China life insurance: Can t you see higher short-term rates?

Transcription

1 Global Markets Research ANCHOR REPORT China life insurance: Can t you see higher short-term rates? Top pick Ping An is only Chinese financial firm with full retail financial services exposure Heading into a deregulated environment for deposit rates in 214, we believe investors have not fully discounted the challenges ahead for life insurers. As long as short-term interest rates remain higher than long-term ones, the opportunity cost to customers will keep sales under pressure as life insurers longer-dated assets fail to offer competitive yields. We expect surrender rates to rise more than expected once deposit rates deregulate further by 2Q14, and the continuing struggle between margin and volume will continue to hurt life insurers margins. Ping An is our only Buy. Its higher renewal premiums, highest organic EV/VNB growth and high beta make it most resilient to the tight liquidity environment, while offering leverage to the A-share market. We downgrade both China Life and CPIC to Reduce. 2 January 214 Research analysts China Insurance David Chung - NIHK david.m.chung@nomura.com Lucy Feng - NIHK lucy.feng@nomura.com Ben Huang - NIHK ben.huang@nomura.com Key analysis in this anchor report includes: Latest updates on business mix and asset-liability trends Updated company notes on Ping An, China Life, CPIC and AIA See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

2 China life insurance EQUITY: INSURANCE Can t you see higher short-term rates? Top pick Ping An is only Chinese financial firm with full retail financial services exposure Bears on life as long as short-term yields are above long-term ones Both investors and life insurers themselves are warming to 214. However, we are adamant life insurers will struggle as long as short-term yields remain above long-term ones, simply because their assets are longer dated and their yields cannot compete. We expect surrenders to surprise on the upside once deposit rates deregulate further by 2Q. As life insurance growth is still lagging that of trust loans, bank loans and even total social financing, volume growth is important so that life insurance doesn't shrink further in terms of market share of financial assets, which is important in garnering policy support. Thus we reiterate our view that the struggle between balance and volume is still there, despite the life insurers themselves mostly guiding that the focus is on margins. We think the only upside risk is a rebound in A-shares, but on this basis we would prefer the brokers given their policy tailwinds. Ping An 214 is the year a valuation premium will emerge Ping An is our top pick within the sector, because it is the only provider that can offer the full spectrum of retail financial services (insurance, banking and investments) within Chinese financials. Its organic EV and VNB growth rates are also the fastest within the three life insurers we cover. Given its traditional focus on the agency channel, it is also much less susceptible to surrenders. Its renewal premiums are also the highest, implying there is no need to sell high cash value and low-margin bancassurance products to offset maturity and surrender payments. Our analysis also indicates Ping An has a higher beta, and hence offers more leverage to the index. Finally, at current valuations of 1.1x FY14F P/EV, Ping An is only trading near par with China Life and CPIC, which are both at 1.1x as well. We believe 214 is the year that Ping An will outperform and trade at a premium to peers. Global Markets Research 2 January 214 Anchor themes Equity markets have yet to fully discount for the negative impact that rising deposit rates would have on life insurers. Additionally, we believe as long as short-term rates remain above long-term ones, the operating environment for life insurers will remain difficult. Nomura vs consensus Our FY14F earnings forecasts are on average 2% lower than consensus. Research analysts China Insurance David Chung - NIHK david.m.chung@nomura.com Lucy Feng - NIHK lucy.feng@nomura.com Ben Huang - NIHK ben.huang@nomura.com Q is as good as it gets; switch from insurers to banks by 2Q Within insurance, we prefer life over non-life, and reiterate our Reduce rating on PICC P&C (PICC Property & Casualty (2328 HK, Reduce) - Downgrade from Buy to Reduce). For life, we understand there is a focus on volume in 1Q14, and so would not be surprised if newsflow of high growth in sales dominates the quarter. However, we would recommend investors sell into any strength as these products have low margins. We would advise switching to banks by 2Q, when their valuations may well reach a near-term trough. Fig. 1: Stocks for action Bloomberg TP Current Potential up/ Company ticker Rating (HKD) price (HKD) downside (%) China (H-share) Ping An 2318 HK Buy China Life 2628 HK Reduce (12) CPIC 261 HK Reduce (8) Note: pricing as of 17 January 214. Source: Bloomberg, Nomura research See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

3 Nomura China life insurance 2 January 214 Contents 3 Too early to be complacent as new challenges are on the way 7 Volume growth to ensure share to financial assets is maintained 12 Ping An Insurance Group 18 China Life Insurance 23 China Pacific Insurance 28 AIA 35 Appendix A-1 2

