To The Moon

Hong Kong/China Insurers – Beneficiaries of China’s reopening & ageing population

Recently released FY22 results of the sector were unsurprising in continuing the trends from 9M22 where NBV, margins and earnings declined due to the negative impact from the pandemic. With the soft FY22 results and falls in NBV over the past three years of the pandemic now behind us, we take on a more constructive outlook for the sector with a robust V-shape economic rebound expected this year (Macroeconomics: China's reopening tailwinds).

For 2023, we favour life insurers over property & casualty (P&C) players. In our view, life insurers offer more attractive risk reward over P&C insurers given depressed valuations and following the latter’s relative outperformance in 2022 and our expectation of claims normalising ahead as traffic and economic activities pickup, which will pressure the sector’s combined ratios. We have advised locking in some gains in PICC Property & Casualty (2328 HK; FV HKD8.90), which has outperformed key life insurer peers in 2022 on both a relative and absolute basis.

The upcoming 1Q23 results will provide a good indication of the ongoing recovery pace for the sector. We expect CPIC could relatively outperform peers helped by a lower base while China Life and Ping An Insurance are likely to report modest growth in NBV. 1Q has seasonally been the most important quarter for Chinese insurance sales which had historically contributed more than a third to full year NBVs. Following the FY22 results release, Chinese life insurers have provided encouraging guidance for FY23 for the first time in three years with key listed life insurers guiding for positive NBV growth from a year ago. Ping An Insurance guided for NBV growth to turn positive in 1Q23 and 2023, while China Pacific (CPIC) guided for positive 1Q23. China Life forecasts March NBV traction will be improved from 2M23 and is optimistic on its overall growth outlook in FY23. For 1Q23E, we expect regional insurer AIA could report mid-teens NBV growth driven by improved growth in Hong Kong and China.

We forecast a modest mid-single digit percentage NBV growth for Chinese life insurers in FY23, which marks a turnaround from the sector’s double-digit percentage decline in FY22. While the pace of quarterly new business value (NBV) growth should improve ahead as the sector moves towards an inflection point, domestic Chinese insurers are expected to see a gradual recovery this year given time needed to rebuild agency force which have seen significant attrition during the pandemic. Over the medium-term however, we continue to view the sector as well positioned to benefit from China’s ageing population and highlight the development of China’s pension market as longer-term opportunities, which is likely to see relatively more benefit reaped by market leaders such as Ping An Insurance and China Life, given their extended distribution network, solid balance sheets and experience in managing long duration liability reserves.

Valuations for most of the listed insurers are undemanding. While we maintain our sector preference in AIA for its solid Asian franchise and strong balance sheet, we highlight H-shares for the top three domestic insurers (China Life, Ping An and CPIC) are currently trading at a discount to their A-listed peers and offer attractive forward dividend yields close to 6%.

@TigerStars 

DYODD