Company Reports

We retain our fair value estimate for China Life at HKD 20 per H-share (CNY 19 per China A-share) and China Pacific Insurance, or CPIC at HKD 30 per H share (CNY 26 per China A-share), following their first-quarter results, which reported new business value, or NBV, growth at 26% and 31%, respectively, year on year on a like-for-like basis. We leave our major assumption largely unchanged, as we expect full-year NBV growth to moderate to mid- to high-teen level, as a result of high base in the second and third quarters created by the strong sales of 3.5% pricing products in the year-ago period. The stronger-than-expected growth was attributable to lower product pricing rate after the regulatory cut starting from August 2023; longer payment duration of insurance policies; and double-digit growth in agent first-year premium. Bancassurance NBV also reported strong growth on lower commission rate despite falling first-year premium. We expect China Life will see less negative base effect in coming quarters as the company did not actively sell the 3.5% pricing rate products in 2023, when compared with CPIC which reported over 50% year-on-year NBV growth in the second and third quarters of 2023. As China Life started to put more strategic focus to bancassurance sales after margin improvement on lower commission rates in 2024, we expect the company should have more room to expand its bancassurance business.

China Pacific Insurance's, or CPIC’s, 2023 net profit contraction widened to 27% year on year from 24% in the first nine months, due to slowing premium growth on suspension of bancassurance sales and weaker investment return on marked-to-market losses of equity investments. We retain our fair value estimate at CNY 26 per A share (HKD 30 per H share). Full-year new business value, or NBV, increased 30% before the economic assumption changes. The P&C combined ratio, or COR, improved 1 percentage point to 97.7% from 2022, attributable to mitigated expense competition and lower catastrophe loss in the fourth quarter. While NBV and COR beat our expectations, we leave our assumptions largely unchanged. We expect NBV to normalize to high-single-digit growth in 2024, off a high base driven by the buying spree of 3.5% traditional life insurance products in 2023. P&C COR is likely to face increasing claim pressures from fast-growing new energy vehicle policies.

According to media reports, China Pacific Insurance Co., New China Life Insurance, and other Chinese life insurers were recently in talks with property developer Vanke to restructure their debt investments. These debt investments are long-term nonstandard investments that usually last for 6-10 years. We believe the short-term financial impacts to CPIC and NCI are limited, since these investments are booked as financial assets at amortized cost and not marked to market. It was reported that these investments have yet to reach maturity, but insurers can exercise their early redemption rights under certain circumstances, including a credit rating downgrade. Moody’s downgraded Vanke’s credit rating on March 11. These insurers were reported to have exposure of several billions each. If we assume CPIC’s and NCI’s exposure is about CNY 5 billion each, this represents 0.2% and 0.4% of their respective total investment assets, or 2% and 4% of shareholders’ equity as of mid-2023. As such, even in the bear case where we assume 100% write-offs, CPIC’s and NCI’s core solvency ratios will decline by 3 and 5 percentage points to 157% and 142%, respectively, but will still be well above the minimum regulatory requirement of 50%.

China Pacific Insurance’s, or CPIC's, trusted brand and extensive distribution network establish a strong foundation for steady long-term growth, thanks to continuing improvements in agent productivity and the company's stronger-than-peer capital position. However, challenges remain in the no-moat firm's near-term prospects.

We maintain our fair value estimates for Ping An Insurance, China Pacific Insurance, or CPIC, and New China Life Insurance, or NCI, at CNY 65 per A-share (HKD 71 per H-share), CNY 26 per A-share (HKD 30 per H-share) and CNY 23 per A-share (HKD 26 per H-share), respectively. Following in-line third-quarter results, we leave our 2023 new business value, or NBV, projections unchanged for these three insurers.

China Life‘s year-to-Sept. 30 year-on-year growth in premium slowed to 4.5% from 5.6% in August. As the first insurer to report monthly premium growth, the performance generally tracks our expectations. The year-on-year contraction in September premium narrowed to 7% from 10% in August on low base in the year-ago period. We expect slowing sales for other Chinese life insurers in September and October due to weakened product demands after the last-batch sales of 3.5% guaranteed rate savings products in July. We also expect ongoing regulation of bancassurance sales (an arrangement between a bank and an insurance company through which the insurer can sell its products to the bank's customers) to adversely affect September and October sales, but the impact should be small given these two months usually report weak sales. Despite the industrywide trend of slowing sales, we expect Ping An and PICC Life to see less downward pressure supported by lower base in the second half of 2022. We expect third-quarter new business value, or VNB, to decelerate significantly from the second quarter’s level, but fourth-quarter growth should rebound on low base and the resumption of bancassurance sales.

