Company Reports

We retain our fair value estimate for China Life Insurance at HKD 20 per share, China Pacific Insurance, or CPIC, at HKD 30 per share, and New China Life, or NCI, at HKD 22 per share, following their interim results that reported strong recovery in respective net profit growth at 11%, 37%, and 11% year on year. We expect upside risk to our current 15% to 30% year-on-year net profit growth forecast in 2024 given a low base in the second half of 2023. The stronger-than-expected net profit growth was primarily boosted by strong investment return, and we’ve factored in a gradual pickup in investment return over our forecast period. We leave our major assumptions unchanged.

We expect China’s life insurers under our coverage to report a double-digit increase in second-quarter net profits versus the year-on-year contraction in the first quarter. While we expect their new business value growth in the first half will slow from 20%-50% in the first quarter, growth should stay healthy at 10% to 25% thanks to margin improvement and resilient demand for savings products as the deposit rate continues to trend down. We also expect property-casualty underwriting margin to improve from the first quarter, helped by reduced catastrophe losses. Despite the earnings improvement, we expect industrywide headwinds, including falling asset yield, potential commission rate cut in the agent channel, and uncertainty in catastrophe losses, will continue to weigh on investor sentiment.

New China Life, PICC Group, and PICC P&C reported larger-than-peer contractions in first-quarter net profits of 29%, 24%, and 38% year on year, respectively. This was partly due to the high base a year ago as a result of strong investment income for NCI and a record-low combined ratio for PICC P&C. We believe the results are largely in line to achieve our 2024 net profit growth of 19%, 22%, and 20% for PICC P&C, PICC Group, and NCI.

We retain our fair value estimates for China Life at HKD 20 per H share (CNY 19 per A share) and New China Life, or NCI at HKD 26 per H share (CNY 23 per A share), following their 2023 results, which saw 34% and 59% year-on-year declines in net profits to CNY 21 billion and CNY 8.7 billion, respectively. As China Life was not actively selling the popular savings type products and its agent reform was less aggressive than peers, the company reported lower-than-peer net book value, or NBV, growth at 14% in 2023, before the changes in actuarial assumptions. In contrast, growth in NCI's NBV exceeded our expectation at 65% year on year. But it was largely driven by the 3.5% pricing traditional life insurance products, which were pulled off shelves by regulators in August 2023. In light of tightened bancassurance expense control and rising interest spread risks for life insurers amid falling interest rate cycle, we expect such robust NBV growth is not maintainable. Thus, we expect NBV growth for Chinese life insurers will decelerate to single-digit levels in 2024.

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%.

New China Life Insurance, or NCI, differentiates with a focus on the underserved health insurance business to drive value-oriented growth. However, facing rising industrywide headwinds and senior management changes, it seems to have come to a crossroad over further growth.

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.

We are maintaining our fair value estimates of CNY 65 per A share and HKD 71 per H share for Ping An; CNY 23 per A share and HKD 26 per H share for New China Life or NCI; and HKD 4 per share for PICC Group and HKD 11 per share for PICC P&C following interim results. As expected, China’s insurers reported stronger new business value, or VNB, growth for first-half 2023 of 18%-33% year on year, as customers rushed to buy high-yield savings products before the pricing rate cut by end-July. We continue to expect Ping An and PICC P&C to deliver above-peer results in coming quarters. Both stocks are undervalued, trading at 0.5 times 2023 price to embedded value for H-share Ping An and 0.8 times 2023 price/book ratio for PICC P&C. We prefer Ping An as our top pick given its larger discount to our fair value estimate, better growth prospects following the successful implementation of the four-year in-depth life insurance reform and low earnings sensitivity to the volatile stock market.

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.

New China Life Insurance's first-quarter IFRS 17-based total revenue and net profit increased 17% and 115%, respectively, year on year. The strong profit growth was mainly attributable to the 48% year-on-year increase in investment income as a higher proportion of investment assets were marked to market, which recorded fair value gains in the past quarter under the adoption of IFRS 9. The company did not disclose first-quarter new business value, and we retain our view that its NBV growth in 2023 still faces greater-than-peer pressures as agent headcount has yet to stabilize. Given that the results were largely in line, we retain our fair value estimate for no-moat New China Life at HKD 26 per H share and CNY 23 per A share. We think the market’s pessimism is fully reflected in the H share price, at below 0.2 times 2023 embedded value, but we don’t see any urgency to invest with earnings performance likely to lag peers in 2023.

