20150916-法国巴黎银行-What_if_the_A-share_index_falls_to_2,000__22页_483kb

Summary of "What if the A-share index falls to 2,000?"

Core Content

This report evaluates the potential impact of a decline in the A-share index to 2,000 on the solvency margins of major listed China insurance companies, based on the first half of 2015 performance and equity sensitivity analysis. It also provides investment recommendations for key players in the life and non-life insurance sectors.

Main Points

• Equity Mix and Investment Returns:

  • China insurers have an equity mix of 15-19% in their total investment portfolios.
  • Excluding non-A-share related equity portfolios, the equity mix drops to 4-12%.
  • In 1H15, key listed China life insurers showed strong VONB growth (38-45% y-y) driven by APE growth (20-48%).
  • The overall investment returns for the sector were strong (6.6-10.5% for 1H15), with China insurers timing the equity market well in 2Q15 when the A-share index rose by 37.8%.

• Equity Sensitivity Analysis:

  • NCI has the highest equity sensitivity, with BV and EV dropping by 7% and 4% for each 10% change in equity value.
  • CPIC, PICC Group, and China Life have the least equity sensitivity, with EV falling by 1.5-1.8% for each 10% drop in equity value.
  • If the A-share index drops to 2,000, China Life, CPIC, and PICC P&C would maintain solvency margins above 170%, while Ping An and PICC Group would need to raise RMB17b and RMB10b respectively to maintain solvency margins at 170%.

• Investment Recommendations:

  • China Life (2628 HK) is the top pick in the life insurance sector, trading at 1x 2016E EV, with a strong interest rate gap (175bp) between the reserving rate and the 1yr PBOC benchmark bank deposit rate.
  • PICC P&C (2328 HK) is the top pick in the non-life insurance sector, trading at 1.45x 2016E PB with a 20% ROE outlook and expected to benefit from auto insurance premium rate liberalisation.

• Current A-share Index Situation:

  • The A-share index has fallen 42% from its peak on 12 June 2015 to its current level of 3,014.
  • A-share equity mix and the impact on solvency margins are analyzed using a portfolio beta of 0.85.

• Solvency Margin Projections:

  • If the A-share index drops to 2,000, China Life's solvency margin would fall to 252%.
  • Ping An and PICC Group would need to raise significant capital to maintain solvency margins at 170%.

• Equity Investment Position:

  • Equity investment positions are detailed for different A-share index levels, showing the impact on capital availability and solvency margins.

• Financial Performance:

  • The report includes detailed financial data, such as profit and loss statements and balance sheets, for Ping An Insurance, highlighting their growth and performance metrics.

Key Information

• Equity Mix: 15-19% of total investment books, but 4-12% when excluding non-A-share related equities.
• Solvency Margin:
  • China Life: 309% at end-June 2015, projected to 252% if A-share index drops to 2,000.
  • Ping An: 197% at end-June 2015, would need to raise RMB17b to maintain 170% solvency margin.
  • PICC Group: 177% at end-June 2015, would need to raise RMB10b to maintain 170% solvency margin.
• Equity Sensitivity:
  • NCI: BV and EV drop by 7% and 4% per 10% equity decline.
  • China Life, CPIC, and PICC P&C: EV drops by 1.5-1.8% per 10% equity decline.
• Investment Metrics:
  • China Life: Trading at 1x 2016E EV, expected to benefit from the interest rate gap.
  • PICC P&C: Trading at 1.45x 2016E PB, with a 20% ROE outlook and expected to benefit from auto insurance rate liberalisation.
• Market Volatility Risk:
  • A-share market volatility is the biggest risk to the BUY ratings, given the high correlation between the A-share index and the sector's valuation.
• Capital Raising Needs:
  • Ping An and PICC Group are projected to require capital injections if the A-share index drops to 2,000 to maintain solvency margins.

Conclusion

The report concludes that while a significant drop in the A-share index to 2,000 would have a negative impact on the solvency margins of China insurers, China Life, CPIC, and PICC P&C are expected to remain above the 170% solvency margin threshold. Ping An and PICC Group would need to raise capital to maintain solvency. China Life and PICC P&C are highlighted as top picks due to their strong fundamentals and potential for growth in their respective sectors.