4 Nomura China life insurance 2 January 214 Too early to be complacent as new challenges are on the way In theory, life insurers can generate returns to shareholders through three spreads: investment, expense and mortality. Life insurers usually generate the most spread from investment, but with funding costs largely driven by high short-term rates and given the lacklustre A-share market, life insurers have shown over the last few years that they have struggled to deliver an investment spread to shareholders. We also see pressure on the expense spread as the industry struggles to attract new talent to its agency force, while banks bargaining power on commission rates also appears to be rising. While online is proving itself a much cheaper intermediary to distribute simple wealth management products, we remain sceptical as to its ability to distribute higher-margin long-term products. Mortality is traditionally the metric with the lowest spread, due to competition, in our view, and there is probably limited upside as life insurers need to increase their protection coverage over time. Fig. 2: Valuation table Bloomberg Rating TP Current price Potential upside/ Mkt cap P/EV (x) P/B (x) P/E (x) Div. Yield ROE ROA ticker (HKD) (HKD) downside (USDmn) 13F 14F 15F 13F 14F 15F 13F 14F 15F 13F 14F 15F 13F 14F 15F 13F 14F 15F China insurers China Life 2628 HK Reduce % 71, % 2.4% 2.8% 12.1% 13.2% 14.3% 1.4% 1.5% 1.6% Ping An 2318 HK Buy % 6, % 1.5% 1.7% 17.1% 17.2% 17.1% 1.% 1.% 1.% CPIC 261 HK Reduce % 27, % 2.1% 2.5% 1.2% 11.% 11.9% 1.4% 1.5% 1.5% PICC P&C 2328 HK Reduce % 18,244 na na na % 3.% 3.2% 2.4% 17.4% 16.1% 3.3% 2.9% 2.7% Sector mean 18, % 2.1% 2.4% 14.4% 14.7% 15.1% 1.5% 1.5% 1.5% China banks ABC 1288 HK Neutral % 128,382 na na na % 6.9% 7.4% 19.9% 19.% 17.9% 1.1% 1.1% 1.% ICBC 1398 HK Buy % 23,753 na na na % 7.6% 8.2% 21.7% 2.5% 19.3% 1.4% 1.4% 1.4% CCB 939 HK Buy % 176,428 na na na % 7.5% 7.9% 21.2% 19.8% 18.4% 1.4% 1.4% 1.3% BOC 3988 HK Buy % 116,793 na na na % 7.7% 8.1% 17.2% 16.2% 15.2% 1.1% 1.1% 1.1% BOCOM 3328 HK Neutral % 47,611 na na na % 5.3% 5.4% 15.4% 14.3% 12.9% 1.1% 1.%.9% CMB 3968 HK Buy % 44,625 na na na % 5.5% 5.9% 2.7% 18.6% 17.8% 1.3% 1.3% 1.2% CITIC Bank 998 HK Buy % 26,34 na na na % 6.1% 6.4% 16.2% 15.5% 14.5% 1.1% 1.% 1.% Minsheng 1988 HK Reduce % 32,253 na na na % 5.4% 5.9% 21.3% 2.3% 19.3% 1.1% 1.1% 1.1% CRCB 3618 HK Buy % 4,11 na na na % 8.1% 9.% 17.6% 17.3% 17.% 1.3% 1.2% 1.1% Sector mean 86,698 na na na % 7.1% 7.5% 2.% 18.7% 17.6% 1.3% 1.2% 1.2% China AMC Cinda 1359 HK Buy % 23,937 na na na % 1.8% 2.2% 12.7% 12.6% 14.% 2.9% 2.8% 2.8% China brokers Citics Secs 63 HK Buy % 21,729 na na na na na 1.6% 2.% na 9.5% 11.% na 4.7% 5.2% na Haitong Secs 6837 HK Buy % 16,8 na na na na na 1.5% 1.8% na 7.2% 8.5% na 3.3% 3.7% na Sector mean 18,868 na na na na na 1.6% 1.9% na 8.5% 1.% na 4.1% 4.5% na Note: pricing as of 17 January 214 Source: Bloomberg, Nomura research Life insurers are trading at the higher end of their historical range against banks since 2H13. In our view, this is because investors are not discounting enough the challenges ahead for life insurers relative to banks under a deregulated rate environment. 3

5 Nomura China life insurance 2 January 214 Fig. 3: China life insurers sector P/EV relative to China banks P/BV (x) Insurers vs banks Avg. -1SD +1SD Jun-5 Oct-5 Feb-6 Jun-6 Oct-6 Feb-7 Jun-7 Oct-7 Feb-8 Jun-8 Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Source: Bloomberg, Nomura research While life insurers valuations have continued to de-rate since FY11, we do not see any near-term recovery in 214. In fact, we believe the trading range will be shifted downward over time. Fig. 4: China life insurers sector 12m forward P/EV Fig. 5: China Life 12m forward P/EV (x) 3. P/EV Avg. -1SD +1SD (x) P/EV Avg. -1SD +1SD Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14.5 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research Fig. 6: Ping An 12m forward P/EV Fig. 7: CPIC 12m forward P/EV (x) 3. P/EV Avg. -1SD +1SD (x) 3. P/EV Avg. -1SD +1SD Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14.5 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research 4

6 Nomura China life insurance 2 January 214 We are expecting very modest growth for NBV over the next couple of years. Fig. 8: Key assumptions China Life Ping An CPIC (%) FY13F FY14F FY15F FY13F FY14F FY15F FY13F FY14F FY15F VNB growth EV growth FYP growth NPAT growth Source: Nomura estimates Market yet to discount the impact of deposit rate deregulation to life insurers In our view, the imminent deposit rate deregulation will clearly put more pressure on life insurance sales as banks increase their deposit rates. One of the key issues for life insurance sales in China is that the short-term perceived risk-free yield is too high for life insurance products to compete. Given most people do not think they will die in the very near future, people think they are better off investing at high yields in the short term, then consider perhaps buying life insurance later. The rising deposit rate will clearly exacerbate this issue and this is something that we believe the market has yet to discount for. That is, they have well discounted this in for banks but not for insurers. Tight liquidity environment will continue to affect new business growth Additionally, we note the continued competition for liability-side funding, as reflected by the now increasingly usual liquidity crunches at quarter-end, and which we believe is driven by the high LDRs at banks. We reiterate our view that as long as the LDRs for banks remain high and banks seek liability-side funding themselves, it is going to be a very difficult environment for life insurers. Bancassurance is clearly the most directly affected area, while agents will also be operating under a more competitive environment. As long as short-term rates remain higher than long-term ones, life insurers asset-liability matching is distorted Life insurance remains a long-term asset-liability matching business. Therefore, we think as long as short-term rates remain higher than longer-term rates in China, life insurance sales will be under pressure. This is because the longer-dated assets that life insurers use to match their long-dated liabilities do not offer sufficient yields to their policyholders relative to other asset classes. Fig. 9: Insurers P/EV vs 1-year benchmark deposit rate Fig. 1: 1-month SHIBOR minus 5-year treasury bond yield vs life insurance premium growth (x) Sector P/EV (LHS) 1 year deposit rate (RHS) Jan-4 Aug-4 Mar-5 Oct-5 May-6 Dec-6 Jul-7 Feb-8 Sep-8 Apr-9 Nov-9 Jun-1 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 (%) (%) 1m SHIBOR minus 5-year treasury bond 5 yield (LHS) life premium y-y growth (RHS) (1) (2) Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 (%) (1) (2) Source: Bloomberg, CEIC, Nomura research Source: Bloomberg, CEIC, Nomura research 5

