INSURANCESTRATEGYLIFEINTRANSITIONPCINDOWNTURN0109

1、investment focusjanuary 8, 2013insuranceresearchshengbo tangsfc ce ref: aytbo lianlife in transition; p&c in downturn2013 insurance sactionwe downgrade all h-/a-share listed insurers to accumulate because current stock prices are not cheap enough givengrowth prospects, with only 10% upside poten

2、tial to our latest target prices. these tp assume a 10% investment return on thea-share market in 2013. our order of preference: cpic, china life, ctih and nci among h-shares, and cpic, chinalife and nci in a-shares.transition of life insurers will continue into 2013 and p&c insurers have starte

3、d to trend down. we still prefer life names top&c. in the transition period, life insurers are value plays rather than growth plays, resembling highly-leveraged,equity-linked bond funds with an embedded policy option. looking into 2013 and beyond, whether life insurers canregain growth faster th

4、an gdp largely depends on institutional reform of pension and health insurance. in p&cinsurance, underwriting profitability has peaked down.reasoninglife insurance in transition after high growth stage at the expense of unbalanced business structure. life insurance inchina has enjoyed more than

5、30 years of rapid, compensatory growth, with channel and product innovation the drivers ofgrowth in premium income. however, the scale-driven strategy in recent years has resulted in an unbalanced businessstructure. the old business model needs to be transformed and life insurance has already entere

6、d a period of transition.the overhangs are maturity payment and policy surrender in the near term, and new entrants from the banking sectorin the long run. we expect operating cash flow to plunge 50% to rmb180bn in 2013, mainly because: 1) most of thefive-year single-premium participating policies s

7、old through bancassurance will mature and at least rmb150bn needs to bepaid; 2) the widening gap between deposit gains and yields to maturity could prompt customers with policies yet to mature tosurrender those policies. to cope with the pressure, life insurers could continue boosting sales of short

8、-term savings-typeproducts, which will impede their efforts to transform their business model.hope lies in breakthroughs on pension and health insurance to refocus on protection and long-term savings. internationalcomparison shows that chinas life insurance market is relatively saturated, but pensio

9、n and health insurance have hugegrowth potential. favorable policies could spark another life insurance boom. if institutional reforms are successful, lifeinsurance premium income could resume compensatory growth of 16% p.a. in the next ten years.p&c underwriting profitability has peaked down du

10、e to overcapacity. changes in supply and demand are the intrinsicdeterminant of underwriting cycles in chinas p&c insurance market, and regulatory policies are extrinsic influences. on thesupply side, p&c insurers have greatly enhanced their supply capacity after replenishing capital with th

11、eir own profits,shareholder capital injection and subordinated debt issuance since 2011. on the demand side, changes are relatively small dueto weak new car sales. we believe the combined ratio will continue worsening to 100% in the next 23 years.valuation and recommendationh-/a-share insurers are t

12、rading at 1.6x/1.5x 2013e p/ev-life. we roll over the target prices for cpic/china life/ctih/ncito hk$33.00/28.80/18.50/33.70, up 8.1%/9.6%/14.0%/9.5%, respectively. given only 10% upside potential for current stockprices versus our latest tp, we downgrade the ratings of all h-/a-share listed insure

13、rs to accumulate.risksprolonged fatigue in the capital market; weaker-than-expected policies.please read carefully the important disclosures at the end of this reportcicc research: january 8, 2013table of contentsinvestment summary: why downgrade to “accumulate”?. 4transformation of life insurance t

14、o continue . 5life insurance in transition after high-growth stage at the expense of unbalanced structure . 5overhangs are maturity payment and policy surrender and new entrants from the banking sector . 8hope lies in breakthroughs on pension and health insurance .11p&c insurance in a downtrend

15、. 15p&c underwriting profitability has peaked down due to overcapacity . 15market-oriented reforms will lead to intensified competition . 17valuation and recommendation . 19cpic (02601.hk): accumulate . 21china life (02628.hk): accumulate . 22ctih (00966.hk): accumulate . 23nci (1336.hk): accumu

