20210727-招银国际-China_Insurance_Transfer_of_Coverage__1H21_preview__Worst_case_already_priced_in_6页_881kb

CMB International Securities | Equity Research | Sector Update Summary

Core Content

This document provides an equity research update on the China Insurance Sector by CMB International Securities, focusing on the expected performance of Chinese insurers in the first half of 2021 (1H21), valuation analysis, and rating changes.

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Main Points

1. 1H21 Results Overview

• Chinese insurers are expected to report 1H21 results in late August.
• Life insurers are anticipated to experience deterioration in margin and soft new business volume (VNB) due to short-term headwinds.
  • CPIC: ~5% VNB decline
  • Ping An and New China Life: ~10% VNB decline
  • Taiping and China Life: ~15% VNB decline
• P&C insurers are expected to show improved underwriting margins, particularly PICC with a 1ppt YoY improvement.
• The current H share prices are believed to have already factored in the worst-case scenario for credit risks and growth outlook, suggesting low downside risk.

2. Sector Outlook and Recovery Expectations

• The weak 1H21 performance is attributed to multiple short-term negative factors.
• Hui Min Bao (government-sponsored insurance products) has suppressed demand for long-term critical illness insurance.
• New critical illness standards have delayed the training of agency forces, leading to soft VNB momentum.
• The demand for long-term protection is expected to recover in 4Q21-1Q22, as policyholders recognize the insufficiency of Hui Min Bao coverage.

3. Valuation and Investment Assumptions

• The valuation is based on conservative assumptions:
  • 3.0% long-term investment return
  • 11% risk discount rate
  • 35% write-down on corporate bonds and non-standard debt investments
• Valuation methods:
  • P/B-ROE method for PICC P&C
  • P/S multiple for Zhong An
• Fair value estimates are derived using the appraisal value method, incorporating adjusted assumptions.

4. Ratings and Price Objectives (POs)

• The insurance sector is re-rated to Outperform.
• Top picks:
  • CPIC-H and PICC P&C
• Rating and PO changes:
  • Ping An (2318 HK): Buy, PO 97.82, Upside 44%
  • Ping An-A (601318 CH): Buy, PO 81.19, Upside 49%
  • China Life (2628 HK): Buy, PO 18.29, Upside 39%
  • China Life-A (601628 CH): Sell, PO 18.21, Upside -38%
  • CPIC (2601 HK): Buy, PO 35.96, Upside 59%
  • CPIC-A (601601 CH): Buy, PO 35.82, Upside 30%
  • NCL (1336 HK): Buy, PO 33.02, Upside 51%
  • NCL-A (601336 CH): Sell, PO 27.41, Upside -35%
  • Taiping (966 HK): Hold, PO 11.84, Upside 3%
  • PICC Group (1339 HK): Buy, PO 3.06, Upside 24%
  • PICC Group-A (601319 CH): Sell, PO 3.17, Upside -42%
  • PICC P&C (2328 HK): Buy, PO 9.99, Upside 53%
  • Zhong An (6060 HK): Buy, PO 61.57, Upside 38%

5. Forecast Revisions

• VNB forecasts were cut by 7–16% for FY21-22E due to slower new business momentum.
• Earnings forecasts were trimmed to factor in reserve catch-up due to the continual downward trend in 10-year China government bond yields.
• Valuation changes are reflected in the EV/share, EPS, and BVPS values across all listed insurers.

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Key Information

• Insurer-specific forecast revisions:

  • Ping An: VNB/share down 13.8%, EV/share up 1.6%, EPS down 2.2%, BVPS down 0.4%
  • China Life: VNB/share down 13.8%, EV/share down 0.7%, EPS down 5.5%, BVPS up 0.4%
  • CPIC: VNB/share down 6.0%, EV/share down 0.4%, EPS down 0.7%, BVPS down 0.1%
  • NCL: VNB/share down 8.1%, EV/share down 0.3%, EPS down 4.2%, BVPS down 2.3%
  • Taiping: VNB/share down 16.3%, EV/share down 0.6%, EPS down 24.0%, BVPS down 38.0%
  • PICC Group: VNB/share unchanged, EV/share up 24.0%, EPS up 25.0%, BVPS up 3.4%
  • Zhong An: EPS down 92.6%, BVPS down 38.0%

• 10-year China government bond yield 750-day moving average is used to assess the impact on earnings forecasts.

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Conclusion

The research highlights that while the first half of 2021 presents short-term challenges for Chinese life insurers, the current valuations already reflect a worst-case scenario, indicating low downside risk. The P&C segment is expected to show improvement in underwriting margins. The sector is re-rated to Outperform, with CPIC-H and PICC P&C as top picks. The forecast revisions and rating changes are based on conservative assumptions and adjusted investment models. Investors are advised to consult with financial advisors due to the risks associated with the market and the potential for conflicts of interest.