other assets Total assets Customer deposits Technical reserves Unearned premium reserves Payables Borrowing Other liabilities Total liabilities Share capital Reserves & others Shareholders' equity Minority interests Total equity & liabilities
2010 89,349 311,424 0 0 8,043 22,756 5,559 0 15,844 10,320 (20,416) 442,879 0 325,061 7,406 4,947 29,474 39,278 406,166 30,600 (7,365) 23,235 13,478 442,879
2011 157,684 395,110 0 0 2,951 26,589 3,933 0 25,223 23,437 (49,775) 585,152 0 429,517 8,422 6,035 34,670 58,573 537,217 34,491 (3,147) 31,344 16,591 585,152
2012 201,868 473,616 0 0 3,361 30,392 4,106 0 23,875 23,305 (71,873) 688,650 0 513,179 8,524 8,030 34,855 40,720 605,308 42,424 22,950 65,374 17,968 688,650
2013 193,206 498,058 0 0 28,268 32,129 4,287 0 27,222 26,762 (54,613) 755,319 0 547,864 9,989 12,029 46,837 43,799 660,518 42,424 29,151 71,575 23,226 755,319
2014 213,061 513,001 0 0 36,128 36,174 808 0 25,857 18,475 (61,283) 782,221 0 539,648 11,495 15,337 47,914 42,250 656,644 42,424 50,157 92,581 32,996 782,221
2015E 208,881 561,990 0 0 37,934 63,761 808 0 28,701 32,825 (66,636) 868,265 0 596,625 12,070 52,782 47,914 (19,914) 689,476 42,424 91,668 134,092 44,697 868,265
2016E 213,043 609,826 0 0 39,831 67,820 808 0 31,571 38,570 (46,377) 955,092 0 675,676 12,673 55,023 47,914 (67,336) 723,950 42,424 130,932 173,356 57,785 955,092
2017E 215,948 661,609 0 0 41,823 72,262 808 0 34,729 42,692 (19,269) 1,050,601 0 765,514 13,307 57,376 47,914 (123,963) 760,148 42,424 175,416 217,840 72,613 1,050,601
2010 17.6 848.2 5.2 net cash 22.3 0.0
2011 19.0 658.3 3.6 net cash 22.7 0.0
2012 14.1 343.9 4.2 net cash 23.8 2.1
2013 11.9 367.8 5.2 net cash 23.1 4.3
2014 16.0 330.1 6.0 net cash 20.1 3.1
2015E 16.1 252.0 6.9 net cash 22.0 3.0
2016E 10.9 216.7 5.8 net cash 22.0 3.0
2017E 11.4 191.4 6.1 net cash 22.0 3.0
Key ratios (%) Year to 31 Dec ROAE (adjusted) Net earned premium/equity Total investment return Net debt to equity Effective tax rate Dividend payout Source: FactSet, Daiwa forecasts
Company profile Founded in 1949, PICC Group is a leading insurance conglomerate in China. It is China’s largest P&C insurer based on P&C premiums for 2014, with a 33.5% market share, and fifth-largest life insurer, with a 6.2% market share of life premiums for 2014. PICC Group has a geographically diversified distribution network, solid government relationships, and a widely recognised brand name throughout China.
- 46 -
Financials / China 2328 HK
Financials / China 29 June 2015 PICC Property and Casualty
PICC Property and Casualty 2328 HK
Leader but in an unexciting market • Preliminary CIRC data suggests rising pricing pressure since the launch of the pilot run for auto insurance pricing reform • Compared with its listed P&C peers, the company is defensive in the face of headwinds from auto reforms and extreme weather • Maintain Hold (3) rating; raising target price to HKD17 from HKD16
Leon Qi, CFA (852) 2532 4381
[email protected]
Ailsa He (852) 2773 8745
[email protected]
Steve Xu (852) 2532 4383
[email protected]
according to the management. Although we expect PICC P&C’s underwriting profitability to remain ahead of the sector’s in 2015, it is not immune to sector-wide pressure. Among its listed peers, PICC P&C derives the lowest GWP contribution from auto insurance and has one of the lowest geographic exposures to the 6 areas where the auto insurance reforms have been implemented. It also has one of the most defensive product mixes in terms of vulnerability to natural disasters. ■ What we recommend
■ What's new
Given the backdrop of the sectorwide slowdown in premium growth and pressure on profitability, we believe PICC P&C is trying to defend its profitability by sacrificing market share (also see PICC P&C: Fairly valued after outperforming in 2014). ■ What's the impact
As discussed in the accompanying sector report, auto insurance policies issued since early June, under the new pricing methodology, have shown price declines. PICC P&C, as the largest auto insurer in China, is trying to be selective in terms of both client segment (more individual businesses, less corporate fleet business) and individual clients (raising prices for high-risk drivers),
We are cutting 2015-17E premium growth by 2% for each year but factor in higher investment gains, mainly for 2015E; and we are raising 2015-17E net profit by 1-38% to reflect the larger investment gains. We are raising our Gordon Growth Model-derived 12month target price to HKD17 (from HKD16) due mainly to book value growth. Our TP now implies 1.7x 2015E PBR (previously 1.8x). The main downside risk: greater-thanexpected price competition following auto-pricing reform. The key upside risk: better-than-expected underwriting profit from agriculture insurance. ■ How we differ
We do not think the market has fully factored in the pricing pressure as a
Target (HKD): 16.00 17.00 Downside: 1.3% 29 Jun price (HKD): 17.22
Buy Outperform Hold (unchanged) Underperform Sell
1 2 3 4 5
How do we justify our view?