16、late . 24please read carefully the important disclosures at the end of this report2cicc research: january 8, 2013figuresfigure 1: earning forecasts and latest tp .4figure 2: premium income of life insurers to shift from high growth to medium growth.5figure 3: more than 80% of life insurers premium i

17、ncome is generated from investment and savings products .5figure 4: the share of life insurers premium income generated from bancassurance is approaching 50%.6figure 5: international comparison shows chinas life insurance (excluding annuity and health insurance) is saturated.6figure 6: lackluster re

18、turns rendering life insurance products weak among financial products in attracting funds .7figure 7: reforms of regulatory system, corporate governance and channel management are pending .7figure 8: life insurers forecasted operating cash flow .8figure 9: forecasted major life insurers operating ca

19、sh flow sensitivity .9figure 10: bank-owned insurers are growing rapidly and the size of their premium income is rising significantly.9figure 11: the share taken by bancassurance differs from country to country, with china in the middle .10figure 12: bank-owned insurers are important players in euro

20、pe and hong kongs financial sector .10figure 13: international comparison of health insurance and annuities . 11figure 14: outlook for chinas life insurance industry assuming institutional reform in health insurance and pensions. 11figure 15: share of health care expenditure in gdp remains low in de

21、veloping countries including china .12figure 16: international comparison of share of commercial insurance in total life insurance premium income .12figure 17: us population aging and annuity growth.13figure 18: japan population aging and annuity growth .13figure 19: chinas annuity business is in th

22、e fledgling stage and policy reform is needed .14figure 20: us p&c insurance industrys historical combined ratio (19692010) shows cyclicality in underwriting 15figure 21: chinas p&c insurance underwriting profit margin is topping out .15figure 22: p&c insurers have reinforced their capit

23、al base since 2011. ratio of book value to retained premiums inp&c insurance industry has reached the highest level of recent years.16figure 23: chinas p&c market is dominated by auto p&c insurance (making up 70% of premiums) and slowgrowth of new car sales will limit p&c premium inc

24、ome growth .16figure 24: p&c insurance premiums are expected to grow steadily at 1315% p.a. in the next three years .17figure 25: market-oriented reform of auto insurance rates in china.17figure 26: foreign p&c insurers market share .18figure 27: entry points under conservative assumptions.1

25、9figure 28: sensitivity test of ev on a-share market performance .19figure 29: sensitivity test of p/ev multiples on nbv growth.19figure 30: changes in assumptions for life insurers .20figure 31: sensitivity analysis for life insurers.20figure 32: cpic financial highlights and stock information .21f

26、igure 33: china life financial highlights and stock information .22figure 34: ctih financial highlights and stock information .23figure 35: nci - financial highlights and stock information .24figure 36: cpic historical and forecasted financial data .25figure 37: china life historical and forecasted

27、financial data .26figure 38: ctih historical and forecasted financial data .27figure 39: nci historical and forecasted financial data .28figure 40: valuation comparison (diluted) .29please read carefully the important disclosures at the end of this report3cicc research: january 8, 2013investment sum

28、mary: why downgrade to “accumulate”?we downgrade the ratings of the h-/a-share life insurance sector and its constituents to accumulate because currentvaluations are relatively fair and listed insurers stock prices are close to our latest target prices. there is only 10% upsidepotential from our lat

29、est tp, which assumes a 10% investment return on the a-share market in 2013.life insurance is in transition after a high growth stage at the expense of unbalanced business structure. lifeinsurance in china has enjoyed more 30 years of rapid compensatory growth, with innovations in channel and produc

30、thaving driven growth in premium income (figure 1). however, in recent years the scale-driven strategy has resulted inan unbalanced business structure. old business model needs to be transformed and life insurance has already entered aperiod of transition.the overhangs are maturity payment and polic

31、y surrender in the near term, and new entrants from the bankingsector in the long run. we expect operating cash flow to plunge 50% to rmb180bn in 2013 (figure 7), mainlybecause: 1) most of the five-year, single-premium participating policies sold through bancassurance will mature in 2013and at least