We lower our fair value estimate for no-moat New China Life Insurance, or NCI, to HKD 26 per H-share and CNY 23 per A-share to factor in our weaker assumptions for premium income and underwriting margins in 2023 and 2024. NCI’s full-year 2022 results continued to reflect significant challenges in ongoing agent reform and it experienced larger-than-peer declines in both new business value, or NBV, and agent headcount. Full-year net profit declined 34% from 2021, driven by a 3% and 29% year-on-year contraction in premium income and investment income, respectively. Dividend per share also declined 25% to CNY 1.08 per share. We think the market’s pessimism is fully reflected in its current H-share price, which prices NCI at below 0.2 times 2023 price/embedded value, but we also don’t see any urgency in buying the shares with earnings performance likely to lag peers in 2023.

NCI differentiates with a focus on the underserved health insurance business to drive value-oriented growth. However, facing rising industrywide headwinds and senior management changes, it seems to have come to a crossroad over further growth.

NCI differentiates with a focus on the underserved health insurance business to drive value-oriented growth. However, facing rising industrywide headwinds and senior management changes, it seems to have come to a crossroad over further growth.

No-moat New China Life Insurance, or NCI's, third-quarter results continued to reflect challenges in agent recruitment and retention as the macroeconomic activities were dampened by sporadic and repeated COVID-19 lockdowns and poor consumer outlooks. Nine-month total revenue and net profits further declined 7% and 57% respectively against the year-ago period, versus the 5% and 51% declines in the first half. The wider year-on-year decline was attributable to 3% and 29% declines in premium and investment income in the third quarter, versus the 0.5% growth in premium and 27% decline in investment income in the first half. As results were largely in line, we retain our FVE for NCI at CNY 27 per A-share, and HKD 30 per for H-share. H-shares are significantly undervalued, trading close to its historical low of below 0.2 times 2022 price to embedded value. We believe overall agent productivity and qualified agent headcount are two important leading indicators for future development of NCI's agent force. We expect the marginal improvement in agent productivity to continue due to ongoing cleanup of unqualified or inactive agents in coming quarters.

No-moat New China Life Insurance, or NCI’s, posted 4.8% and 51% year-on-year declines in first-half total revenue and net profit, respectively. First-half revenue and net profit growth both improved from the 7.9% and 79% year-on-year declines in the first quarter, as first-half total investment yield increased to 4.2% from the 4% in the first quarter. However, the results showed its agent channel business remained in deep restructuring. As expected, first-half value of new business, or VONB, was weaker than peers, contracting 48% on year to CNY 2 billion, on sharp declines in both VONB margin and agent headcount. We retain our fair value estimate of CNY 27 per A-share, and HKD 30 per H-share. H-shares are undervalued, trading close to their historical low of 0.2 times 2022 price/embedded value. We believe overall agent productivity and qualified agent headcount are two important leading indicators for future development of NCI’s agent force. We expect the improvement in agent productivity to continue due to ongoing cleanup of unqualified or inactive agents, and recovery of offline customer interactions after lockdowns in the first half.

No-moat New China Life Insurance, or NCI’s, 2021 results were mixed. In line with our expectation, new business value, or NBV, declined 35% to CNY 6 billion. This decline was larger compared with the around 25% declines for leading insurers. This was attributable to sharp declines in both NBV margin and agent headcount. NCI’s agent headcount dropped 35.8% to 389,000 from 606,000 in 2020. Compared with China Life and Ping An, which posted a 40% decline in agent headcount, this contraction was smaller than expected. We retained our fair value estimate for NCI at CNY 27 per A-share and HKD 30 per H-share. H-shares are trading at the historical low of 0.2 times forward price to embedded value, and we believe they are undervalued. Our preferred Asia life insurers are AIA and Ping An Insurance given their better fundamentals.

NCI differentiates with a focus on the underserved health insurance business to drive value-oriented growth. However, facing rising industrywide headwinds and abrupt management change, it seems to have come to a crossroad over further growth.

NCI differentiates with a focus on the underserved health insurance business to drive value-oriented growth. However, facing rising industrywide headwinds and abrupt management change, it seems to have come to a crossroad over further growth.

No-moat New China Life Insurance, or NCI’s, first-three quarter net profit growth slowed to 7.6% year on year from 28% in the first half. This was due to a 4% year-on-year premium contraction and a CNY 6.4 billion increase in insurance liability reserve as a result of a lower 750-day moving average of the 10-year government bond yield, versus the CNY 2.5 billion in the first half. This resulted in a 51% year-on-year decline in third-quarter net profits. NCI’s agent regular new premium declined by 5% year on year to CNY 6 billion, faring better than China Life’s 14% premium contraction during the same period. However, it also reported a 38% decline in agent single premium, which we suspect was attributable to a sharp shrinkage in agent force during the past quarter. As a result, agent new premium posted higher-than-peers decline of 12% year on year, versus 8% and 2% contractions for China Life and Ping An.