China Insurance Industry by DB
Fundamental, Industry, Thematic, Thought-leading Deutsche Bank's Company Research's Investment Policy Committee has deemed this work F.I.T.T. for our clients seeking differentiated ideas. The unification of accounting standards between the A-share and H-share listed China insurance companies has both financial and strategic implications for China insurers. We assess the ‘new’ market shares of the H-share listed insurers, earnings implications as well as changes to their strategic behavior. Fundamental: The financial impact under the new accounting standards Industry: China much more underpenetrated than previously thought Thematic: Shifts in strategic behavior should increase competition for agents Thought-leading: Identifying the winners in the new landscape Our top picks in the China insurance sector are China Life and CIIH Fundamental, Industry, Thematic, Thought-leadin FITT Research F Two key differences between the Chinese (CAS) and Hong Kong (HKFRS) accounting standards will be unified from the start of next year. We estimate earnings under HKFRS for China Life, Ping An and PICC could fall 37%, 52% and 18%, respectively, in 2010, with no change to CIIH’s earnings. Embedded values, earnings under CAS and solvency margin, however, should remain unchanged. I With about half of insurance premiums under CAS expected to ‘vanish’ under the new accounting rule, stricter premium recognition criteria would result in 2008 life insurance penetration rates (premiums/GDP) falling from 2.2% to 1.2%. This would once again highlight China’s extremely low insurance penetration rate and its strong growth potential. S-curve analysis also shows the China life insurance sector rapidly approaching an inflection point from which penetration rates should increase markedly. This has positive implications for new business multiples. T agents We see a shift in insurers’ strategy towards those insurance products that are recognized as premiums, and away from investment-type products. This is due to the importance of market share as an indicator of a successful expansion strategy, particularly for the small insurers in a rapidly emerging market. With these insurance products best distributed by agents, we foresee intensifying competition for new agents. The resulting ‘new’ market shares should also highlight how difficult it has been for foreign insurers to expand their reach, even though China opened its insurance sector to foreign insurers back in 2004. T Listed local life insurers with a sizeable agency force and a low proportion of new agents should be winners, and we believe China Life is best placed under the new accounting standards. Its largest-of-peer agent force of 716,000 agents would be hard to replicate, and China Life appears well placed to grow those insurance products that are recognized as premiums. China Life’s low proportion of new agents in recent years also sees its agent turnover suffering less from a likely pickup in agent competition. O Buy China Life, TP: HKD33.00 and CIIH, TP: HKD19.00, our top picks in the sector. We rate Ping An a Hold, TP: HKD57.00 and have a Sell on PICC, TP: HKD3.50. We use SOTP, appraisal value and Gordon Growth models to value the shares. Key risks include a stronger A-share market and de-regulation of investment channels on the upside, and higher bank deposit rates and excessive competition for agents on the downside. (See pages 20-21 for further details.)
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