32、 rmb150bn needs to be paid; and 2) the widening gap between deposit gains and yields to maturity couldprompt customers with policies yet to mature to surrender those policies. to cope with this pressure, life insurers couldcontinue boosting sales of short-term, savings-type products, which will impe

33、de efforts to transform their businessmodel.breakthroughs to be made in pension and health insurance to refocus on the functions of protection and long-termsaving. international comparison shows that chinas life insurance market (excluding health insurance and annuities) isrelatively saturated, but

34、pension and health insurance have huge growth potential. favorable policies could sparkanother life insurance boom. if institutional reforms succeed, chinas life insurance premium income could resumecompensatory growth at 16% p.a. in the next ten years (figure 13).p&c underwriting profitability

35、has peaked down due to overcapacity. the relationship between changes in supplyand demand is the intrinsic driver of underwriting cycles in chinas p&c insurance market, and regulatory policies areextrinsic factors influencing this process. on the supply side, p&c insurers have greatly enhanc

36、ed their supply capacityafter replenishing capital with their own profits, shareholder capital injections and subordinated debt issuance since2011. on the demand side, changes are relatively small due to weak new car sales. we expect the combined ratio tocontinue worsening to 100% in the next 23 yea

37、rs.figure 1: earning forecasts and latest tp2013e (hk$)nbv/shrev/shrtpsbeforeafter+/-beforeafter+/-beforeafter+/-china life - hcpic - hnci - hctih0.981.151.830.750.961.031.810.71-2.0%-10.5%-1.3%-5.2%15.8820.5525.1714.6316.0319.5524.4815.001.0%-4.8%-2.7%2.5%26.330.530.816.228.833.033.718.59.6%8.1%9.5

38、%14.0%source: company data, cicc researchnote: we adopt a 10% discount to our tp for nci due to the risk of share unlocking, and a 10% discount to our tp for ctih due to the risk of capitalraising, both compared to our fair prices derived in figure 27.please read carefully the important disclosures

39、at the end of this report470%59.7%60%yoy premiumcicc research: january 8, 2013transformation of life insurance to continuelife insurance in transition after high-growth stage at the expense of unbalanced structurelife insurance in china has enjoyed 30 years of rapid compensatory growth, and innovati

40、ons in channel and producthave been the constant drivers of growth in premium income. a review of the development of life insurers during the pastdecade shows that from 2000 to 2010, premium income of chinese life insurers achieved a cagr of 26.5%, far above thecagr of nominal gdp during the same pe

41、riod (figure 2). premium income grew 60% yoy in 2002 on the introduction ofbancassurance and new products such as participating life insurance; it expanded 50% yoy in 2008 thanks to the rapidgrowth of investment-type products such as investment-linked insurance and universal insurance on the back of

42、 a boomingcapital market.figure 2: premium income of life insurers to shift from high growth to medium growthhigh-grow th phase: 20002010 cagr for lifeinsurers premium income reached 26.5%in 2002, the introduction of bancassurancechannel and the promotion of participatingproducts fueled the fast gro

43、w th of lifemedium-grow th phase: 20112014 cagr for lifeinsurers premium income is expected to be 7.4%in 2008, thanks to the flourishing capitalmarket, the premium of univ ersal andinv estment-linked products experienced a50%42.1%insurance.48.5%robust grow th.40%30%31.1%21.9%28.9%20%10%13.3%7.2%14.0

44、%11.3%11.0%6.9%3.5%4.0%8.4%10.0%0%00010203040506070809101112.11012e13e14epremium income yoy growthofof life insurance companiessource: yearbook of chinas insurance, annual report of chinas insurance market, circ, cicc researchfigure 3: more than 80% of life insurers premium income is generated from

45、investment and savings products100.0%80.0%60.0%2.0%11.0%59.0%8.0%17.1%44.9%5.8%19.8%51.7%1.8%13.0%65.0%1.5%10.7%71.0%0.0%0.8%80.2%40.0%20.0%0.0%200611.5%16.5%20079.8%20.3%20089.3%13.5%20098.4%11.8%20107.8%9.0%20119.0%9.9%general life insuranceparticipating life insuranceinvestment-linked insurancehe

