EUR 850.00 For Business Accounts Only

Morningstar | Ping An Insurance Net Profit Surged on FVE Gains on Equity Investment

No-moat Ping An Insurance’s first-quarter results reported net profit growth surging 77% from the year-ago period. Though such growth exceeded our expectation, it was primarily attributable to the doubling of total investment return on a sharp increase in fair value gains from Ping An’s equity investments after its adoption of IFRS9. The strong stock market rally has translated to a CNY 34.2 billion fair value gain which represented nearly half of its total investment return in the first quarter, versus a CNY 5 billion loss in the year-ago period. The 22% total revenue growth was also inflated by the same factor. Excluding the mark-to-market impact of trading assets, revenue growth would slow to 9% from the year-ago period. Furthermore, growth in adjusted operating profits, which excludes short-term investment variance, the impact of a discount rate change, and one-off material nonoperating items growth, increased 21% from the year-ago period. Given the slowing insurance premium and resilient growth in adjusted operating profits were within our expectation, we retain our fair value estimate at CNY 88 and HKD 103 for A-shares and H-shares, respectively.

With the H-shares trading at an 8% discount to fair value, we believe the stock is slightly undervalued but we suggest investors consider a wider sufficient margin of safety. The stock has rallied 38% since year-to-date, as the market has realized its improvement in underwriting profitability and stronger-than-peer return on embedded value, or EV, as we previously noted. Trading at the high end of its historical valuation range at 1.2 times forward price/EV and its valuation level now stands well above the 0.6 to 0.7 times for close peers including China Life and CPIC. Upside surprise in its new business value growth, or NBV, above 10% is likely to trigger further upward revaluation for the stock, in our view.

Among the adjusted operating profits, life insurance, P&C insurance, banking and asset management business grew 21%, 77%, 13% and 20%, respectively, from the year-ago period, while fintech and healthtech business saw a 22% decline due to increased investment in some of the firms in nascent stage. NBV growth in life insurance rebounded to 6% versus the 7.5% drop in the year-ago quarter. The growth was driven by a 5.9 percentage point increase in NBV margin despite a 11% decline in annualized new premium. Though the past quarter, NBV growth was slightly lower than our expectation partly due to the company’s decision to de-emphasize the new year sales campaign, we expect it will gradually pickup in coming quarters as moving out of the high base in the first quarter.

The 77% growth in P&C insurance net profits was driven by increased investment return and reduced tax rate as sales commission ratio fell below the regulator’s requirement. P&C premium growth slowed to 9% versus 18% growth in the year-ago period. Growth in auto insurance premium remained steady at 8% and represented about 70% of total premium, while growth in accident and health, and other non-auto insurance slowed to 45% and 7%, respectively, from 55% and 51% in the year-ago period. Along with peers, combined ratio was under pressure, climbing one percentage point to 97% from 2018. Management explained the deterioration was attributable to lower sales acquisition expenses as the company reduced commission expenses in response to the regulator’s tightened regulation. Some of the sales acquisition expense are allowed to capitalize and amortize in the future. Regardless of such change, combined ratio remained relatively stable.