result of the trial run for the auto insurance pricing reforms and the likely nationwide rollout of them in 2016. Forecast revisions (%) Year to 31 Dec Net premiums change Net profit change Core EPS (FD) change
15E (1.5) 37.7 37.7
16E (1.9) 1.5 1.5
17E (2.2) 0.7 0.7
Source: Daiwa forecasts
Share price performance (%)
(HKD) 20
150
18
135
16
120
13
105
11
Jun-14
90
Sep-14
Dec-14
PICC Prop (LHS)
Mar-15 Relative to HSI (RHS)
12-month range Market cap (USDbn) 3m avg daily turnover (USDm) Shares outstanding (m) Major shareholder
11.04-19.76 32.94 68.27 14,828 PICC Group (69.0%)
Financial summary (CNY) Year to 31 Dec Net premiums (m) Net investment income (m) Net profit (m) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) ROE (%)
15E 231,953 14,065 21,048 1.419 33.8 22.4 9.7 2.6 0.355 1.7 20.3
Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 58
16E 253,622 17,251 17,542 1.183 (16.7) (4.1) 11.7 2.1 0.296 1.4 13.3
17E 276,028 19,956 20,758 1.400 18.3 0.5 9.9 2.5 0.350 1.2 13.4
China Insurance Sector 29 June 2015
1 2 3 4 5
Buy Outperform Hold (unchanged) Underperform Sell
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook
PICC P&C: premium and premium growth
We forecast a premium CAGR of 9% for PICC P&C over 2015-17E, from 16% and 13% for 2013 and 2014, respectively. The main reason for the slowdown is that the auto insurance market has become more competitive due to slowing new vehicle sales in China and pricing pressure from the recently launched auto insurance pricing reform.
(CNYbn) 50 0
20%
40 0
15% 10%
30 0
5% 20 0
0%
10 0
-5% -10%
0 2013
20 14
20 15E
20 16E
Gross writt en premiu ms
2017E
YoY growth (RHS)
Source: Company, Daiwa forecasts
Valuation
PICC P&C: 12-month forward PBR Rolling PBR (x) 4
Price (HKD) 20
0
Average PBR Price
Jun-15
Jun-13
Jun-11 Rolling PBR -1SD
Jun-14
0
Dec-13
5
Dec-12
1
Jun-12
10
Dec-11
2
Dec-10
15
Jun-10
3
Dec-14
The stock is trading currently at a 12-month forward PBR of 1.6x, versus the stock’s trough PBR of 1.3x in the middle of 2013 and peak of 3.5x in 2010. In our view, the China P&C sector’s fundamentals in 2015 are weaker than they were in 2010 and slightly better than they were in 2013. Hence, we argue that PICC P&C is now fairly valued.
+1SD
Source: Bloomberg, Daiwa forecasts
PICC P&C: 2015E net profit Bloomberg consensus-forecast revisions
Earnings revisions The Bloomberg consensus forecasts for PICC P&C’s 2015E net profit have been trending higher since August 2014, when the company reported a much better-than-expected 1H14 combined ratio. The delay in rolling out commercial auto insurance deregulation also boosted investor sentiment on the China’s P&C sector. YTD, the consensus net profit forecast for 2015 has been going up, mainly reflecting China’s strong investment market.