7 Nomura China life insurance 2 January 214 Ping An growing NBV to EV fastest within life insurers under our coverage Of the three Chinese life insurers under our coverage, Ping An demonstrates the highest VNB to EV, which means that Ping An s organic EV growth is the highest. This is important from a valuation standpoint, because the PEV will look cheaper for every year forward. This is supported by Ping An s above-peer NBV growth during 1H13. We note that the relatively high figure for PICC Life s VNB to EV is mainly because of the low base, given its shorter operating history. We also reiterate that while AIA has the highest VNB growth now relative to its Chinese peers, its organic EV growth remains the slowest. Fig. 11: China insurers VoNB as % of EV FY12/1H13 (%) Vo NB as % of EV 2 VoNB & expected return on EV as % of EV PICC Ping An CPIC Taiping China NCI Life Life Life Life Life AIA Fig. 12: China insurers VoNB growth (y-y) (%) China Life Ping An Life CPIC Life NCI 6 PICC Life Taiping Life AIA 4 2 (2) FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 1H13 Note: FY12 numbers for VoNB & expected return on EV as % of EV for Ping An Life, CPIC Life, PICC Life and Taiping Life. Beta analysis affirms Ping An as our top pick Our beta analysis is done with the Hang Seng Index. The one-year beta is in line with general market perceptions that brokers and insurers react more vigorously than banks relative to the index. In particular, brokers have the highest beta. However, the three-year beta tells a different story, with the three sectors having similar numbers. This suggests that on a medium-term basis, actually brokers and insurers do not offer much more leverage than banks. Within the insurers, PICC P&C clearly stands out, having the highest 1-year beta, and hence offers the most leverage to short-term index movements. Interestingly, somewhat contrary to more popular beliefs, it is the large caps of Ping An and China Life that offer higher betas than the smaller caps of New China Insurance and PICC Group. Interestingly, over a three-year basis, PICC P&C offers the lowest beta, which appears to suggest that underwriting performance may be still the key to share prices over the more medium term. We believe these findings support our views that: 1) Insurers will be particularly sensitive to investment returns this year, given the relatively high cost of liability right now. 2) Investment performance will be key to short-term share price movements of PICC P&C in the near term, given the weakening of the underwriting business. Over the longer term though, investors will still pay most attention to profitability of underwriting business, leading to de-rating of multiples. 3) Our top pick, Ping An, offers a solid fundamental business model but at the same time relatively high leverage to the index compared to China Life and CPIC. 6

8 Nomura China life insurance 2 January 214 Fig. 13: Banks, brokers and insurers sector beta for 1 year and 3 years Fig. 14: Insurers beta for 1 year and 3 years (beta) 1 year 3 years (beta) 1 year 3 years Brokers Insurers Banks. PICC P&C Ping An China Life CTIH CPIC NCI PICC Group Note: relative to Hang Seng Index Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research H-A share premium the highest for insurers within financials It is interesting to note that the H-A share premium for insurers has diverged from that for banks and brokers. This suggests that H-share investors are even more optimistic for insurers versus banks and brokers compared to their A-share counterparts. Fig. 15: H-A-share premium by sectors Fig. 16: H-A-share premium by insurers Jul-6 Dec-6 May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Source: Bloomberg, Nomura research Banks Insurers Brokers China Life Ping An CPIC NCI Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Source: Bloomberg, Nomura research Volume growth to ensure share to financial assets is maintained In essence, with total social financing (TSF) continuing to grow at 14% y-y, the life insurance industry must maintain a similar growth rate to ensure its share of financial assets can be maintained at an acceptable level. Otherwise, the industry s influence could continue to fade, making the case for policy support from the central government increasingly difficult. 7