Following largely in-line results, we maintained our fair value estimate for China Pacific Insurance, or CPIC, at CNY 26 per A share and HKD 30 per H share. With the H share trading at a sharp discount to the A shares, we prefer the H share over the relatively expensive A share. First-half new business value, or NBV, growth increased to 31.5% year on year from 16.6% growth in the first quarter, largely in line with our expectations and likely ahead of peers in our coverage. We appreciate management’s efforts to enhance agent quality and its ability to deliver steady underwriting margins in the P&C insurance business over the past few years.

We expect the upcoming interim earnings results to show that new business value, or VNB, growths of China’s insurers accelerated between 15% and 35% in the first half of 2023, from 8% to 17% year on year in the first quarter of 2023, as customers rushed to buy high-yield savings products before the pricing rate cut by end-July. However, the weaker equity market performance and falling interest rates in the second quarter are likely to weigh on net profits and shareholders’ equity under the new accounting rules. Nevertheless, we think downside risk to H-share prices is contained, with the H-shares of Chinese insurers trading at a historical low of 0.2 times to 0.6 times forward price/embedded value, or EV.

China Pacific Insurance’s, or CPIC’s, first-quarter IFRS 17-based revenue and net profit grew 19% and 24% year on year, respectively, broadly in line with our expectations. We retain our fair value estimate at HKD 30 per H-share. The H-shares are undervalued, trading at a historic low valuation level of 0.4 times 2023 price/embedded value.

China Pacific Insurance, or CPIC, saw full-year 2022 net profit decline 8.3% from 2021 on a 14% decline in investment returns, despite accelerating net earned premium growth to 8.6% year on year. However, we think the market will look ahead and we are positive on CPIC’s improving new business value, or NBV, growth, which continues to recover. NBV growth accelerated to 30% year on year in fourth-quarter 2022, faster than peer Ping An Insurance’s 12% uptick, from 2.5% growth in the third quarter. We retain our fair value estimate at HKD 30 per H share. The H shares are undervalued, trading at a historical low valuation level of 0.3 times 2023 price/embedded value. We believe CPIC has achieved early success in life insurance reform, which was evidenced in robust growth in both premium income and NBV in the bancassurance channel, and in improving agent productivity.

China Pacific Insurance’s, or CPIC's, trusted brand and extensive distribution network establish a strong foundation for steady long-term growth, thanks to continuing improvements in agent productivity and the company's stronger-than-peer capital position. However, challenges remain in the no-moat firm's near-term prospects.

CPIC’s first three quarters of total revenue growth was 7.5% against the year-ago period while net profit declined 10.6% over the same period. Though nine-month new business value declined 38% against the year-ago period, third-quarter NBV grew 2.5%. This made CPIC the first company among peers to report positive growth in 2022, contrary to the 20% decline of Ping An. The stabilizing agent headcount in the past quarter was above our expectations, contrary to the single digit declines from June for peers. The agent headcount has stabilized at around 254,000 since June. We believe positive growth in third-quarter NBV was partly due to the relatively low base of the year-ago period and increasing sales contribution from productive premier agents, that expanded to 68,000, or 23% of total headcount. The development of first-year premiums per agent and average income per agent in the past quarter was encouraging, which increased more than 61% and 52% respectively against the year-ago period. Management noted average income improved to nearly CNY 10,000 per premier agent, or nearly 1.5 times of China’s social average wage.

We retain our fair value estimate for China Pacific Insurance at HKD 30 per H share after first-half results were in line with our expectations. Total revenue grew 1% while net profit declined 23% from the year-ago period. The results highlight a larger-than-peer improvement in the property and casualty combined ratio, at 2.1 percentage points from the year-ago period to 97.2%, on the back of the 2.4- and 2-percentage-point respective declines in auto and nonauto insurance CRs to 96.6% and 97.6%. Benefiting from reduced claim costs during COVID-19 lockdowns and growing car ownership, CPIC saw across-the-board improvement in margins of major product lines.