(Rebased to 100) 120 115 110 105 100 95 90
Source: Bloomberg, Daiwa
- 48 -
Jun-15
Apr-15
May-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
Apr-14
May-14
Mar-14
Feb-14
Jan-14
85
China Insurance Sector 29 June 2015
Key assumptions Year to 31 Dec P&C premium growth (%) Combined ratio (%) Loss ratio (%) Expense ratio (%) Investment assets growth (%) Net investment yield (%) Solvency ratio (%) Payout ratio (%)
2010 28.8 97.7 67.4 30.3 39.4 3.1 115 0.0
2011 12.7 94.0 65.8 28.2 28.6 3.9 184 31.2
2012 11.2 95.1 63.6 31.6 14.2 4.1 175 24.7
2013 15.5 96.7 66.2 30.5 10.4 4.4 180 59.8
2014 13.2 96.5 64.4 32.2 23.2 4.5 239 26.5
2015E 9.8 97.8 64.7 33.1 20.0 4.3 262 25.0
2016E 9.3 98.2 64.5 33.7 10.0 4.6 287 25.0
2017E 8.8 97.9 63.9 33.9 10.0 4.9 315 25.0
2010 136,689 122,990 (82,908) 0 (23,412) (13,890) 0 0 2,780 3,968
2011 136,619 133,134 (87,546) 0 (20,290) (17,282) 0 0 8,016 6,529
2012 164,131 155,304 (98,722) 0 (29,505) (19,496) 0 0 7,581 8,387
2013 191,756 182,546 (120,902) 0 (34,437) (21,247) 0 0 5,960 9,939
2014 221,758 211,169 (135,947) 0 (41,803) (26,128) 0 0 7,291 12,141
2015E 250,147 231,953 (150,067) 0 (47,806) (28,994) 0 0 5,086 14,065
2016E 279,594 253,622 (163,483) 0 (53,792) (31,703) 0 0 4,645 17,251
2017E 304,295 276,028 (176,420) 0 (59,205) (34,504) 0 0 5,899 19,956
1,127
(2,600)
(913)
(342)
1,319
8,700
1,389
1,528
81 (1,360) 6,596 (1,308) 0 5,288 5,288 0.416 0.416 0.416 0.000 n.a.
108 (1,767) 10,286 (2,259) 0 8,027 8,027 0.602 0.602 0.602 0.188 n.a.
66 (1,772) 13,349 (2,944) 0 10,405 10,405 0.781 0.781 0.781 0.193 n.a.
77 (2,195) 13,439 (2,881) 0 10,558 10,558 0.747 0.747 0.747 0.446 n.a.
307 (1,617) 19,441 (4,326) 0 15,115 15,115 1.061 1.061 1.061 0.281 n.a.
338 (1,116) 27,072 (6,024) 0 21,048 21,048 1.419 1.419 1.419 0.355 n.a.
371 (1,094) 22,563 (5,021) 0 17,542 17,542 1.183 1.183 1.183 0.296 n.a.
409 (1,093) 26,698 (5,941) 0 20,758 20,758 1.400 1.400 1.400 0.350 n.a.
2011 12.7 8.2 n.a. 188.3 64.5 51.8 51.8 44.7 44.7 44.7 n.a. n.a. 6.0 7.7 6.0
2012 11.2 16.7 n.a. (5.4) 28.5 29.6 29.6 29.6 29.6 29.6 2.7 n.a. 4.9 8.6 6.7
2013 15.5 17.5 n.a. (21.4) 18.5 1.5 1.5 (4.3) (4.3) (4.3) 131.2 n.a. 3.3 7.4 5.8
2014 13.2 15.7 n.a. 22.3 22.2 43.2 43.2 42.1 42.1 42.1 (37.1) n.a. 3.5 9.2 7.2
2015E 9.8 9.8 n.a. (30.2) 15.8 39.3 39.3 33.8 33.8 33.8 26.3 n.a. 2.2 11.7 9.1
2016E 9.3 9.3 n.a. (8.7) 22.7 (16.7) (16.7) (16.7) (16.7) (16.7) (16.7) n.a. 1.8 8.9 6.9
2017E 8.8 8.8 n.a. 27.0 15.7 18.3 18.3 18.3 18.3 18.3 18.3 n.a. 2.1 9.7 7.5
Profit and loss (CNYm) Year to 31 Dec Net written prem. & policy fees Net earned premiums Net claims incurred Deferred policy acq. cost amort. Underwriting & policy acq. cost G&A expenses P'holders' div. & profit particip. Other underwriting inc./(exp.) Underwriting profit/(loss) Net investment inc./(exp.) Net realised & unrealised gains/(losses) on inv. Associates' profits Other inc./(expenses) Profit before tax Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (CNY) EPS (adjusted) (CNY) EPS (adjusted, fully-diluted)) (CNY) DPS (CNY) EV/share (CNY)
