EUR 850.00 For Business Accounts Only

Morningstar | China Pacific Insurance’s 2018 Results Delivered Strong NBV Growth, P&C Underwriting Margin Improved

Following no-moat China Pacific Insurance's 2018 results, we retain our fair value estimate at CNY 34 per share for A shares and HKD 38 for H shares as we made little change to key assumptions. China Pacific's H shares are trading at an 18% discount to our fair value estimate and 0.8 times 2019 price/embedded value assuming 15% growth in embedded value, or EV, versus the 18% average growth over the past five years. We believe the stock is undervalued as the market remains overly concerned about the impact from general volatility in the capital market on the insurer’s investment portfolio, the firm's slowing life premium growth, and weakening profitability in the property-casualty insurance business. China Pacific’s good track record in investments and underwriting performances over the past decade gives us confidence that the firm is able to achieve EV growth at around 15% over our five-year forecast period.

The 22% net profit growth in 2018 was attributable to steady premium growth of 13.7% and a 4-percentage-point reduction in reserve expense ratio to 35% of net earned premium, as a result of an increase in the 720-day moving average government bond yield. New business value, or NBV, of the life insurance business grew 1.5% from 2017, versus a 17.5% decline in the first half. The recovery exceeded our expectation, partly due to a low base in the second half of 2017 that contributed merely 26% of full-year NBV. It was also driven by a 4.3-percentage-point expansion in NBV margin to 43.7%, at a similar level to its competitor Ping An Insurance. The 17% growth in EV also beat our expectation, thanks to strong contribution from new business and expected return on EV. We expect EV growth will remain at about 15% in the near term, in line with steady contributions from the above-mentioned two factors, and relatively low fluctuation in operating and investment return variance thanks to the company’s prudent operations.

Life insurance premium grew 15% from 2017, significantly above the 0.8% industry growth though lower than the 21% growth of Ping An Insurance. Given the product mix restructuring, agent new premium dropped 5.6% and represented 23% of total premium. Despite a 3% contraction in monthly agent force, agent productively has improved amid challenging market conditions, as evidenced by a 4.7% increase in NBV per agent. The 30% growth in renewal premium provided strong support to premium income growth. However, we are slightly concerned about the early signs of a rebound in surrender rates in 2018 as market interest rate gradually declined since. The 13-month continuation rate and the surrender rate reversed the improvement trend over the past few years, with the former slightly dropping to 92.9% versus 93.4% and the latter increasing to 1.4% from 1.3% in 2017.

The property and casualty, or P&C, insurance segment delivered a 40-basis-point improvement in combined ratio to 98.4%, despite worsening auto insurance market fundamentals. P&C insurance premium grew 12.6%, above the 11.5% industry level growth in 2018. Auto insurance premium grew 7.5%, surpassing the 7% growth for Ping An Insurance and 5% growth for PICC P&C. Thanks to increasing contribution from cross sales that represented about 10% of total premium, the auto insurance combined ratio improved by 30 basis points to 98.4%, at par with the level of PICC P&C while lower than the 97.4% of Ping An Insurance. Similar to peers, non-auto insurance premium grew robustly at 30% and accounted for 26% of total P&C premium. Agriculture and liability insurances became growth drivers and generated relatively high profitability.