20151008-中国银河国际证券-China_Life_Insurance_Sector__Volatility_in_Equity_Market_Will_Not_Alter_the_Trend_of_Multiple_Year_Growth_75页_1mb

Summary of China Life Insurance Sector Analysis

Core Content

The document provides an in-depth analysis of the China life insurance sector, highlighting its resilience despite recent equity market volatility and outlining future growth opportunities driven by policy changes and demographic shifts.

Main Points

1. Equity Market Volatility Not a Repeat of 2008

• In 1H2015, life insurance companies reported net profit growth over 60%, but share prices dropped about 2% due to the sharp correction in the A-share market.
• The equity exposure in 1H2015 was 16.07%, much lower than the 27.1% peak in the previous bull market, indicating lower vulnerability.
• Interest rates have been falling since November 2014, leading to bond value gains, which may offset equity market losses.
• A two-sample T-test showed that the increase in equity exposure was likely passive due to market rally, not a shift in investment strategy.
• The sensitivity test suggested that even with a 20% drop in the CSI 300 index, the impact on net profits would be less than -30% of 2014 levels, indicating controllable risk.

2. Premium Growth Remains Strong

• 8M2015 premium growth reached 21.6% YoY, showing strong fundamentals.
• 1H2015 saw a 19.3% YoY growth in premiums, with total assets and equity also rising.
• Ping An recorded the highest net profit growth in 2014 at 39.5%, while New China Life had 44.9% and China Taiping had 140%.
• Despite strong performance, share prices of major insurers declined significantly, indicating market sentiment concerns.

3. Long-term Growth Potential

• The penetration rate and density rate of the insurance sector in China are still far below international averages, suggesting huge growth potential.
• The State Council's "New Guideline" sets ambitious targets for 2020, including 5% insurance penetration and RMB3500/person insurance density.
• The CAGR of premiums is expected to be 16.56% from 2015 to 2020, aligning with these targets.
• The government is shifting responsibility from itself to commercial insurance in managing retirement and health insurance systems due to aging population and economic pressures.

4. C-ROSS: New Solvency System

• The China Risk Oriented Solvency System (C-ROSS) is set to be implemented in 2016, replacing the simple factor-based system.
• C-ROSS includes quantitative capital requirements (Pillar I), qualitative supervisory requirements (Pillar II), and market discipline mechanisms (Pillar III).
• The new system is expected to unfreeze capital for larger insurers, who are better positioned to benefit from the more risk-oriented framework.
• Ping An is highlighted as the top pick due to its integrated financial business, better products/distribution structure, and readiness for internet finance.

5. Tax Deferral Policies and Health Insurance Demand

• A pilot tax-deferred health insurance plan was launched, offering RMB2400/year tax credit, which could increase demand for commercial health insurance.
• The potential impact on embedded value (EV) is estimated to be +0.5% to +4.2%, depending on the percentage of taxpayers using the credit.
• Ping An, China Life, and New China Life are expected to benefit significantly from this policy, with EV increases ranging from 0.5% to 2.4%.

6. Social Health and Pension Systems Under Pressure

• The social health insurance system has seen income growth of 17.4% and expense growth of 19.6% in 2014, with expenses growing faster than income.
• The replacement ratio for pensions has dropped significantly, from 75% in 1999 to 50.3% in 2011, and is expected to fall further, below the 50% threshold.
• The aging population and rising medical costs are putting pressure on the social pension system, making commercial insurance a necessary complement.

7. Commercial Pensions as a Growth Driver

• The government is shifting more responsibility to commercial insurers to manage the pension system.
• The merger of social insurance systems for public sector and private sector employees is likely to increase demand for commercial pensions.
• The commercial pension market is expected to grow at a CAGR of 39.63% between 2014 and 2020, with Ping An leading the growth, expecting premium increases of 3.9%-4.6% and China Life at 9.7%-12.2%.

Key Information

• Equity exposure in 1H2015 is 14.84%, well below the 30% limit, showing conservative investment approach.
• Bond yields remain high, supporting investment gains and offsetting equity losses.
• C-ROSS is expected to improve capital efficiency and risk management for the insurance sector.
• Insurance penetration rate is ~3%, while density is ~US$250 per capita, significantly lower than developed countries.
• Government policies are driving demand for commercial insurance, especially in health and pension sectors.
• Ping An is recommended as the top pick due to its strong financial position and strategic advantages.

Conclusion

Despite the recent equity market correction, the China life insurance sector is expected to continue its multiple-year growth trend. The low penetration and density rates of insurance in China, combined with government support and policy reforms, suggest a favorable long-term outlook. The implementation of C-ROSS and tax deferral policies are likely to boost the sector’s performance, especially for larger and more integrated insurers like Ping An.