9 Nomura China life insurance 2 January 214 Fig. 17: y-y growth of trust balances, loan balances, total social financing and life insurance premiums 213 YTD (%) 7 6 Fig. 18: Life insurance as % of total financial assets in China 1H13 Insurers 5% Brokers 1% Trust 6% Trust Loans TSF Life insurance premium Banks 88% Note: up to Sept 213 for trust; up to Nov 213 for loan balances, TSF and life insurance premiums Source: CEIC, China Trustee Association, Nomura research Source: CEIC, CBRC, Securities Association of China, China Trustee Association, Nomura research With the industry traditionally relying heavily on savings substitute bancassurance products and the current high short-term yields, life insurers are effectively forced to grow at minimal margins or even at losses. Surrender rates will remain high as long as short-term yields remain high In our view, surrender rates will likely remain at a relatively high level given continued high short-term yields and the fact that insurers have been selling high cash value products in FY13. While we see the selling of high cash value products as slowing down the industry s structural shift towards value, nonetheless, this is a necessary step that the industry has to go through as its struggle between value and volume continues. Fig. 19: China insurers 3Q13 surrenders y-y growth Fig. 2: China insurers 9M13 surrenders rate (%) 9 (%) NCI CPIC Life China Life Ping An Life NCI China Life Note: not available for Ping An Life and CPIC Life Cashflow analysis suggests China Life and CPIC most susceptible We note that China Life has experienced a severe increase in cash paid for claims during 9M13. Its total premiums and cash balance by cash paid for claims is also the lowest within its peer group. This suggests that it is the most vulnerable to any rise in claims payments that can arise from both maturity and surrenders. 8

10 Nomura China life insurance 2 January 214 We reiterate our view that surrenders can surprise on the upside for life insurers in 214. Fig. 21: China insurers y-y growth of cash paid for claims 9M13 (%) Fig. 22: China insurers total premiums and cash balance divided by cash paid for claims 9M13 (x) China Life NCI CPIC Life Ping An Life Ping An Life NCI CPIC Life China Life Ping An deserves a premium for its higher share of renewal business Ultimately, if insurers are true to their value rather than volume/market share approach, then we believe going forward, the majority of bancassurance sales should be mainly for cashflow purposes. This is mainly to offset the still relatively high level of maturity and surrender payments in FY14/15F. Over time, the continued focus on regular premiums should mean that renewal will account for an increasing proportion of total premiums over time. As a result, we believe insurers with the highest level of renewal premiums should be valued at a premium to others, as there is less need for these insurers to sell low-margin single bancassurance products. Therefore, we believe Ping An deserves a premium to its peers. Fig. 23: China insurers single-premium bancassurance sales divided by maturity and surrender payments 1H13 (%) Note: data not available for PICC Life 46 Taiping Life CPIC Life China Life NCI Ping An Life Fig. 24: China insurers life insurance premium mix by products 1H13 (%) Others Regular-renewal Regular-new Single NCI Ping An Life CPIC Life China Life Taiping Life 9

11 Nomura China life insurance 2 January 214 Fig. 25: China insurers 1H13 FYP y-y growth Fig. 26: China insurers 1H13 renewal premiums y-y growth (%) FYP regular -agent 2 FYP single - bancassurance (%) FYP regular - bancassurance (5) China Life Ping An Life CPIC Life NCI Taiping Life Taiping Life NCI CPIC Life Ping An Life China Life Fig. 27: China insurers life insurance premium mix by channels 1H13 (%) Others Group insurance Bancassurance Agent Ping An Life CPIC LifeChina Life NCI PICC Life Taiping Life Fig. 28: China insurers bancassurance renewal as % of total premium 1H13 (%) NCI Taiping Life CPIC Life China Life Ping An Life Agency productivity still driven by case size and not number of cases Average case size growth was a key driver to first year premium growth for 1H13; however, we note this metric is more a function of disposable income and GDP growth rather than agency force efficiency improvements. We continue to point to new policies per agent per month as a critical measure for productivity and we have still yet to see a sustained improvement. In our view, for new policies per agent per month to improve, there will either need to be a structural change to the sector such as policy support for new products or significant improvement in investment returns to boost the crediting rate to policyholders. 1

12 Nomura China life insurance 2 January 214 Fig. 29: China insurers number of agents (') China Life Ping An Life CPIC Life NCI Taiping Life FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 1H13 Fig. 3: China insurers average new individual life policy size Fig. 31: China insurers new individual life policies per agent per month (CNY) 8, 6, 4, 2, Ping An Life CPIC Life NCI Taiping Life 7,135 7,131 7,264 5,642 4,87 5,824 6,383 4,126 3,765 4,82 3,119 3,241 2,127 2,856 3,521 1,898 1,635 1,162 1,823 2,456 2,89 2,887 FY6 FY7 FY8 FY9 FY1 FY11 FY12 1H Ping An Life CPIC Life NCI Taiping Life FY6 FY7 FY8 FY9 FY1 FY11 FY12 1H13 11