Change (YoY %) and margins (%) Year to 31 Dec Gross premium growth Net premium growth Net claims incurred Underwriting profit/(loss) Net investment income Net profit (reported) Net profit (adjusted) EPS (reported) EPS (adjusted) EPS (adjusted, fully-diluted) DPS EV/share Underwriting margin (%) PBT margin (%) Net-profit margin (%)
2010 28.8 31.8 n.a. n.a. 38.5 196.6 196.6 196.6 196.6 196.6 n.a. n.a. 2.3 5.4 4.3
Source: FactSet, Daiwa forecasts
- 49 -
China Insurance Sector 29 June 2015
Balance sheet (CNYm) As at 31 Dec Cash & bank balances Total investment Loans and advances Deferred acquisition costs Investment in associates Net fixed assets Goodwill & other intangibles Assets under management Reins. recov. on unpaid losses Receivables Other assets Total assets Customer deposits Technical reserves Unearned premium reserves Payables Borrowing Other liabilities Total liabilities Share capital Reserves & others Shareholders' equity Minority interests Total equity & liabilities
2010 17,727 129,996 0 0 1,611 15,125 0 0 15,549 22,676 873 203,557 0 65,249 60,214 11,141 14,157 26,190 176,951 11,142 15,464 26,606 0 203,557
2011 14,135 169,571 0 0 2,131 16,180 0 0 24,275 37,440 1,912 265,644 0 78,428 69,617 26,282 19,299 36,858 230,484 12,256 22,904 35,160 0 265,644
2012 12,890 189,899 0 0 2,584 17,478 0 0 22,637 43,581 1,355 290,424 0 85,878 75,634 17,242 19,427 46,793 244,974 12,256 33,194 45,450 0 290,424
2013 16,272 202,722 0 0 3,973 17,554 0 0 26,431 51,202 1,270 319,424 0 93,844 86,595 18,153 19,562 43,766 261,920 13,604 43,895 57,499 5 319,424
2014 24,157 241,673 0 0 4,750 17,217 0 0 25,681 52,652 0 366,130 0 104,285 95,638 11,158 22,449 46,825 280,355 14,828 70,942 85,770 5 366,130
2015E 25,447 323,482 0 0 5,225 17,389 0 0 33,977 19,191 0 424,711 0 114,936 105,559 12,065 22,449 47,775 302,783 14,828 107,094 121,922 5 424,711
2016E 24,096 359,987 0 0 5,486 17,563 0 0 38,054 30,490 0 475,676 0 126,580 116,408 13,266 22,449 54,359 333,062 14,828 127,781 142,609 5 475,676
2017E 26,505 396,260 0 0 5,761 17,739 0 0 42,621 43,872 0 532,757 0 139,252 128,214 14,582 22,449 61,871 366,368 14,828 151,556 166,384 5 532,757
2010 21.9 462.3 3.8 net cash 19.8 0.0
2011 26.0 378.7 2.3 14.7 22.0 31.2
2012 25.8 341.7 3.7 14.4 22.1 24.7
2013 20.5 317.5 5.1 5.7 21.4 59.8
2014 21.1 246.2 5.2 net cash 22.3 26.5
2015E 20.3 190.2 7.0 net cash 22.3 25.0
2016E 13.3 177.8 5.0 net cash 22.3 25.0
2017E 13.4 165.9 5.3 net cash 22.3 25.0
Key ratios (%) Year to 31 Dec ROAE (adjusted) Net earned premium/equity Total investment return Net debt to equity Effective tax rate Dividend payout Source: FactSet, Daiwa forecasts
Company profile PICC Property & Casualty (PICC P&C) was established in July 2003, with PICC Group as its sole promoter, and was listed on the Hong Kong Stock Exchange on 6 November 2003. It is the largest non-life insurance company in China in terms of gross premiums as at 2014. PICC P&C offers a wide range of non-life insurance products covering autos, commercial property, accidental injury and agriculture, etc.