For the first quarter, China Pacific Insurance, or CPIC, reported a larger-than-expected decline in net profits at 36% year on year, primarily due to a 36% decline in total investment income. Gross investment return fell 0.9 percentage points to a new low of 3.7%. Both life and P&C insurance businesses showed better-than-peer growth momentum in premium income over the quarter. Total premium income grew 7% to CNY 149.6 billion from the year-ago period, driven by the 4% and 14% growth in life and P&C insurance segments, respectively. CPIC did not disclose new business value growth in the past quarter. We leave our full-year forecast of around 25% decline in NBV unchanged, as we believe its 44% decline in agent new premium was on track to meet our full-year forecast. We lowered our investment assumption in 2022 to reflect recent hefty market volatility but the negative impact was not enough to change our fair value estimate. We maintained our fair value estimate at HKD 30 per H-share. CPIC was approved by the regulator to implement the China Risk Oriented Solvency System II, or C-ROSS II framework in 2022.

We reduced our fair value estimate for CPIC to CNY 26 from CNY 30 per A-share and HKD 30 from HKD 36 per H-share after disappointing 2021 results. Total revenue and net profits were up 4.4% and 9.2%, respectively, year on year but the trend of new business value, or NBV, was disappointing, declining 25%, missing our expectation of around 20% decline. We attributed this to a larger-than-peer contraction in NBV margin due to product mix shift toward low-margin endowment insurance and falling sales of upgraded critical illness insurance after the change in CI definitions. Another disappointment was the reduction in dividend payout ratio to 36% from 50% in 2020 with absolute dividend per share declining by 17% against last year to CNY 1 per share. Management explained the decision was made in consideration of policy uncertainties during the transition period for adoption of the China Risk-Oriented Solvency System, or C-ROSS II, framework starting Jan. 1 2022, and future capital expenditure for technology, healthcare, and retirement service investments. Our new valuation factored in lower assumption for underwriting profitability in 2022 and 2023 and slower life premium growth during our forecast period.

China Pacific Insurance’s, or CPIC's, trusted brand and extensive distribution network establish a strong foundation for steady long-term growth, thanks to continuing improvements in agent productivity and the company's stronger-than-peer capital position. However, challenges remain in the no-moat firm's near-term prospects.

China Pacific Insurance’s, or CPIC's, trusted brand and extensive distribution network establish a strong foundation for steady long-term growth, thanks to continuing improvements in agent productivity and the company's stronger-than-peer capital position. However, challenges remain in the no-moat firm's near-term prospects.

No-moat China Pacific Insurance’s, or CPIC's, third-quarter results were largely in line with our expectations. First-three-quarters net profit growth slowed to 15.5% year on year from 21.5% in the first half on deteriorating growth in net earned premium and investment return. These two revenue streams contracted 8% and 7% respectively in the third quarter from 4% and 23% growths in the first half. Third-quarter net profit merely dropped 0.5% year on year, which was better than the double-digit decline for most peers. This was attributable to a strong investment return at 5.3% and an 18% year-on-year decline in insurance liability reserve provisioning. The results are in line to deliver our projected 2021 net profit growth in the midteens; we retain our A-share and H-share fair value estimates of CNY 30 and HKD 36, respectively. The H-shares imply a historical low valuation level of 0.3 times 2021 price/embedded value. The stock is undervalued.

China Pacific Insurance’s, or CPIC's, first-half results were largely in line with our expectations. First-half net profit growth accelerated to 21.50% year on year from 1.50% in the first quarter primarily on increased investment returns, with total investment yield rising 0.20 percentage points to 5% from the year-ago period. Growth in first-half net earned premium dropped to 3.80% from 4% in the year-ago period. While growth in life insurance premium gradually recovered to 2.40% from a 1% contraction, the slowing growth in the P&C insurance premium to 6.80% from 17% in the year-ago period more than offset the positive impact. The results were in line to deliver our projected 2021 net profit growth in the midteens; we retain our A-share and H-share fair value estimates of CNY 30 and HKD 36, respectively. The H-shares imply a historical low valuation level of 0.3 times 2021 price/embedded value. The stock is undervalued.

China Pacific Insurance’s, or CPIC's, first quarter was largely in line with our expectations. Net profit grew 1.5% year on year, versus 53% growth in the year-ago period. Total investment return was relatively stable at 4.6%, up 0.1 percentage point from the year-ago period. We maintain our A-share and H-share fair value estimates of CNY 30 and HKD 36, respectively. H-shares are trading at 15% below our fair value estimate, implying a historical low valuation level of 0.4 times 2021 price/embedded value. The stock is undervalued.