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1、,Investment Focus,January 8,2013,Insurance,RESEARCH,Shengbo TANGSFC CE Ref:AYTBo LIAN,Life in Transition;P&C in Downturn2013 Insurance Strategy,ActionWe downgrade all H-/A-share listed insurers to ACCUMULATE because current stock prices are not cheap enough givengrowth prospects,with only 10%upside
2、potential to our latest target prices.These TP assume a 10%investment return on theA-share market in 2013.Our order of preference:CPIC,China Life,CTIH and NCI among H-shares,and CPIC,ChinaLife and NCI in A-shares.Transition of life insurers will continue into 2013 and P weaker-than-expected policies
3、.Please read carefully the important disclosures at the end of this report,CICC Research:January 8,2013,Table of Contents,Investment summary:Why downgrade to“ACCUMULATE”?.4Transformation of life insurance to continue.5Life insurance in transition after high-growth stage at the expense of unbalanced
4、structure.5Overhangs are maturity payment and policy surrender and new entrants from the banking sector.8Hope lies in breakthroughs on pension and health insurance.11P&C insurance in a downtrend.15P&C underwriting profitability has peaked down due to overcapacity.15Market-oriented reforms will lead
5、to intensified competition.17Valuation and recommendation.19CPIC(02601.HK):ACCUMULATE.21China Life(02628.HK):ACCUMULATE.22CTIH(00966.HK):ACCUMULATE.23NCI(1336.HK):ACCUMULATE.24,Please read carefully the important disclosures at the end of this report,2,CICC Research:January 8,2013,Figures,Figure 1:E
6、arning forecasts and latest TP.4Figure 2:Premium income of life insurers to shift from high growth to medium growth.5Figure 3:More than 80%of life insurers premium income is generated from investment and savings products.5Figure 4:The share of life insurers premium income generated from bancassuranc
7、e is approaching 50%.6Figure 5:International comparison shows Chinas life insurance(excluding annuity and health insurance)is saturated.6Figure 6:Lackluster returns rendering life insurance products weak among financial products in attracting funds.7Figure 7:Reforms of regulatory system,corporate go
8、vernance and channel management are pending.7Figure 8:Life insurers forecasted operating cash flow.8Figure 9:Forecasted major life insurers operating cash flow sensitivity.9Figure 10:Bank-owned insurers are growing rapidly and the size of their premium income is rising significantly.9Figure 11:The s
9、hare taken by bancassurance differs from country to country,with China in the middle.10Figure 12:Bank-owned insurers are important players in Europe and Hong Kongs financial sector.10Figure 13:International comparison of health insurance and annuities.11Figure 14:Outlook for Chinas life insurance in
10、dustry assuming institutional reform in health insurance and pensions.11Figure 15:Share of health care expenditure in GDP remains low in developing countries including China.12Figure 16:International comparison of share of commercial insurance in total life insurance premium income.12Figure 17:US po
11、pulation aging and annuity growth.13Figure 18:Japan population aging and annuity growth.13Figure 19:Chinas annuity business is in the fledgling stage and policy reform is needed.14Figure 20:US P&C insurance industrys historical combined ratio(19692010)shows cyclicality in underwriting 15Figure 21:Ch
12、inas P&C insurance underwriting profit margin is topping out.15Figure 22:P&C insurers have reinforced their capital base since 2011.Ratio of book value to retained premiums inP&C insurance industry has reached the highest level of recent years.16Figure 23:Chinas P&C market is dominated by auto P&C i
13、nsurance(making up 70%of premiums)and slowgrowth of new car sales will limit P&C premium income growth.16Figure 24:P&C insurance premiums are expected to grow steadily at 1315%p.a.in the next three years.17Figure 25:Market-oriented reform of auto insurance rates in China.17Figure 26:Foreign P&C insu
14、rers market share.18Figure 27:Entry points under conservative assumptions.19Figure 28:Sensitivity test of EV on A-share market performance.19Figure 29:Sensitivity test of P/EV multiples on NBV growth.19Figure 30:Changes in assumptions for life insurers.20Figure 31:Sensitivity analysis for life insur
15、ers.20Figure 32:CPIC Financial highlights and stock information.21Figure 33:China Life Financial highlights and stock information.22Figure 34:CTIH Financial highlights and stock information.23Figure 35:NCI-Financial highlights and stock information.24Figure 36:CPIC Historical and forecasted financia
16、l data.25Figure 37:China Life Historical and forecasted financial data.26Figure 38:CTIH Historical and forecasted financial data.27Figure 39:NCI Historical and forecasted financial data.28Figure 40:Valuation comparison(diluted).29,Please read carefully the important disclosures at the end of this re
17、port,3,CICC Research:January 8,2013Investment summary:Why downgrade to“ACCUMULATE”?We downgrade the ratings of the H-/A-share life insurance sector and its constituents to ACCUMULATE because currentvaluations are relatively fair and listed insurers stock prices are close to our latest target prices.
