Morningstar | CPIC’s 3Q Results Showed Weakening Premium Growth and Weakening P&C Profitability. See Updated Analyst Note from 29 Oct 2018
Following no-moat China Pacific Insurance, or CPIC’s, third-quarter results, we reduce our fair value estimate to CNY 34 from CNY 38 per share for A shares and to HKD 38 from HKD 43 for H shares to reflect our slower near-term premium growth assumption. With slowing premium growth and weaker investment returns, growth in CPIC's total revenue and net profits dropped to 13.6% and 16.4% for the first three quarters. Year-on-year growth in P&C insurance premium slowed to 9.3% from 16% in the first half on lower premium per contract after deepening auto pricing deregulation and slowing auto sales. Life premium growth was a bit disappointing, with third-quarter premium growth falling to 3% versus 14% in the previous quarter, and agent new premium growth fell to zero from 8%. Besides the ongoing agent force optimization, the slower growth was partially due to a high base in the year-ago period which saw the promotion of short-term savings type products before the launch of stricter product rules by the regulator in October 2017.H shares are trading at a 24% discount to our fair value estimate and 0.7 times 2018 price/embedded value conservatively assuming 10% growth in embedded value, versus the 19% average growth over the past four years. We believe the stock is undervalued as the market remains overly concerned about the general volatility in the capital market, CPIC’s slowing life premium growth and weakening profitability in property-casualty insurance business. We believe CPIC‘s good track record of steady investment performance over the past decade gives us confidence that the firm is able to meet its long-term average return of 5.0%. We expect life premium growth will pick up as moving into a lower-base fourth quarter. Rising contribution from high-margin protection products should also helped alleviate the negative impact of declines in new agent premium, thus we expect an around 10% decline in full-year new business value.
Growth in P&C insurance business slowed to 13.5% for the first three quarters, versus the 15% and 12.3% for Ping An Insurance and PICC P&C. Representing over 70% of total P&C premium income, auto insurance growth decelerated to 3.7% in the past quarter on weakening auto sales, versus 14% and 6% in the previous two quarters. Nonauto insurance remained a major growth driver, while growth slowed down to 26% from 33% in the first half. Income tax grew 35% from the year-ago period, as driven by rising auto insurance sales-related expenses which exceeded the regulator’s upper ceiling and are not tax-deductible. Such expenses remained high over the recent quarters, indicating the competition continued to intensify amid weaker auto sales. We expect underwriting profitability for CPIC’s P&C business will be more challenging in the fourth quarter which is traditionally high quarter for expenses and claims ratio.
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