13 Ping An Insurance Group 2318.HK 2318 HK EQUITY: INSURANCE Only retail/mass affluent play in Financials Sector top pick FY14F is the year of divergence from life insurance peer group 214 is the year that Ping An should begin to show a valuation premium While Ping An s share price has been overshadowed by market concerns over corporate governance and shareholder changes, we believe operating fundamentals should return as the key share-price driver for 214F. We like Ping An, as unlike most peers, its surrenders will not be under pressure, it has higher organic EV and NBV growth, a high renewal premium, a high beta and undemanding-looking valuations. We think Ping An gives investors a unique exposure to China financials with its retail/mass affluent model. Migration of more profitable customers to banking and investment While we expect life insurance will remain the key value driver over the next couple of years, as the insurance business continues to migrate customers to the banking business, the income streams will diversify into more banking and investment. Both the life and non-life businesses have a relatively higher portion of affluent and mass-affluent customers, so the migration would also mean Ping An Bank absorbs more of these customers. This is very important because the affluent customers are 3x more profitable than mass-affluent, while the mass-affluent segment is 3x more profitable than mass. Undemanding valuation at 1.1x given 19% EV growth We estimate NBV to grow 1% and 11% y-y, respectively, for FY14F and FY15F, and Ping An to be the only life insurer under our coverage to report double-digit NBV growth in FY14F and FY15F. We expect EV to grow 16% and 15% y-y, respectively, in FY14F and FY15F, again the highest within our coverage. While market concerns over Chinese banks should weigh on Ping An more than peers, we see relatively limited downside for Ping An Bank (1 CH; not rated) at.8x FY14F P/B and its valuation, accounting for 12% of our sum-of-the-parts valuation. 31 Dec FY12 FY13F FY14F FY15F Currency (CNY) Actual Old New Old New Old New Net premium (mn) 221,89 248, ,584 28,29 285, , ,68 Reported net profit (mn) 2,5 29,743 29,512 35,671 34,457 4,515 39,663 Normalised net profit (mn) 2,5 29,743 29,512 35,671 34,457 4,515 39,663 FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) 21.9 N/A 14.6 N/A 12.3 N/A 1.7 Price/EV (x) 1.1 N/A 1.3 N/A 1.1 N/A.9 Price/implied VNB (x) 1.6 N/A 5.1 N/A 1.8 N/A -1. Dividend yield (%).8 N/A 1.2 N/A 1.4 N/A 1.7 ROE (%) ROA (%) Global Markets Research 2 January 214 Rating Up from Neutral Buy Target price Increased from 6.9 HKD 8. Closing price 17 January 214 HKD Potential upside +16.4% Anchor themes Equity markets have yet to fully discount for the negative impact that rising deposit rates would have on life insurers. Additionally, we believe as long as short-term rates remain above long-term ones, the operating environment for life insurers will remain difficult. Nomura vs consensus Our FY14F earnings forecast of CNY34.5bn is 3% above market consensus. Research analysts China Insurance David Chung - NIHK david.m.chung@nomura.com Lucy Feng - NIHK lucy.feng@nomura.com Ben Huang - NIHK ben.huang@nomura.com Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

14 Nomura Ping An Insurance Group 2 January 214 Key data on Ping An Insurance Group Profit and Loss (CNYmn) Year-end 31 Dec FY11 FY12 FY13F FY14F FY15F Gross premiums 27,82 233,94 266,39 33,33 344,366 Government charges Reinsurance ceded -1,97-12,851-14,87-17,69-19,686 Net written premium 196, ,89 251, , ,68 Change in unearned premium reserves -1,17-7,945-9,159-1,565-12,192 Net earned premium 186, , , , ,488 Claims and benefit payments -145, , ,339-24, ,959 Change in reserves Commission and DAC expenses -1,5-1, Other expenses -95,44-139,46-126,49-146,866-17,777 Underwriting surplus -55,556-93,711-68,535-76,617-86,538 Recurrent investment income 34,285 41,598 45,979 47,968 5,273 Realised and unrealised gains Investment income 34,285 41,598 45,979 47,968 5,273 Other income 51,297 84,451 7,155 84,223 1,235 Employee share expense Operating profit 3,26 32,338 47,599 55,574 63,97 Amortisation Other non-operating income Associates and JCEs Pre-tax profit 3,26 32,338 47,599 55,574 63,97 Income tax -7,444-5,588-8,225-9,63-11,54 Net profit after tax 22,582 26,75 39,374 45,971 52,916 Minority interests -3,17-6,7-9,862-11,514-13,254 Other items Preferred dividends Normalised NPAT 19,475 2,5 29,512 34,457 39,663 Extraordinary items Reported NPAT 19,475 2,5 29,512 34,457 39,663 Dividends -3,166-3,562-5,243-6,122-7,47 Transfer to retained earnings 16,39 16,488 24,269 28,335 32,616 Relative performance chart (one year) Source: ThomsonReuters, Nomura research (%) 1M 3M 12M Absolute (HKD) Absolute (USD) Relative to MSCI China Market cap (USDmn) 27,746.2 Estimated free float (%) week range (HKD) 76.5/ mth avg daily turnover (USDmn) Major shareholders (%) Charoen Pokphand Group 15.6 Shenzhen Investment Holdings 6.1 Source: Thomson Reuters, Nomura research Notes Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/book (x) Investment return (%) Recurrent investment return (%) Non-recurrent return/invt. return (%)..... Price/EV (x) Price/implied VNB (x) Loss ratio (%) Combined ratio (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) ROR (%) Growth (%) Life premiums Non life premiums Net profit Normalised EPS Normalised FDEPS Source: Company data, Nomura estimates 13