18、There is only 10%upsidepotential from our latest TP,which assumes a 10%investment return on the A-share market in 2013.Life insurance is in transition after a high growth stage at the expense of unbalanced business structure.Lifeinsurance in China has enjoyed more 30 years of rapid compensatory grow
19、th,with innovations in channel and producthaving driven growth in premium income(Figure 1).However,in recent years the scale-driven strategy has resulted inan unbalanced business structure.Old business model needs to be transformed and life insurance has already entered aperiod of transition.The ove
20、rhangs are maturity payment and policy surrender in the near term,and new entrants from the bankingsector in the long run.We expect operating cash flow to plunge 50%to Rmb180bn in 2013(Figure 7),mainlybecause:1)most of the five-year,single-premium participating policies sold through bancassurance wi
21、ll mature in 2013and at least Rmb150bn needs to be paid;and 2)the widening gap between deposit gains and yields to maturity couldprompt customers with policies yet to mature to surrender those policies.To cope with this pressure,life insurers couldcontinue boosting sales of short-term,savings-type p
22、roducts,which will impede efforts to transform their businessmodel.Breakthroughs to be made in pension and health insurance to refocus on the functions of protection and long-termsaving.International comparison shows that Chinas life insurance market(excluding health insurance and annuities)isrelati
23、vely saturated,but pension and health insurance have huge growth potential.Favorable policies could sparkanother life insurance boom.If institutional reforms succeed,Chinas life insurance premium income could resumecompensatory growth at 16%p.a.in the next ten years(Figure 13).P&C underwriting profi
24、tability has peaked down due to overcapacity.The relationship between changes in supplyand demand is the intrinsic driver of underwriting cycles in Chinas P&C insurance market,and regulatory policies areextrinsic factors influencing this process.On the supply side,P&C insurers have greatly enhanced
25、their supply capacityafter replenishing capital with their own profits,shareholder capital injections and subordinated debt issuance since2011.On the demand side,changes are relatively small due to weak new car sales.We expect the combined ratio tocontinue worsening to 100%in the next 23 years.Figur
26、e 1:Earning forecasts and latest TP,2013E(HK$),NBV/shr,EV/shr,TPs,Before,After,+/-,Before,After,+/-,Before,After,+/-,China Life-HCPIC-HNCI-HCTIH,0.981.151.830.75,0.961.031.810.71,-2.0%-10.5%-1.3%-5.2%,15.8820.5525.1714.63,16.0319.5524.4815.00,1.0%-4.8%-2.7%2.5%,26.330.530.816.2,28.833.033.718.5,9.6%
27、8.1%9.5%14.0%,Source:Company data,CICC ResearchNote:We adopt a 10%discount to our TP for NCI due to the risk of share unlocking,and a 10%discount to our TP for CTIH due to the risk of capitalraising,both compared to our fair prices derived in Figure 27.Please read carefully the important disclosures
28、 at the end of this report4,70%,59.7%,60%,YoY premium,CICC Research:January 8,2013Transformation of life insurance to continueLife insurance in transition after high-growth stage at the expense of unbalanced structureLife insurance in China has enjoyed 30 years of rapid compensatory growth,and innov
29、ations in channel and producthave been the constant drivers of growth in premium income.A review of the development of life insurers during the pastdecade shows that from 2000 to 2010,premium income of Chinese life insurers achieved a CAGR of 26.5%,far above theCAGR of nominal GDP during the same pe
30、riod(Figure 2).Premium income grew 60%YoY in 2002 on the introduction ofbancassurance and new products such as participating life insurance;it expanded 50%YoY in 2008 thanks to the rapidgrowth of investment-type products such as investment-linked insurance and universal insurance on the back of a bo
31、omingcapital market.Figure 2:Premium income of life insurers to shift from high growth to medium growth,High-grow th phase:20002010 CAGR for lifeinsurers premium income reached 26.5%In 2002,the introduction of bancassurancechannel and the promotion of participatingproducts fueled the fast grow th of
32、 life,Medium-grow th phase:20112014 CAGR for lifeinsurers premium income is expected to be 7.4%In 2008,thanks to the flourishing capitalmarket,the premium of univ ersal andinv estment-linked products experienced a,50%,42.1%,insurance.,48.5%,robust grow th.,40%,30%,31.1%,21.9%,28.9%,20%10%,13.3%,7.2%
33、,14.0%,11.3%,11.0%,6.9%,3.5%,4.0%,8.4%,10.0%,0%,00,01,02,03,04,05,06,07,08,09,10,11,12.110,12E,13E,14E,Premium income yoy growthofof life insurance companiesSource:Yearbook of Chinas Insurance,Annual Report of Chinas Insurance Market,CIRC,CICC ResearchFigure 3:More than 80%of life insurers premium i
34、ncome is generated from investment and savings products,100.0%80.0%60.0%,2.0%11.0%59.0%,8.0%17.1%44.9%,5.8%19.8%51.7%,1.8%13.0%65.0%,1.5%10.7%71.0%,0.0%0.8%80.2%,40.0%,20.0%0.0%,2006,11.5%16.5%,2007,9.8%20.3%,2008,9.3%13.5%,2009,8.4%11.8%,2010,7.8%9.0%,2011,9.0%9.9%,General life insuranceParticipati
