高盛-中国-保险业-资产风险可控，下半年NBV增长与ROE扩张驱动价值恢复-20180801-25页_573kb

China Insurance Summary

Core Content

This report provides an analysis of the Chinese insurance sector, focusing on the performance of life insurers in the first half of 2018 (1H18) and future outlooks for 2018-2020. It addresses concerns around asset risks, new business value (NBV) growth, and the impact of regulatory changes. The report also updates earnings and valuation estimates, highlighting the potential for recovery in the sector.

Main Points

• NBV Growth:

  • New business sales improved in 2Q, but NBV growth for most life insurers is expected to decline year-over-year (yoy) in 2H18.
  • China Life and NCI are projected to have the largest declines (>20% yoy), while Ping An and China Taiping are expected to show the smallest declines (-1% yoy).
  • Despite the decline in NBV, embedded value (EV) is expected to grow at a double-digit rate for most insurers in 2H18 and future years.

• Asset Risks:

  • Concerns about asset risks include bond defaults, credit spread increases, and equity investment losses.
  • Goldman Sachs has stress-tested the balance sheets and concluded that asset risks are manageable, with capital risks remaining low.
  • The stress test assumes a 4% default rate on corporate bonds, 8% on non-standard assets, and a 0% recovery rate.
  • A 150bps increase in credit spread and a 40% decline in common equities are also considered.

• Valuation and Earnings:

  • Insurers are currently trading at large discounts to EV, but Goldman Sachs believes this reflects a historical low valuation multiple.
  • Earnings are expected to grow strongly in 2018/19 due to the reversal of previous reserve charges.
  • Target prices for H-share insurers have been reduced by 4–15%, primarily due to a revised USD/CNY exchange rate assumption and lower NBV growth expectations.

• Agent Headcount and Productivity:

  • The industry has experienced rapid agent headcount growth (35% CAGR) over three years, which may lead to a period of consolidation.
  • Agent productivity is expected to remain relatively flat, with only modest gains for some insurers.
  • Insurers with superior agent quality, such as Ping An, are better positioned for growth.

• Regulatory Impact:

  • The No.19 document has introduced a negative list for insurance product development, which may impact product offerings.
  • However, the effect on covered companies is expected to be limited due to their conservative product strategies.
  • Premium growth continued to improve in May/June during the self-review period.

• Bond Yield and Earnings:

  • Bond yields have declined, but this is already factored into insurers' long-term investment assumptions.
  • Even with lower bond yields, earnings are still expected to grow due to reserve write-backs and improved cost of liability.

Key Information

• Stress Test Impact:

  • A stress test scenario would result in a 49–72pt decline in the core solvency ratio, but all insurers would still remain above the 100% threshold.
  • The solvency ratio for Ping An is expected to drop to 171% under stress, but it remains above the minimum requirement.

• Valuation Drivers:

  • EV is considered a more significant driver of valuation than NBV growth.
  • Goldman Sachs believes that EV growth will support a recovery in valuations.

• Investor Ratings:

  • Buy ratings are reiterated for Ping An H/A, NCI H, and PICC due to attractive risk/reward profiles.
  • Sell rating is maintained for China Life H/A due to deterioration in product mix and NBV growth outlook.

Exhibits Summary

• Exhibit 1: Double-digit NBV growth is expected for most insurers in 2H18 and future years.
• Exhibit 2: NBV growth in 2H18 is mainly driven by new business sales growth.
• Exhibit 3: Agent headcount growth is expected to be moderate for most insurers.
• Exhibit 4: Productivity gains for NCI and China Life are limited compared to 2H16.
• Exhibit 5: China Life and NCI could face a slowdown in YTD growth in September due to strong 2017 sales.
• Exhibit 6: The industry may enter a consolidation phase with flat or declining agent headcount.
• Exhibit 7: Insurers with higher quality agents may see productivity gains to offset headcount slowdown.
• Exhibit 8: Stress test assumptions include credit defaults, spread shocks, and equity declines.
• Exhibit 9: Chinese insurers have significant exposure to corporate bonds and non-standard assets.
• Exhibit 10: Stress test would lead to a substantial decline in core solvency ratios.
• Exhibit 11: EV is expected to grow for all insurers in 2H18, despite NBV declines.
• Exhibit 12: Earnings are forecasted to increase for most insurers due to reserve charge reversals.
• Exhibit 13: The 10-year government bond yield has declined, but this is already reflected in long-term assumptions.
• Exhibit 14: Insurers with better agent quality and productivity are more likely to maintain growth.
• Exhibit 15: The core solvency ratio for all insurers remains above 100% under stress scenarios.
• Exhibit 16: Ping An and PICC Group have the highest core solvency capital/investment asset ratio.
• Exhibit 17: Market risk is the largest risk component for life insurers, while insurance risk is largest for PICC.
• Exhibit 18: Taiping Life has the largest risk diversification and policyholder sharing impact.
• Exhibit 19: Earnings growth is expected to be strong due to reserve charge reversals and improved bond yields.

Summary Table