15 Nomura Ping An Insurance Group 2 January 214 Balance Sheet (CNYmn) As at 31 Dec FY11 FY12 FY13F FY14F FY15F Cash and deposits 486, ,286 84,41 845, ,619 Bonds 1,124,34 1,459,616 1,526,259 1,63,829 1,693,625 Equities 222, ,89 259,28 272, ,633 Unit trusts Loans and mortgages Foreign investments Real estate Other investments 98, , , ,7 171,77 Total investments 1,931,259 2,624,232 2,744,49 2,883,51 3,44,954 Deferred acquisition costs Prepaid and unearned prem. reserves Debtors and prepayments Fixed assets Goodwill Separate account assets Other assets 354,165 22,34 445,21 69,7 96,118 Total assets 2,285,424 2,844,266 3,189,249 3,573,517 4,5,72 Insurance reserves 487, , , ,146 78,465 Catastrophe reserves Insurance protection fund Deposit and investment contracts 228,192 27, , ,684 34,523 Separate account liabilities 33,46 32,417 35,828 39,843 44,556 Provision for Unearned Premiums 42,288 5,81 6,563 71,846 84,878 Provision for Outstanding Claims Interest bearing liabilities 1,132,21 1,563,18 1,774,268 2,8,927 2,268,346 Other liabilities 19, , ,76 181, ,112 Total liabilities 2,114,82 2,634,617 2,945,482 3,291,38 3,678,881 Minority interest 4,475 5,32 58,174 67,331 77,844 Common stock 7,916 7,916 7,916 7,916 7,916 Preferred stock Retained earnings 43,546 6,43 86,38 115, ,134 Proposed dividends 3,166 3,562 5,243 6,122 7,47 Other equity 76,239 87,79 86,54 85,175 84,25 Shareholders' equity 13, , , ,86 248,347 Total liabilities and equity 2,285,424 2,844,266 3,189,249 3,573,517 4,5,72 Notes Balance sheet ratios (%) Life solvency margin Non-life solvency margin Net premiums/equity Tech. reserves/total premiums Investment portfolio mix (%) Cash and deposits Bonds Equities Unit trusts..... Loans and mortgages..... Foreign investments..... Real estate..... Other investments Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) BVPS (CNY) Life/LT EVPS (CNY) Life/LT VNBPS (CNY) Value of non-life bus. PS (CNY)..... Source: Company data, Nomura estimates 14

16 Nomura Ping An Insurance Group 2 January 214 One customer, one account and multiple products We are fans of Ping An s clear strategy to provide a full spectrum of financial products to its customers. While Ping An, like its peers, is suffering from slower growth at the moment, we believe the key difference is that Ping An s growth path is much more clear and sustainable in the medium term. Most of its peers are still in the very early reform stages and are selling high cash value products knowing that there is a high possibility of surrender in one year's time. In the end, this loses customers in the process and does not create much shareholder value. In our view, Ping An s profit contribution should still be dominated by the insurance business (both life and non-life) over the next couple of years. We think this is also where the misperception is, as investors focus too much on its life valuation, and hence growth. It is increasingly clear that Ping An s more important growth driver is probably not the insurance business but the overall cross-selling process from insurance to banking and investment. Fig. 32: Ping An profit by segment FY12 & 1H13 (%) FY12 1H13 Others Trust Securities Banking P&C insurance Life insurance Over the next few years, as the insurance business continues to migrate customers to the banking business, we expect the income streams will diversify into more banking and investment. This, we believe, is important because it implies that Ping An can afford to have a larger agency force as this agency force helps it distribute not only insurance but also other financial products. For example, we understand that income from cross-selling accounted for 13% of total income for agents in 213. As the chart below indicates, the life and non-life businesses have a relatively higher portion of affluent and mass-affluent customers so the migration would also mean Ping An Bank absorbs more of these customers, in our view. 15

17 Nomura Ping An Insurance Group 2 January 214 Fig. 33: Ping An's retail customer structures (%) Affluent Mass-affluent Mass Ping An Group PAB Ping An Life Ping An P&C Source: Ping An, Nomura research Fig. 34: Ping An's profit contribution (%) Investment Banking Insurance 212 in 3-5 years in 6-8 years Source: Ping An, Nomura research According to Ping An, it is important to have more affluent and mass affluent customers because the affluent customers are three-times more profitable than mass-affluent while the mass-affluent customers are 3-times more profitable than mass. In particular, ~7% of the affluent and mass-affluent customers of Ping An are of a younger age group of years relative to 57% for the mass market. This implies that these customers still have time to grow their wealth and they can remain with Ping An for a longer period of time. Fig. 35: Ping An retail customer age distribution by wealth level (%) Affluent Mass affluent Mass Source: Ping An, Nomura research > 65 years old years old years old years old years old < 26 years old Fig. 36: Ping An average profit contribution per customer 3 times 3 times Affluent Mass affluent Mass Source: Ping An, Nomura research We remain a fan of Ping An s goal to become the primary wealth manager for affluent and mass-affluent customers, which is in sharp contrast to some of its peers exposure to the mass market and singular life insurance products. We believe Ping An can achieve its goal by offering a variety of financial products through its subsidiaries. 16