- 50 -
Financials / China 2601 HK
Financials / China 29 June 2015 China Pacific Insurance Group
China Pacific Insurance Group 2601 HK
Target (HKD): 38.00 37.00 Upside: 3.2% 29 Jun price (HKD): 35.85
P&C headwinds continue Buy Outperform Hold (unchanged) Underperform Sell
1
• We expect much weaker profitability for CPIC P&C for 2015 compared with all of its other listed peers’ P&C businesses • CPIC’s life and P&C businesses saw the lowest premium growth for 5M15 among its peers that we cover • Maintain Hold (3) rating, lower target price HKD37
2 3 4 5
How do we justify our view?
Leon Qi, CFA (852) 2532 4381
[email protected]
Ailsa He (852) 2773 8745
[email protected]
Steve Xu (852) 2532 4383
[email protected]
■ What's new
CPIC’s premium growth continues to lag that of its peers, with its life and P&C premium growth up just 1.5% and 1.0% YoY, respectively, for 5M15 (also see our report CPIC: P&C business is a drag). ■ What's the impact
We understand the mere 1.5% YoY rise in 5M15 life premiums was mainly due to CPIC’s focus on premium quality rather than volume. Also, CPIC’s agency FYP was up c.25% YoY, while its bancassurance premiums were down c.15% YoY for 1Q15. Hence, CPIC’s life business seems to be balanced. We expect CPIC P&C to see a much higher combined ratio for 2015 vs.
peers as it has: 1) a higher proportion of auto premiums, 2) geographic concentration in the Yangtze River Delta area, where competition is fierce and there is a high premium contribution from the 6 areas piloting auto reform, 3) the highest property and auto insurance premiums among peers, which would see large claim hikes should El Nino conditions occur this year, 4) large exposure to liability and cargo insurance, which is seeing thin profitability, and 5) minimal exposure to lucrative products, such as agriculture or credit insurance. ■ What we recommend
We raise our 2015E net profit by 31%, due to the YTD A-share investment gains, and cut our 2016-17E by 6-11% to factor in a potential slowdown in premium growth and underwriting profitability pressure. Accordingly, we lower our SOTP-based 12-month TP to HKD37 (from HKD38) and maintain our Hold (3) rating. Our TP implies a 2015E P/EV (group) of 1.4x (from 1.5x) and 2015E PBR of 2.2x (from 2.1x). Although we like CPIC Life’s VNB-focused strategy, we expect CPIC P&C to continue to see underwriting losses in 2015. The main upside risk: higher-thanexpected agency FYP growth, while prolonged underwriting losses in its P&C business is the downside risk.
■ How we differ
We are still more bearish than the market on CPIC P&C’s profitability and expect it to see underwriting losses in 2015-17E. Forecast revisions (%) Year to 31 Dec Net premiums change Net profit change Core EPS (FD) change
15E (5.8) 30.7 30.7
16E (9.0) (10.5) (10.5)
17E (11.8) (6.2) (6.2)
Source: Daiwa forecasts
Share price performance (%)
(HKD) 45
145
40
133
35
120
31
108 95
26
Jun-14
Sep-14
Dec-14
China Paci (LHS)
Mar-15 Relative to HSI (RHS)
12-month range 27.00-44.10 Market cap (USDbn) 41.91 3m avg daily turnover (USDm) 70.26 Shares outstanding (m) 9,062 Fortune Investment Co. Ltd (14.2%) Major shareholder
Financial summary (CNY) Year to 31 Dec Net premiums (m) Net investment income (m) Net profit (m) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) ROE (%)
15E 175,998 40,583 18,087 1.996 63.7 17.4 14.4 2.1 0.599 2.1 15.1
Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 58
16E 186,162 45,266 13,557 1.496 (25.0) (16.9) 19.2 1.6 0.449 1.9 10.4
17E 197,573 50,238 16,141 1.781 19.1 (15.1) 16.1 1.9 0.534 1.7 11.1
China Insurance Sector 29 June 2015
1 2 3 4 5
Buy Outperform Hold (unchanged) Underperform Sell
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook We now forecast life and P&C premium CAGRs of 6.0% and 4.0%, respectively, over 2015-17E (9% and 10% previously). The moderating growth is a combined result of CPIC P&C’s profitability issues and CPIC Life’s value-focus strategy for 2015-17.
CPIC: premium and premium growth (CNYbn) 30 0
10%
25 0 5% 20 0 15 0
0%
10 0 -5% 50 0
-10% 20 13
2014
2015E
20 16E
Gross writt en premiu ms
2017E
YoY growth (RHS)
Source: Company, Daiwa forecasts
Valuation
CPIC: SOTP valuation
We use an SOTP methodology to value CPIC as the listed company is made up of a few segments. There are 3 components in our SOTP valuation: the life insurance business, the P&C insurance busines and others. We apply a 10% holding company discount to CPIC.
