EUR 850.00 For Business Accounts Only

Morningstar | CPIC’s Life Insurance Premium Growth Slowed Down During Management Reshuffle

With net profit growth accelerating to 46% from 23% in 2018, no-moat China Pacific Insurance's first-quarter results were on track to deliver our full-year expectation of over 40% growth. The pickup in growth was attributable to strong investment return and the CNY 7.3 billion reduction in insurance liability reserve as a result of rising 720-day moving average 10-year government bond yield. Investment return for the quarter surged 40%, versus a 10% decline in the year-ago period. Total investment yield improved 4 basis point to 4.6% on A share market rally and CNY 1.1 billion fair value gains on tradable investment. The company also reported CNY 7.2 billion increase in comprehensive income on fair value gains of available-for-sales investment. This translated to an 8.5% growth in shareholders’ equity from 2018, well on track to deliver our 15% projected growth in embedded value in 2019.

Given the earnings fluctuation was primarily driven by investment income and underwriting profitability looked relatively stable from 2018, 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 a 13% discount to our fair value estimate and 0.7 times 2019 price/embedded value assuming 15% growth in embedded value, or EV, versus the 18% average growth over the past five years. The stock is slightly undervalued as the market remains overly concerned about its slowing life premium growth and weakening profitability in the property-casualty insurance business.

Growth in gross premium income decelerated to 5.4% versus the 18% in the year-ago period, primarily due to slowdown in life insurance premium growth to 2.8% from 21%, while P&C insurance business showed resilient growth at 13%. Growth in agent channel was again struggling with first-year premium and first-year regular premium declining 13% and 18%, respectively, in contrast to the 7% and 9% respective growth rates for China Life. Furthermore, CPIC’s life insurance premium growth was lower than the 12% and 8% respective growth rates of China Life and Ping An Insurance. We believe this was attributable to management’s decision to de-emphasize the New Year Sales campaign due to change in regulatory and market conditions. While other firms, such as China Life and PICC Life with relatively heavy reliance on bancassurance channel, tend to stay focused on such campaign. Given strong seasonal pattern (which contributed over 40% of full-year premium) and increasing strategic divergency among companies, we believe such growth was not comparable among peers. In addition, we suspect the slowdown in life insurance growth was partly due to possible delay in strategy making during large-scale management reshuffle since late 2018, we expect steady improvement in growth momentum in coming quarters as the restructuring completes.