18 Nomura Ping An Insurance Group 2 January 214 Fig. 37: China's personal investable assets (CNY trn) 9 Cash & deposits 8 Investment properties 7 Capital market 6 5 Other investments CAGR Other investments +31% Capital market +23% Investment properties +29% Cash & deposits +16% Source: Ping An, Nomura research Fig. 38: Ping An financial summary P&L F 214F 215F F 214F 215F Amount (CNYmn) y-y change (%) Gross written premiums 159,384 27,82 233,94 266,39 33,33 344, Less: premium ceded to reinsurers (8,181) (1,97) (12,851) (14,87) (17,69) (19,686) Net written premiums 151,23 196, ,89 251, , , Net change in unearned premium reserves (1,79) (1,17) (7,945) (9,159) (1,565) (12,192) 1 (22) Net premiums earned 141, , , , , , Reinsurance commission income 2,616 3,656 4,529 5,661 7,77 8, Net interest income from banking 5,934 18,882 34,51 36,417 4,779 45, Fees and commission income 5,543 8,614 1,891 1,281 14,53 17, (6) Net investment income 31,83 29,265 27,378 45,979 47,968 5,273 (6) (6) Others 6,117 4,733 8,399 17,796 22,314 27,98 (23) Total revenue 192, , , ,559 47, , Claims and policyholders' benefits (115,77) (145,764) (165,994) (184,339) (24,896) (227,959) Insurance related handling charges and commission (14,545) (17,767) (2,437) (24,43) (27,749) (31,521) Fees & commission expense of non-insurance operations (69) (1,5) (1,455) (212) (254) (29) (85) 2 14 Impairment losses (626) (1,74) (3,48) (5,35) (6,583) (8,28) General and administrative expenses (34,385) (5,575) (68,477) (73,258) (84,586) (97,78) Finance costs (913) (1,254) (1,758) (1,934) (2,127) (2,34) Other operating expenses (3,915) (3,672) (5,335) (21,463) (25,82) (31,18) (6) Total expenses (17,7) (221,786) (266,54) (31,96) (352,16) (399,26) Profit before tax 22,347 3,26 32,338 47,599 55,574 63, Income tax expense (4,49) (7,444) (5,588) (8,225) (9,63) (11,54) 69 (25) Net profit 17,938 22,582 26,75 39,374 45,971 52, Non-controlling interests 627 3,17 6,7 9,862 11,514 13, Profit attributable to owners 17,311 19,475 2,5 29,512 34,457 39, Source: Nomura estimates Valuation methodology Following the change in analyst coverage, our target price of HKD8 is based on a sumof-the-parts (SOTP) valuation. For the life business, we apply our target new business multiple of 5.x to the FY15F new business value and then add FY14F embedded value. We value Ping An s P&C business by applying 1x P/E to its FY14F NPAT, and its securities and trust operations by applying 1x P/E to its FY14F NPAT, respectively. We incorporate PAB into our valuation of Ping An by applying a target P/BV multiple of.8x to our FY14F BV forecast. The implied target P/EV is 1.3x, vs the historical average of 1.9x and current level of 1.1x. The benchmark index for this stock is MSCI China. Investment risks Key downside risks include poorer-than-expected execution of the financial conglomerate model, integration with PAB and returns from the A-share market, which would affect sentiment to insurers in general, in our view. Key upside risks are better and earlier-than-expected synergies from the integration of PAB. 17

19 China Life Insurance 2628.HK 2628 HK EQUITY: INSURANCE Reform challenged by rising deposit rates Market yet to fully discount impact of rising deposit rates on sales and surrenders Downside risks as life insurers not ready for new environment We are adamant that the market has yet to fully appreciate what rising deposit rates would mean for life insurers. In fact, we are not sure if the managements at most life insurers themselves are ready for such an environment. While we appreciate China Life s management s commitment to the strategic change from volume to value, we think the transparency is low for sales growth and surrenders. We are now expecting low single digit VNB growth for FY14/15F, but we feel the risk is more to the downside than upside. We cut our TP from HKD21 to HKD 2 and lower our rating from Neutral to Reduce. More low-margin products necessary to maintain cashflow We expect another ~CNY6bn in maturity payments in FY14F relative to the ~CNY1bn in FY13F, while surrenders will also likely reach ~CNY2bn. Hence, our current expectation is that single-premium bancassurance sales could still be at least CNY6bn for FY14F, or around 86% of the FY13F level, to ensure cashflow is balanced. This should drop off to CNY3bn by FY15F and CNY1bn by FY16F. We note these bancassurance products will need to have cash value after one year of 13-4% of the initial premium (equivalent the yield of 1-year time deposits) for the products to be sold. Assuming these products were sold at 3-4% commission rates and life insurers earn about 4-5% yields, then in general, China Life is still making a 2-3% loss in the spread. Recurring premiums will replace bancassurance, but only very gradually Assuming first year regular premiums grow by 4-1% during FY14/15F, supporting renewal premiums growth of 8-9%, then we expect total premiums to reach CNY353bn in FY15F, implying a market share of ~3%, which should be largely in line with management s one-third target. 31 Dec FY12 FY13F FY14F FY15F Currency (CNY) Actual Old New Old New Old New Net premium (mn) 322, , , , ,6 355, ,884 Reported net profit (mn) 11,61 28,576 28,17 33,216 33,9 42,297 38,529 Normalised net profit (mn) 11,61 28,576 28,17 33,216 33,9 42,297 38,529 FD normalised EPS 39.13c c FD norm. EPS growth (%) FD normalised P/E (x) 46.6 N/A 18. N/A 15.1 N/A 12.9 Price/EV (x) 1.5 N/A 1.3 N/A 1.1 N/A 1. Price/implied VNB (x) 8.4 N/A 5.2 N/A 2.8 N/A.6 Dividend yield (%).8 N/A 2. N/A 2.4 N/A 2.8 ROE (%) ROA (%) Global Markets Research 2 January 214 Rating Down from Neutral Reduce Target price Reduced from 21. HKD 2. Closing price 17 January 214 HKD Potential downside -11.7% Anchor themes Equity markets have yet to fully discount for the negative impact that rising deposit rates would have on life insurers. Additionally, we believe as long as short-term rates remain above long-term ones, the operating environment for life insurers will remain difficult. Nomura vs consensus Our FY14F earnings forecast of CNY33bn is 8% lower than consensus. Research analysts China Insurance David Chung - NIHK david.m.chung@nomura.com Lucy Feng - NIHK lucy.feng@nomura.com Ben Huang - NIHK ben.huang@nomura.com Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