Corporate & others P&C 6.4% 6.1%
CPIC’s life insurance businesses accounts for 88% of our SOTP valuation, while P&C and others account for about 12% combined. Life 87.5% Source: Daiwa estimates
Earnings revisions
CPIC: 2015E net profit consensus-forecast revisions
The Bloomberg consensus 2015E net profit forecasts for CPIC did not change much throughout 2014. The consensus, however, did revise up its net profit forecast for 2015, by c.5%, in early 2015, which we believe was a reflection of good A-share returns. However, the consensus forecasts were revised down in April 2015 due to CPIC’s disappointing 2014 results.
(Rebased to 100) 120 115 110 105 100 95 90
Source: Bloomberg, Daiwa
- 52 -
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Feb-14
85
Jan-14
Our 2015-17E net profit forecasts are overall in line with those of the consensus, although after factoring in its market-related investment gains, our 2015E net profit forecast is higher than consensus.
China Insurance Sector 29 June 2015
Key assumptions Year to 31 Dec Life premium growth (%) VNB growth (%) P&C premium growth (%) Combined Ratio (%) Investment assets growth (%) Net investment yield - Group (%) Embedded value growth (%) Solvency Ratio - Group (%) Payout Ratio (%)
2010 41.7 22.0 50.5 93.7 19.1 4.3 11.9 357 35.2
2011 6.1 10.1 19.5 93.1 20.0 4.7 3.2 284 36.2
2012 0.3 5.2 13.0 95.8 20.1 4.9 19.1 312 62.5
2013 1.8 6.2 17.3 99.5 6.3 5.0 6.7 283 39.1
2014 3.8 16.3 13.8 103.8 14.3 5.3 18.6 280 41.0
2015E 2.0 8.8 4.6 101.7 14.0 5.0 16.1 203 30.0
2016E 8.0 10.9 3.7 100.7 10.0 5.0 12.1 210 30.0
2017E 8.0 10.7 3.7 99.7 10.0 5.0 12.6 218 30.0
2010 126,133 119,751 (102,209) 0 0 (28,063) 0 546 (9,975) 17,034
2011 141,574 137,238 (111,645) 0 0 (33,120) 0 1,039 (6,488) 21,199
2012 151,433 147,839 (120,532) 0 0 (38,224) 0 (1,030) (11,947) 26,618
2013 161,628 159,625 (135,183) 0 0 (42,365) 0 (1,135) (19,058) 31,046
2014 178,368 172,891 (147,958) 0 0 (50,616) 0 (1,267) (26,950) 36,449
2015E 182,441 175,998 (148,262) 0 0 (53,355) 0 (6,043) (31,663) 40,583
2016E 193,356 186,162 (156,426) 0 0 (57,595) 0 (8,516) (36,375) 45,266
2017E 205,082 197,573 (165,718) 0 0 (61,081) 0 (9,604) (38,830) 50,238
3,623
(4,807)
(8,558)
(74)
4,979
14,939
8,981
9,879
(12) 0 10,670 (2,005) (108) 8,557 8,557 1.002 1.002 1.002 0.350 12.801
495 0 10,399 (2,006) (80) 8,313 8,313 0.967 0.967 0.967 0.350 13.205
0 0 6,113 (983) (53) 5,077 5,077 0.575 0.575 0.575 0.367 14.928
0 0 11,914 (2,519) (134) 9,261 9,261 1.022 1.022 1.022 0.400 15.932
22 0 14,500 (3,255) (196) 11,049 11,049 1.219 1.219 1.219 0.500 18.902
47 0 23,906 (5,498) (321) 18,087 18,087 1.996 1.996 1.996 0.599 21.937
48 0 17,919 (4,121) (240) 13,557 13,557 1.496 1.496 1.496 0.449 24.592
49 0 21,335 (4,907) (286) 16,141 16,141 1.781 1.781 1.781 0.534 27.698
2011 11.0 14.6 n.a. n.a. 24.5 (2.9) (2.9) (3.5) (3.5) (3.5) 0.0 3.2 (4.7) 7.6 6.1
2012 5.3 7.7 n.a. n.a. 25.6 (38.9) (38.9) (40.5) (40.5) (40.5) 4.9 13.0 (8.1) 4.1 3.4
2013 8.4 8.0 n.a. n.a. 16.6 82.4 82.4 77.8 77.8 77.8 8.9 6.7 (11.9) 7.5 5.8
2014 8.4 8.3 n.a. n.a. 17.4 19.3 19.3 19.3 19.3 19.3 25.0 18.6 (15.6) 8.4 6.4
2015E 3.2 1.8 n.a. n.a. 11.3 63.7 63.7 63.7 63.7 63.7 19.8 16.1 (18.0) 13.6 10.3
2016E 5.9 5.8 n.a. n.a. 11.5 (25.0) (25.0) (25.0) (25.0) (25.0) (25.0) 12.1 (19.5) 9.6 7.3
2017E 5.9 6.1 n.a. n.a. 11.0 19.1 19.1 19.1 19.1 19.1 19.1 12.6 (19.7) 10.8 8.2
