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Morningstar | Ping An Insurance Delivered Stronger than Expected Growth in EV and Underwriting Profit Improvement

We increased our fair value estimate for no-moat Ping An Insurance to CNY 88 from CNY 80 and HKD 103 from HKD 92 per share for A-shares and H-shares, respectively, following its stronger-than-expected results despite the challenges in both capital market and insurance sales in 2018. The increase was attributable to our improved outlooks for its underwriting profitability of insurance business and time value of money. The firm exceeded our expectations in net profit and embedded value, or EV, growth; net profits to shareholders grew 21% on strong operating profits of life insurance; while the 3.7% total investment return under the implementation of IFRS9 was partially offset by investment gain from the revaluation of Lufax. Growth in EV surpassed our expectation by one percentage point to 21%, driven by strong contribution from new business value, or NBV, and positive operating variance as expenses grew below its actuarial assumptions. Adjusted operating profits growth, which exclude short-term investment variance, the impact of a discount rate change, and one-off material nonoperating items growth, increased 19% from 2017 on the 35% and 25% respective increases in life insurance and fintech and healthcare technology divisions. With the H-shares trading at an 18% discount to new fair value, we believe the stock is undervalued, as the market seems overly concerned about short-term challenges including capital market volatilities and tighter regulations, while Ping An’s continuous improvement in underwriting profitability and stronger-than-peer return on EV (22% average over the past five years) have yet to be fully recognized. Ping An’s good progress of its customer-centered strategy in terms of customer growth and cross sales. Financial customers grew 11% to 184 million while number of contracts per client significantly rose 9% to 2.53 from 2017. Operating profit per client surged 18% to CNY 531, indicating strong stickiness of its integrated financial platform.

Core business life insurance continued to outperform, with adjusted operating profits increasing 35% from 2017 and representing 63% of the group. NBV grew 7.3% on 4.4 percentage point increase in NBV margin to 43.7% despite a 3.6% decline in first-year premium given the change in product mix as required by regulation. Such solid growth is witnessed in both agent and bancassurance channels. Ping An's expansion of its agent workforce led the industry despite industrywide challenges, thanks to its industry-leading agent productivity. Average agent headcount increased 4.8% to 1.3 million from 2017, while NBV per agent up 1.1% on difficult market conditions, leading to a 6% growth in agency NBV. Fourth-quarter NBV accelerated to 24%, versus an 8% decline, 10% and 11% increases, respectively, in the first three quarters. Ping An’s NBV growth has outperformed over the past five years and now presented 40% of the industry. In light of such strong momentum, we expect Ping An’s NBV will achieve around 13% growth in 2019.

The market is worrying about slowing NBV growth given the pressure in new agent recruiting amid aging population and intensifying competitions. We believe Ping An is best positioned for the change in secular trend, thanks to its unique Internet plus technology strategy. Management believed that agent force will remain the core driver for life insurance business growth over the next eight to 10 years, while the company is also well prepared for changing customer acquisition behavior in the longer run, via the establishment of five ecosystems both online and offline. Number of Internet users grew 23% to 538 million, and these five ecosystems have brought in 35.6% new customers in 2018.

Despite an 8% drop in net profit for property and casualty insurance, underwriting profitability of such business came in slight better than expectations. Combined ratio remained steady at 96%, slightly improved from 96.2% in 2017. This was attributable to its prudent expansion in the market for major product lines and expense savings due to growing scale and technology adoption. Its P&C business continued to gain market shares over the past 11 years, and was able to keep its combined ratio steady at 95% to 96% level over the past five years despite challenges including auto insurance pricing reform and declining new auto sales. This indicates very strong competitive advantage in our view.

Ping An also announced its plan to buy back A-shares for no more than CNY 5 to 10 billion at price not exceeding CNY 101.24 per share. All of such investment will be made from the group’s own capital of CNY 42 billion, up 9.5% from 2017. This will be the first round share buyback and they do not exclude the possibility to launch following plans if the management sees opportunities. 2018 full-year dividends lifted 15% to CNY 1.72 per share, up 380% from 2014. As a result, dividend payout ratio increased to 27% of adjusted operating profits, up from 20% in 2016 and 2017.