46、alth insurance & accident insuranceuniversal insuranceprotection productssource: annual report of chinas insurance market, cicc researchhowever, the scale-driven strategy in recent years has resulted in an unbalanced business structure, as reflected in: 1) ahigh portion of low-margin participati

47、ng products, which account for 80% of chinese life insurers premium income (figure3), versus 20%/30%/15% in the us/germany/south korea; and 2) bancassurance kick-starting a decade of rapid growth oflife insurance in china and having now overtaken the individual channel to generate the biggest share

48、of premium income(figure 4). however, stricter regulations and competition from wealth management products issued by banks have begun toweigh on the bancassurance business since 2011.please read carefully the important disclosures at the end of this report520.0(%)12.0(%)cicc research: january 8, 201

49、3figure 4: the share of life insurers premium income generated from bancassurance is approaching 50%100%16.1%13.2%9.1%8.5%9.0%7.5%80%60%29.1%34.2%48.9%47.7%50.0%47.8%40%20%54.8%52.6%42.0%43.8%41.1%44.6%0%200620072008200920102011other channelsbancassurance channelindividual agent channelsource: annua

50、l report on chinas insurance market, cicc researchold business model needs to be transformed and life insurance has entered a period of transition. short-term, lacklusterinvestment returns are rendering life insurance products weak among financial products in attracting investable funds (figure6). m

51、edium term, excluding annuity and health insurance, the life insurance market is saturated and there is limited room forcompensatory growth (figure 5). therefore, the life insurance industry growth is set to slow to a medium pace. lookingahead, we expect life insurance to see industry-wide reform of

52、 the regulatory system, corporate governance and channelmanagement (figure 7). a lack of policy stimulus and innovations in channels as well as products will slow the growth rateof life insurers premium income in 20112014 to that of nominal gdp. we believe institutional reform in pension andhealth i

53、nsurance is the key for life insurers to enjoy a growth rate far in excess of nominal gdp growth.figure 5: international comparison shows chinas life insurance (excluding annuity and health insurance) is saturatedinternational comparison on life insurancepenetration (including annuity and health ins

54、urance)international comparison on life insurance penetration(excluding annuity and health insurance)11.315.014.910.08.010.07.36.04.65.04.72.14.24.02.02.11.80.80.00.0taiwanjapangermanymainlandustaiwanjapangermanymainlanduschinasource: national insurance regulatory bodies, swiss re, cicc researchplea

55、se read carefully the important disclosures at the end of this report6chinacicc research: january 8, 2013figure 6: lackluster returns rendering life insurance products weak among financial products in attracting funds20061h12 cagr: banks wmps: 81.6% trust assets: 65.2% aum of asset mgmt business of

56、security firms: 46.9% utilization balance of insurance funds: 25.4% (rmb, tn)100%80%60%40%20%0%20061.80.40.220072.70.80.90.420083.10.91.21.520093.71.42.01.720104.61.93.02.820115.52.74.84.61h126.24.65.56.0balance of banks wmpsaum of asset mgmt business of security firmsasset balance of trust companie

57、sutilization balance of insurance funds10.00(%)8.919.089.368.048.006.907.146.004.002.004.713.803.322.624.994.063.225.594.804.313.883.602.414.003.732.705.264.384.055.454.894.040.002006200720082009201020111h12average yield on banks wmps with maturity of 3 monthscredit rate for china lifes universal in

58、surance productsaverage expected annualized yield on collective trust productsweighted average benchmark ir for 5-yr time depositssource: circ, cbrc, wind, cicc researchfigure 7: reforms of regulatory system, corporate governance and channel management are pendingregulatory systemcorporate governanc

59、e the guarant eed rate cap is set at 2.5% on life adoption of scale-orient ed,rather than value-insurance products; timely disclosure of total written premiums (twp),oriented, operating strategy; performance assetment based on twps, ratherrather than annual premium equivalent (ape), isrequired.obsta

60、bles todevelopment protection-than new business value (nbv).type insurance productsdistribution channel management suitability to existing distribution channel takes precedenc eover clients need in new product design; major business channel adopts short-term business target; inappropriate selling tactics widely used.source: circ, cicc researchplease read carefully the important