Profit and loss (CNYm) Year to 31 Dec Net written prem. & policy fees Net earned premiums Net claims incurred Deferred policy acq. cost amort. Underwriting & policy acq. cost G&A expenses P'holders' div. & profit particip. Other underwriting inc./(exp.) Underwriting profit/(loss) Net investment inc./(exp.) Net realised & unrealised gains/(losses) on inv. Associates' profits Other inc./(expenses) Profit before tax Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (CNY) EPS (adjusted) (CNY) EPS (adjusted, fully-diluted)) (CNY) DPS (CNY) EV/share (CNY)
Change (YoY %) and margins (%) Year to 31 Dec Gross premium growth Net premium growth Net claims incurred Underwriting profit/(loss) Net investment income Net profit (reported) Net profit (adjusted) EPS (reported) EPS (adjusted) EPS (adjusted, fully-diluted) DPS EV/share Underwriting margin (%) PBT margin (%) Net-profit margin (%)
2010 44.9 42.3 n.a. n.a. 33.8 16.3 16.3 10.2 10.2 10.2 9.8 10.4 (8.3) 8.9 7.1
Source: FactSet, Daiwa forecasts
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China Insurance Sector 29 June 2015
Balance sheet (CNYm) As at 31 Dec Cash & bank balances Total investment Loans and advances Deferred acquisition costs Investment in associates Net fixed assets Goodwill & other intangibles Assets under management Reins. recov. on unpaid losses Receivables Other assets Total assets Customer deposits Technical reserves Unearned premium reserves Payables Borrowing Other liabilities Total liabilities Share capital Reserves & others Shareholders' equity Minority interests Total equity & liabilities
2010 17,267 418,044 0 0 440 7,034 553 0 12,347 14,616 5,410 475,711 0 336,589 21,951 14,169 2,338 19,113 394,160 8,600 71,697 80,297 1,254 475,711
2011 18,997 503,533 0 0 0 7,857 1,495 0 14,118 17,258 7,354 570,612 0 395,637 26,556 17,078 8,000 45,286 492,557 8,600 68,196 76,796 1,259 570,612
2012 24,990 602,338 0 0 0 9,424 1,700 0 14,121 21,836 7,093 681,502 0 451,110 29,610 19,601 15,500 68,112 583,933 9,062 87,115 96,177 1,392 681,502
2013 19,335 647,453 0 0 11 10,601 1,869 0 17,388 19,766 7,110 723,533 0 503,638 33,418 23,464 15,500 47,127 623,147 9,062 89,906 98,968 1,418 723,533
2014 14,042 747,580 0 0 264 13,018 1,848 0 17,167 23,589 7,592 825,100 0 563,059 37,322 27,461 19,496 58,567 705,905 9,062 108,069 117,131 2,064 825,100
2015E 16,850 832,604 0 0 277 14,971 1,848 0 22,897 32,137 (5,723) 915,861 0 606,542 46,138 33,850 23,395 80,689 790,614 9,062 113,801 122,863 2,385 915,861
2016E 19,378 915,865 0 0 291 17,216 1,848 0 25,644 36,606 8,916 1,025,764 0 657,186 51,948 40,778 28,074 107,501 885,487 9,062 128,590 137,652 2,625 1,025,764
2017E 22,285 1,007,451 0 0 306 19,799 1,848 0 28,721 41,862 26,584 1,148,856 0 711,714 57,973 48,321 33,689 140,049 991,746 9,062 145,137 154,199 2,912 1,148,856
2010 11.0 149.1 5.3 net cash 18.8 34.9
2011 10.6 178.7 3.7 net cash 19.3 36.2
2012 5.9 153.7 3.3 net cash 16.1 63.9
2013 9.5 161.3 5.0 net cash 21.1 39.1
2014 10.2 147.6 6.1 4.6 22.4 41.0
2015E 15.1 143.2 6.8 5.2 23.0 30.0
2016E 10.4 135.2 5.9 6.2 23.0 30.0
2017E 11.1 128.1 6.0 7.3 23.0 30.0
Key ratios (%) Year to 31 Dec ROAE (adjusted) Net earned premium/equity Total investment return Net debt to equity Effective tax rate Dividend payout Source: FactSet, Daiwa forecasts
Company profile China Pacific Insurance Group (CPIC) is a pure insurance company and was China’s third-largest insurance group in terms of net premiums as at the end of 2014. The company operates life and P&C businesses, with respective market shares in terms of premiums of 8% and 12% for 2014. CPIC is listed on Shanghai Stock Exchange (since December 2007) and Hong Kong Exchange (since December 2009).
