China Pacific Insurance: Challenging Q4 but Improving Productivity Bodes Well

China Pacific Insurance 601601, 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.

We expect the stabilizing agent head count and the fast-growing bancassurance channel to support faster-than-peer NBV growth in the first half of 2023. Risk, however, comes from regulators’ increasing concerns that the popularity of whole life insurance products may cause spread losses in the longer term. Such products offer a 3%-3.5% guarantee rate. We are concerned that the change in future regulations will post additional uncertainty to CPIC’s near-term NBV outlook. In light of such uncertainty, we factor in full-year 2023 NBV growth to remain subdued at a low- to mid-single-digit percent pace, as NBV growth will be no longer be driven by high-yield savings-type products.

The challenging fourth quarter saw agent head count fall further to 241,000, down 14% from its mid-2022 head count. Despite this negative headline number, head count of high-productivity core agents has stabilized and recorded 32% growth in first-year premiums per agent from 2021.