Following our article on the Chinese insurance sector and why it is set to grow in years to come, we follow up with a highlight of four growth plays that DBS recommends investors to invest in the sector.
Ping An Insurance (Ping An) has business footprint that spans across life insurance, property and casualty insurance, banking, trust services, asset management, and internet finance. Its flagship entity is Ping An Life, which accounts for 48 percent of Ping An’s profit in 1H17.
Life Insurance Business To Drive Growth
DBS notes that Ping An’s strength lies in its strong agent productivity, high operating efficiency and an experienced management team. Given its retail focused strategy concentrating on protection and regular-premium policies, DBS believes Ping An Life should be able to deliver 29 percent compounded annual growth rate (CAGR) in New Business Value (VNB) and 25 percent CAGR in Embedded Value (EV) in the coming two years.
Leading Innovative Insurer In The World
Ping An is one of the leading innovation insurer in the world, not just in China. Ping An has been unveiling various technological innovations, such as world leading facial recognition, Ping An FinCloud, and its self-created four ecosystems (financial services, healthcare, real estate, and auto). DBS believes that these technological innovations will serve as additional upside for Ping An.
Ping An has also been joining the fintech game aggressively with its internet finance business, Lufax. With continuous growth in the number of active users and trading volume in Lufax, it managed to achieve break-even in 1H17. Moving forward, Lufax still holds great prospects and opportunities. BUY, TP HK$86.00
Life Insurance Giant On Upward Growth Trend
China Life is the largest life insurance company in China, both in terms of premium and assets. Due to its sizeable existing underwriting portfolio, DBS warns that growth for China Life might not be as fast as its peers. However, the overall sector industry outlook will buoy well for China Life and it is expected to grow at 19 percent CAGR for its VNB and 16 percent CAGR for its EV between FY17-FY19F.
Investment Yield To See Significant Improvement
China Life has started to lengthen its asset duration by allocating more assets to debt-type financial products and equities (H-share). It has also increased its scale by cash and term deposits, to capture the benefit from rising bond and dividend yield. Given its past prudent investment culture, DBS believes that the rise in its credit and risk appetite will help to support its investment yield. BUY, TP HK$32.00
China Taiping is DBS’ top pick among China insurers.
Significant VNB And EV Growth Ahead
China Taiping is benefitting from its early focus on regular premium polices and the fast-growing traditional life/long term health insurance segment. Both segments accounted for 96 percent and 29 percent respectively of its first-year premium (FYP) in 1H17. So far, China Taiping Life has recorded strong Value of New Business (VNB) growth of 55 percent year-on-year (based on annual premium equivalent basis) during the period. As China Taiping continues to focus on “value” growth with sales coming from life or health products, DBS expects growth from VNB to reach 43 percent year-on-year and EV to reach 19 percent year-on-year in FY17/18F.
Prime Position To Take Advantage Of Duration Mismatch
China Taiping has the best duration mismatch position among China insurers to benefit. China Taiping currently has an asset duration of nine years and liability duration of 30 years. This translates to a 21-year duration gap. DBS notes that the wide duration gap is driven by its focus on regular-premium policies, and endowment/annuity products. Amid a rising interest rate environment, this bodes well for China Taiping and should enhance its book value. BUY, TP HK$38.00
Early Mover Focusing On Protection Products
China Pacific Insurance Company (CPIC) is one of the early movers in adopting “value” growth strategy among Chinese insurers. Thanks to its continuous product mix shift towards long-term protection policies, CPI posted strong VNB and EV growth of 59 percent year-on-year growth 1H17. With the strong momentum expected to continue, DBS forecasts CPI’s VNB and EV to grow at 32 percent and 21 percent CAGR in FY17-19F.
Agency Force To Drive VNB Growth
As agency force has become CPI’s main sales channel for life business, the insurer has aggressively built up its agency force to increase by 36 percent year-on-year in 2016. Right now, nearly 90 percent of CPI Life’s underwriting business is driven by agent sales. With total agent number expected to reach one million by FY17F (53 percent year-on-year growth), DBS believes that this will translate into strong premium growth of 24 percent year-on-year in the next two years. BUY, TP HK$54.00