MCV: The differences post-pandemic
- We are confident that the average case sizes of MCV insurance policies in FY24F-25F can remain well above pre-pandemic norms.
- This is mainly because we see the post-pandemic shift towards brokers, savings products and shorter-duration payment products continuing.
- We believe US$122.6bn of non-Rmb mainland China household deposits in Nov 2023 (Fig 20) represents a potential profit pool for HK insurers’ MCV.
- With China’s stable forex reserves, we think MCV-related policy risks appear low. Retain sector Overweight. Sector top picks: AIA and Prudential (Pru).
Average MCV insurance policy case sizes could remain high
We are confident that the case sizes of insurance policies purchased by Mainland Chinese visitors (MCV) in HK in FY24F-25F could stay well above pre-pandemic levels. A persistent investor concern has been the sustainability of these large case sizes, with 9M23 system MCV average policy case size at 3.2x 2018’s levels (Fig 3). Higher case sizes in 9M23 vs. 2018 were due to: 1) greater reliance on the broker channel to drive MCV sales, which have larger case sizes (Fig 4), 2) a higher mix of shorter-duration premium-payment products (Fig 10) plus savings insurance and whole life policies (Fig 11), and 3) a higher mix of single premiums within first-year premiums (Fig 24). We see these factors largely persisting in FY24F-25F (see Resilience in MCV insurance demand, dated 4 Dec 2023).
Some signs of a turnaround in the falling agent number trend
Recent HK agent data is encouraging, in our view, with Dec 2023’s 1.1% mom rise in agent numbers being the second consecutive mom increase of more than 1% (Fig 26). Nevertheless, agent numbers still slumped 11% yoy in Dec 2023, despite the rapid recovery of the MCV insurance business and announcement of more aggressive agent growth targets by major HK insurers in early-2023 (Fig 28). While Dec 2023’s growth rate has improved from Jul 2023’s -17% yoy lows, it is still markedly worse vs. pre-pandemic agent growth of 23% yoy in Aug 2019 (Fig 25). We believe that agent number growth is important, as the agent channel is higher-margin and less subject to price competition than the broker channel (HK Insurance: The battle for MCV heats up in HK, dated 10 Aug 2023).
US$122.6bn non-Rmb deposits in China a potential profit pool
People’s Bank of China (PBOC) data indicates US$122.6bn of non-Rmb household deposits in Mainland China as of Nov 2023; we think that this represents a potential profit pool for HK insurers’ MCV business (Fig 20). To put things in perspective, MCV insurance sold in HK in 9M23 only totalled US$6bn on an unweighted basis and US$3.9bn on a weighted basis. With Tier 1 cities closer to HK seeing a greater fall in non-Rmb deposits than those further away (Fig 1), we think this suggests that people in these regions may be going to HK to buy higher-yielding US$ insurance policies.
Reiterate sector Overweight; Sector top picks are AIA and Pru
Unlike pre-pandemic, we think that MCV-related policy risks are still low, with China’s forex reserves remarkably stable over 2020-23 (in marked contrast to the 2014-16 period; Fig 31). Our sector OW call is premised on favourable new business premium growth trends amid inexpensive valuations. Potential re-rating catalysts: stronger-for-longer MCV insurance demand and faster agent growth. Key downside risks: stricter capital controls on HK insurance products and a global recession hurting insurance demand.
Highlighted Companies
AIA Group
ADD, TP HK$91.00, HK$63.00 close
AIA Group is our sector top pick. We see significant new business premium growth potential in China driving continued operational outperformance vs. peers and we think its 2023 underperformance offers a highly attractive entry point.
Ping An Insurance
ADD, TP HK$80.00, HK$32.55 close
We believe Ping An Insurance is well placed to benefit from rebounding new business value growth, on the back of its strong agent force, the benefits of its completed agent reform, and strong demand for savings insurance products.
Prudential PLC
ADD, TP HK$114.0, HK$80.5 close
We see numerous tailwinds for Prudential (Pru) in the medium and long term, which could drive a closing of its sizeable P/EV valuation gap vs. AIA. We think changes that could be introduced by its incoming new CEO are positive.
