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Morningstar | CPIC’s First-Half Results Posted Agent Headcount Contraction and Nonauto Insurance Losses

Net profit growth of no-moat China Pacific Insurance, or CPIC, slowed to 27% in the first half from 88% in the first quarter. The results were a bit disappointing on a decline in life insurance agent headcount, which might indicate weaker agent sales than peers, and underwriting losses in nonauto P&C insurance business. Similar to China Life, the robust bottom-line growth was primarily attributable to write-back of insurance reserve expenses. Excluding the CNY 3.7 billion decrease in insurance reserve expense, first-half operating profits would grow 4% instead of 43% in the year-ago period. Given that first-half revenue and net profits represent 58% and 45% of our respective full-year forecasts, we’re not changing our key assumptions, and we retain our CNY 38 per share fair value estimate for the A shares, while for the H shares, we lower our fair value estimate to HKD 43 from HKD 47 to reflect the latest CNY/HKD exchange rate.

Trading at a 27% discount to our fair value estimate and 0.8 times 2018 price/embedded value, its H-shares are undervalued compared with our valuation of 1 time forward price/embedded value. We believe the market is overly concerned about the negative regulatory impact on the sales of short-term savings-type products and weakening profitability in property-casualty insurance business. While CPIC’s steady rise in new business value, or NBV, margin is at an industry-leading level, a relatively large agent headcount contraction and its good track record business transformation should indicate a prudent and disciplined underwriting approach for the company during times of difficulty. This translates to our more positive long-term outlook for the company.

Life insurance premium grew 17.8% from the year-ago period, outperforming a decline of 9% for the industry average. Market share rose to 8% from 6.7% in 2017, confirming our prior expectation that tightening product regulations helped speed up industry consolidation. The growth was driven by strong increase in renewal premium, while agent new premium and NBV contracted 18% and 20% from the year-ago period, respectively. Contrary to China Life and Ping An, which recorded steady agent headcount during the period, CPIC’s agent headcount contracted by about 7% from 2017 to 839,000 by mid-2018, while monthly average headcount rose 2% from the year-ago period. Despite this, growth in second-quarter NBV and agent new premium improved to 35% and 8% from negative 32% and negative 29%, respectively, in the first quarter. NBV growth has improved quarter over quarter, and we expect it will record a stronger-than-peer recovery in the second half due to a low base in the year-ago period, but full-year NBV growth is likely to remain in negative territory in our view.

Growth in P&C insurance premium was strong at 15%, at the high end of listed peers. This was mainly driven by nonauto insurance premium growth at 33%, versus a 6% contraction in the year-ago period. Market share remained steady at 10% from 2017, and the 98.7% underwriting cost ratio was flat from 2017 and mid-2017. However, the accelerating growth resulted in underwriting losses for this segment related to property insurance, credit insurance, and casualty insurance, only one year after management turned around the business in 2017. Performance in auto insurance was positive, seeing premium growth increasing to 10% growth from 0% in the year-ago period, while underwriting costs fell 70 basis points to 98% on a lower claim ratio as a result of CPIC’s focus on high-quality customers.