New Norm For Domestic Insurers
Weak December premium data suggests that insurers kick off “jumpstart sales” without much fanfare under the new regulations. We believe that life insurers will focus more on quality growth over top-line premium growth in order to manage spread risks effectively amid the low interest rate environment. Maintain MARKET WEIGHT on the insurance sector. We prefer regional life insurers over domestic insurers due to the former’s diversified exposures at this juncture. AIA remains our top pick.
WHAT’S NEW
- Positive yearly premium growth sustained in 2023. The top five listed domestic insurers registered a total insurance premium income of Rmb269.3b in 2023, implying a 5.2% yoy growth. Among them, China Pacific (CPIC) led the pack with 7.7% growth, followed by PICC (6.9%), China Life (4.3%), Ping An (4.1%) and New China Life (1.7%).
- Life insurance. Monthly premium growth turned positive due to jumpstart presale but still 10% below 2021 level. Despite a low base in 2022, the top five listed life insurers’ monthly premium only increased by 4.0% yoy in Dec 23. CPIC and China Life led peers with positive yoy premium growths of 16.7% and 13.0%, respectively, while Ping An, New China Life and PICC experienced yoy premium declines of 1.6%/2.9%/16.4% in December. We attribute the weakness in premium growth to the tightened regulations as life insurers are now prohibited from collecting most of the premiums in advance.
- P&C insurance. Premium growth slowed further on the muted non-auto insurance business. The top three P&C insurers (PICC P&C, Ping An P&C and CPIC P&C) saw their monthly premiums grow 2.0% yoy (vs +2.8% in Nov 23). CPIC P&C outperformed its peers with a robust 7.8% premium growth, while PICC P&C and Ping An P&C remained laggards with muted premium growth in Dec 23, mainly dragged by the negative growth in the nonauto segment.
ESSENTIALS
- Lower yields and capital market volatility raise concerns. Given the declining trend of bond yields and volatile capital market, the investment yields of life insurers are consistently below 5% long-term investment return assumptions. The negative spread could hurt the profitability and embedded value (EV) of insurers badly as the average maturity mismatch of domestic life insurers is seven years on average. Furthermore, the adoption of the new accounting standards, IFRS 9 and IFRS 17 starting from 2023, has added more volatility to insurers’ net profit, mainly due to more financial assets in investment portfolios being recorded using the mark-to-market method.
- Regulations implemented to address spread loss risk. In Aug 23, the financial authority lowered the guaranteed rate cap to 3.0% for whole life insurance products, which we believe it is crucial in mitigating the mounting risks associated with poor investment yield. Regulators also tightened their grip on the bancassurance channel by demanding that insurers adhere strictly to their filed expense budgets (????) in order to curb the expense spread loss caused by intense competition for distribution points.
- NBV growth momentum unlikely to sustain in 1H24 due to high base, but we expect a recovery in 2H24, underpinned by resilient demand. The explosive new business value (NBV) growth seen in 1H23, fuelled by economic reopening and hot-selling savings products, is unlikely to be replicated in 1H24 due to the high-base effect and the regulator’s efforts to reduce the importance of the jumpstart sales campaign. However, this is not all bad as we expect rising household savings amid economic uncertainty and the appealing yields of insurance products to support underlying demand at this juncture. Furthermore, our channel checks indicate that the bancassurance sales disruptions in 2H23 could come to an end, with most insurers having finished renewing their distribution agreements with banks. Thus, we expect NBV growth to resume in 2H24 on the recovery of the bancassurance channel and margin improvement after the regulatory changes.
ACTION
Maintain MARKET WEIGHT on China’s insurance sector, focusing on high-quality growth.
- Life Insurers. We are neutral on the premium income data for the upcoming jumpstart sales amid a high-base effect and stricter regulations on sales campaigns. However, life insurers are still likely to achieve positive NBV growth in 2024, driven by margin improvement. We expect the favourable product mix towards protection products and more sustainable expense control in the bancassurance channel to uplift life insurers’ NBV margins in 2024.
- P&C Insurers. While natural disaster losses and poor credit guarantee insurance underwriting performance woes weighed on P&C insurers’ underwriting profit in 2023, we cautiously expect a more stable combined ratio (CoR) in 2024 as these temporary headwinds are fading out. However, the increasing frequency of accidents accompanying economic recovery may exert upward pressure on the combined ratio.
- Prefer regional life insurers over domestic insurers at this juncture. While economic uncertainties pose challenges for domestic insurers, especially from an investment yield perspective, regional players are well-positioned to navigate these headwinds due to their diversified businesses and investment portfolios. Furthermore, they are poised to capitalise on the upcoming interest rate cut cycle, which will boost their EV, which is a key valuation metric for life insurers.
RECOMMENDATIONS
- AIA Group (1299 HK/BUY/Target: HK$95.00) is our top pick. We expect AIA to record 15% NBV growth in 2024 due to its: a) diversified business portfolios in different countries, b) high-quality premier agency force with the highest number of Million Dollar Round Table members, and c) more sustainable product mix prioritising protection products which has led to an industry-leading margin. Maintain BUY with a target price of HK$95.00, implying 1.9x 2024F PEV, 1.0SD above its historical mean. Recently, AIA was granted approval by the exchange to adopt the automatic share buyback programme, which allows AIA to conduct share buyback during a blackout period. We think this will be positive to its share price performance in the near term as share price tends to underperform the market during this window. Furthermore, AIA currently trades at a compelling valuation of 1.2x 2024F PEV, 2.0SD below its historical average, which we deem too cheap to ignore.
- Ping An Insurance Group (2318 HK/BUY/Target: HK$57.00). We maintain our previous forecasts of 10% yoy NBV growth in 2024 as we see continued margin improvement from a more favourable product mix shift and enhanced agent productivity. However, we have trimmed our EV forecast for 2023/24 by 3% and ascribed a lower PEV multiple of 0.8x (previously: 0.9x) to Ping An’s life insurance business due to the lower investment yield as the result of declining yield and sluggish capital market. As such, we have derived a lower SOTP-based target price of HK$57.00, implying 0.6x 2024F Group EV. Although, Ping An’s valuation at 0.36x PEV (-1.8SD) appears deeply discounted, its relatively larger exposure to the stock market and property sector compared to its peers exposes it to potential volatility. However, if the upcoming government stimulus package and policy supports successfully revitalise these sectors, Ping An’s sensitivity to these policy tailwinds could translate into significant valuation re-rating.