Chinese Life Insurers: VNB Growth Accelerates but Net Profit Under Pressure

We expect the upcoming interim earnings results to show that new business value, or VNB, growths of China’s 601628 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.

We think the market has yet to acknowledge the stronger-than-expected VNB growth due to uncertainties regarding future product demand and the impact of lower investment yield. We expect the 3.0% pricing products are still attractive when compared with the five-year fixed deposit rate at 2.75% and 10-year government bond yield at around 2.65%. Thus, we conservatively assume second-half VNB growth of between 8% and 12% year on year for major life insurers, helped by a favorable base effect in the year-ago period, and we expect full-year VNB growths to stay at 14%-22% year on year. We also modestly increase our fair value estimate for Ping An to HKD 71 from HKD 66 to factor in a 3-percentage-point increase in 2023 premium growth. Our top picks are Ping An and China Pacific Insurance for their leading VNB growths and above-peer agent reform progress.

We think first-half net profit growth for insurers is likely to moderate from the first-quarter’s level, but remain at a double-digit pace year on year. While we expect CPIC and Ping An to achieve higher-than-peer VNB growth in the first half, China Life is likely to see more resilient growth in the second half thanks to its lower sales reliance on the 3.5% pricing products.