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China Insurance Sector 29 June 2015
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China Insurance Sector 29 June 2015
Daiwa’s Asia Pacific Research Directory HONG KONG Takashi FUJIKURA Regional Research Head
SOUTH KOREA (852) 2848 4051
Kosuke MIZUNO
(852) 2848 4949 / (852) 2773 8273 Regional Research Co-head
[email protected] [email protected]
Sung Yop CHUNG (82) 2 787 9157
[email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Mike OH (82) 2 787 9179
[email protected] Banking; Capital Goods (Construction and Machinery)
John HETHERINGTON (852) 2773 8787
[email protected] Regional Deputy Head of Asia Pacific Research
Iris PARK Consumer/Retail
(82) 2 787 9165
[email protected]
Rohan DALZIELL (852) 2848 4938 Regional Head of Product Management
Jun Yong BANG Oil; Chemicals; Tyres
(82) 2 787 9168
[email protected]
[email protected]
Kevin LAI (852) 2848 4926
[email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)
Thomas Y KWON (82) 2 787 9181
[email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game
Christie CHIEN (852) 2848 4482
[email protected] Macro Economics (Regional); Banking; Insurance (Taiwan)
TAIWAN
Junjie TANG (852) 2773 8736 Macro Economics (China)
[email protected]
Jonas KAN (852) 2848 4439 Head of Hong Kong and China Property
[email protected]
Rick HSU (886) 2 8758 6261
[email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)
Cynthia CHAN
[email protected]
Steven TSENG (886) 2 8758 6252
[email protected] IT/Technology Hardware (PC Hardware)
(852) 2773 8243
Property (China) Leon QI (852) 2532 4381
[email protected] Banking (Hong Kong/China); Broker (China); Insurance (China)
Christine WANG (886) 2 8758 6249
[email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer
Anson CHAN (852) 2532 4350 Consumer (Hong Kong/China)
[email protected]
Kylie HUANG (886) 2 8758 6248
[email protected] IT/Technology Hardware (Handsets and Components)
Jamie SOO (852) 2773 8529 Gaming and Leisure (Hong Kong/China)
[email protected]
Helen CHIEN Small/Mid Cap
Dennis IP (852) 2848 4068
[email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI
(852) 2773 8730
[email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Becky HAN (852) 2848 4464 Small/Mid Cap (Regional)
[email protected]
Kelvin LAU (852) 2848 4467
[email protected] Head of Transportation (Hong Kong/China); Transportation (Regional) Brian LAM (852) 2532 4341
[email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 Head of Custom Products Group
[email protected]
Thomas HO Custom Products Group
(852) 2773 8716
[email protected]
(63) 2 737 3023
[email protected]
PHILIPPINES Bianca SOLEMA Utilities and Energy
(886) 2 8758 6254
[email protected]
INDIA Punit SRIVASTAVA (91) 22 6622 1013
[email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA Capital Goods; Utilities
(91) 22 6622 1009
[email protected]
SINGAPORE Ramakrishna MARUVADA (65) 6499 6543
[email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Royston TAN (65) 6321 3086 Oil and Gas; Capital Goods
[email protected]
David LUM Property and REITs
[email protected]
(65) 6329 2102
Jame OSMAN (65) 6321 3092
[email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)
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China Insurance Sector 29 June 2015
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China Insurance Sector 29 June 2015
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"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings Rating Buy* Hold** Sell***
Percentage of total 61.0% 26.1% 12.9%
Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2015. * comprised of Daiwa’s Buy and Outperform ratings.
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China Insurance Sector 29 June 2015
** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
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