20 Nomura China Life Insurance 2 January 214 Key data on China Life Insurance Profit and Loss (CNYmn) Year-end 31 Dec FY11 FY12 FY13F FY14F FY15F Gross premiums 318, ,742 34,8 354, ,34 Government charges Reinsurance ceded Net written premium 318,2 322, , ,6 352,884 Change in unearned premium reserves Net earned premium 318, , , ,85 352,63 Claims and benefit payments -181, ,99-192,48-187, ,293 Change in reserves Commission and DAC expenses Other expenses -171,2-178,564-26,818-23, ,997 Underwriting surplus -34,323-41,428-59,435-63,999-67,66 Recurrent investment income 6,722 73,243 88,23 98,748 19,4 Realised and unrealised gains -1,871-27,189 Investment income 49,851 46,54 88,23 98,748 19,4 Other income Employee share expense Operating profit 15,528 4,626 28,769 34,749 41,38 Amortisation Other non-operating income 2,772 3,35 3,47 3,644 3,826 Associates and JCEs 2,213 3,37 3,189 3,348 3,516 Pre-tax profit 2,513 1,968 35,428 41,741 48,721 Income tax -2, ,73-7,929-9,255 Net profit after tax 18,491 11,272 28,698 33,812 39,466 Minority interests Other items Preferred dividends Normalised NPAT 18,331 11,61 28,17 33,9 38,529 Extraordinary items Reported NPAT 18,331 11,61 28,17 33,9 38,529 Dividends -6,51-3,957-1,23-11,89-13,784 Transfer to retained earnings 11,83 7,14 17,994 21,2 24,745 Relative performance chart (one year) Source: ThomsonReuters, Nomura research (%) 1M 3M 12M Absolute (HKD) Absolute (USD) Relative to MSCI China Market cap (USDmn) 21,733.7 Estimated free float (%) week range (HKD) 27/17 3-mth avg daily turnover (USDmn) Major shareholders (%) CLIC 68.4 Credit Suisse 3.4 Source: Thomson Reuters, Nomura research Notes Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/book (x) Investment return (%) Recurrent investment return (%) Non-recurrent return/invt. return (%) Price/EV (x) Price/implied VNB (x) Loss ratio (%) Combined ratio (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) ROR (%) Growth (%) Life premiums Non life premiums Net profit Normalised EPS Normalised FDEPS Source: Company data, Nomura estimates 19

21 Nomura China Life Insurance 2 January 214 Balance Sheet (CNYmn) As at 31 Dec FY11 FY12 FY13F FY14F FY15F Cash and deposits 576,778 71, ,85 883, ,488 Bonds 666, ,98 928,698 1,29,49 1,125,24 Equities 18,61 161,296 18,891 2,57 219,173 Unit trusts Loans and mortgages Foreign investments Real estate Other investments 7,897 9,912 11, ,13 123,533 Total investments 1,494,969 1,79,838 2,8,395 2,226,191 2,433,435 Deferred acquisition costs Prepaid and unearned prem. reserves Debtors and prepayments Fixed assets Goodwill Separate account assets Other assets 88,938 18,78 123,718 13,692 14,69 Total assets 1,583,97 1,898,916 2,132,113 2,356,884 2,574,44 Insurance reserves 1,193,675 1,378,582 1,57,873 1,758,636 1,93,417 Catastrophe reserves Insurance protection fund Deposit and investment contracts 69,797 66,639 64,669 61,157 58,434 Separate account liabilities Provision for Unearned Premiums 5,698 5,955 6,425 7,258 8,22 Provision for Outstanding Claims Interest bearing liabilities 29,99 67,981 67,983 67,983 67,983 Other liabilities 91, , ,15 2, ,352 Total liabilities 1,39,519 1,675,815 1,889,271 2,96,158 2,292,565 Minority interest 1,858 2,16 2,117 2,223 2,334 Common stock 28,265 28,265 28,265 28,265 28,265 Preferred stock Retained earnings 79,894 8,392 94,428 15,65 118,542 Proposed dividends 6,51 3,957 1,23 11,89 13,784 Other equity 76,87 18,471 18,8 112, ,555 Shareholders' equity 191,53 221,85 24, ,53 279,145 Total liabilities and equity 1,583,97 1,898,916 2,132,113 2,356,884 2,574,44 Notes Balance sheet ratios (%) Life solvency margin Non-life solvency margin Net premiums/equity Tech. reserves/total premiums Investment portfolio mix (%) Cash and deposits Bonds Equities Unit trusts..... Loans and mortgages..... Foreign investments..... Real estate..... Other investments Per share Reported EPS (CNY) 64.85c 39.13c 99.12c Norm EPS (CNY) 64.85c 39.13c 99.12c Fully diluted norm EPS (CNY) 64.85c 39.13c 99.12c DPS (CNY) BVPS (CNY) Life/LT EVPS (CNY) Life/LT VNBPS (CNY) Value of non-life bus. PS (CNY)..... Source: Company data, Nomura estimates 2

22 Nomura China Life Insurance 2 January 214 Fig. 39: China Life 12m forward P/EV (x) P/EV Avg. -1SD +1SD Fig. 4: China insurers 9M13 surrenders rate (%) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 NCI China Life Source: Bloomberg, Nomura research Note: not available for Ping An Life and CPIC Life Fig. 41: China insurers y-y growth of cash paid for claims 9M13 (%) China Life NCI CPIC Life Ping An Life Fig. 42: China insurers total premium and cash balance divided by cash paid for claims 9M13 (x) Ping An Life NCI CPIC Life China Life Fig. 43: China insurers 1H13 FYP y-y growth (%) FYP regular -agent 2 FYP single - bancassurance FYP regular - bancassurance 15 Fig. 44: China insurers 1H13 renewal premiums y-y growth (%) (5) China Life Ping An Life CPIC Life NCI Taiping Life Taiping Life NCI CPIC Life Ping An Life China Life 21