35、ng life insuranceInvestment-linked insurance,Health insurance&accident insuranceUniversal insuranceProtection products,Source:Annual Report of Chinas Insurance Market,CICC ResearchHowever,the scale-driven strategy in recent years has resulted in an unbalanced business structure,as reflected in:1)ahi
36、gh portion of low-margin participating products,which account for 80%of Chinese life insurers premium income(Figure3),versus 20%/30%/15%in the US/Germany/South Korea;and 2)bancassurance kick-starting a decade of rapid growth oflife insurance in China and having now overtaken the individual channel t
37、o generate the biggest share of premium income(Figure 4).However,stricter regulations and competition from wealth management products issued by banks have begun toweigh on the bancassurance business since 2011.Please read carefully the important disclosures at the end of this report5,20.0,(%),12.0,(
38、%),CICC Research:January 8,2013Figure 4:The share of life insurers premium income generated from bancassurance is approaching 50%100%,16.1%,13.2%,9.1%,8.5%,9.0%,7.5%,80%,60%,29.1%,34.2%,48.9%,47.7%,50.0%,47.8%,40%,20%,54.8%,52.6%,42.0%,43.8%,41.1%,44.6%,0%,2006,2007,2008,2009,2010,2011,Other channel
39、s,Bancassurance channel,Individual agent channel,Source:Annual Report on Chinas Insurance Market,CICC ResearchOld business model needs to be transformed and life insurance has entered a period of transition.Short-term,lacklusterinvestment returns are rendering life insurance products weak among fina
40、ncial products in attracting investable funds(Figure6).Medium term,excluding annuity and health insurance,the life insurance market is saturated and there is limited room forcompensatory growth(Figure 5).Therefore,the life insurance industry growth is set to slow to a medium pace.Lookingahead,we exp
41、ect life insurance to see industry-wide reform of the regulatory system,corporate governance and channelmanagement(Figure 7).A lack of policy stimulus and innovations in channels as well as products will slow the growth rateof life insurers premium income in 20112014 to that of nominal GDP.We believ
42、e institutional reform in pension andhealth insurance is the key for life insurers to enjoy a growth rate far in excess of nominal GDP growth.Figure 5:International comparison shows Chinas life insurance(excluding annuity and health insurance)is saturated,International comparison on life insurancepe
43、netration(including annuity and health insurance),International comparison on life insurance penetration(excluding annuity and health insurance)11.3,15.0,14.9,10.08.0,10.0,7.3,6.0,4.6,5.0,4.7,2.1,4.2,4.02.0,2.1,1.8,0.8,0.0,0.0,Taiwan,Japan,Germany,Mainland,US,Taiwan,Japan,Germany,Mainland,US,ChinaSo
44、urce:National insurance regulatory bodies,Swiss Re,CICC ResearchPlease read carefully the important disclosures at the end of this report6,China,CICC Research:January 8,2013Figure 6:Lackluster returns rendering life insurance products weak among financial products in attracting funds20061H12 CAGR:Ba
45、nks WMPs:81.6%Trust assets:65.2%AUM of asset mgmt business of security firms:46.9%Utilization balance of insurance funds:25.4%(Rmb,tn)100%,80%60%40%20%0%,2006,1.80.40.2,2007,2.70.80.90.4,2008,3.10.91.21.5,2009,3.71.42.01.7,2010,4.61.93.02.8,2011,5.52.74.84.6,1H12,6.24.65.56.0,Balance of banks WMPsAU
46、M of asset mgmt business of security firms,Asset balance of trust companiesUtilization balance of insurance funds,10.00,(%),8.91,9.08,9.36,8.04,8.00,6.90,7.14,6.004.002.00,4.713.803.322.62,4.994.063.22,5.594.804.31,3.883.602.41,4.003.732.70,5.264.384.05,5.454.894.04,0.00,2006,2007,2008,2009,2010,201
47、1,1H12,Average yield on banks WMPs with maturity of 3 monthsCredit rate for China Lifes universal insurance products,Average expected annualized yield on collective trust productsWeighted average benchmark IR for 5-yr time deposits,Source:CIRC,CBRC,WIND,CICC ResearchFigure 7:Reforms of regulatory sy
48、stem,corporate governance and channel management are pending,Regulatory System,Corporate Governance,The guarant eed rate cap is set at 2.5%on life,Adoption of scale-orient ed,rather than value-,insurance products;Timely disclosure of total written premiums(TWP),oriented,operating strategy;Performanc
49、e assetment based on TWPs,rather,rather than annual premium equivalent(APE),isrequired.,Obstables todevelopment protection-,than new business value(NBV).,type insurance productsDistribution Channel Management Suitability to existing distribution channel takes precedenc eover clients need in new prod
50、uct design;Major business channel adopts short-term business target;Inappropriate selling tactics widely used.Source:CIRC,CICC ResearchPlease read carefully the important disclosures at the end of this report7,CICC Research:January 8,2013Overhangs are maturity payment and policy surrender and new en
