Equity Research ANCHOR REPORT February 7, Research analysts Key analysis in this anchor report includes:

Transcription

1 Equity Research ANCHOR REPORT China insurance: Life faces headwinds Life running out of value, switch into AIA from China Life & CPIC; non-life has positive catalysts We think now is an appropriate time for investors to consider switching out of Chinese life insurers into AIA, given AIA is still delivering more than 2% y-y NBV growth with strong management execution. We downgrade China Life and CPIC to Neutral. We reiterate Buy on AIA, which has underperformed over the last few months following the AIG placement in mid-december which may have absorbed potential buyers. In non-life, we believe the insurance regulator will remain strict on commission rates for motor insurance this year to clamp down on aggressive competition. In general, we expect profitability of non-lifers to record positive trends in 213F and expect P&C companies to beat expectations. We upgrade PICC to Buy. February 7, 213 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: Key headwinds faced by life insurers in 213. FY12 preview and 1Q13 outlook. See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

2 China insurance INSURANCE EQUITY RESEARCH Life faces headwinds Life running out of value, switch into AIA from China Life & CPIC; non-life has positive catalysts February 7, 213 Valuation for life insurers getting rich but headwinds still unresolved China s insurance sector has returned 15% over the past three months following the 15% gain seen in the A-share index. In particular, our sector top pick, CPIC, has outperformed peers by 1pp during the same period. While we are certainly not making a call on the A-share market and we could very likely end up being too early in saying this, we think it is important to remind investors the rising risks of holding insurers at current valuations for purely its leverage to the A-share market. We downgrade China Life and CPIC to Neutral on a valuation basis. Out of the three large cap life insurers we cover (China Life, Ping An and CPIC), we continue to favour CPIC for its well capitalised position and better-than-peers new business growth. Life to disappoint; non-life to pleasantly surprise Buy PICC While we think most investors understand the risks associated with maturity payments and the potential for more policy surrenders in 213, we believe they have generally downplayed or even ignored them. Therefore, we believe there may be room for downside surprises for the life insurers. While we have to be honest and admit that we would probably have higher conviction on this upgrade if PICC P&C s FY13F P/B were nearer 2x rather than the current 2.2x, especially in terms of absolute performance, we would still recommend investors if they have to pick an insurer for an A- share proxy to select PICC P&C. We believe the insurance regulator will remain strict on commission rates for motor insurance this year to clamp down on aggressive competition. We think generally profitability for the nonlife sector will trend quite well in 213F and beat expectations. Switching out from Chinese life insurers; Reaffirm Buy on AIA We think now is an appropriate time for investors to consider switching out of their Chinese life insurers into AIA, given AIA is still delivering more than 2% y-y NBV growth with strong management execution. AIA has been a relative underperformer ytd and over the last few months we believe this can be partially attributable to the AIG placement on 17 Dec 212, which perhaps took a good tranche of the marginal buyers given it was 13.69% of the outstanding share capital. AIA is due to release its results by late February and it has a tendency to outperform after results while on the other hand, we are expecting mediocre results for the Chinese insurers, scheduled to release around mid to late March. Anchor themes Following the recent re-rating of the sector on the back of the A- share rally, we believe expectations have run ahead of fundamentals. We see downside risk for the life sector and recommend investors to switch to PICC P&C. Nomura vs consensus Our FY13F earnings forecasts are generally in line with consensus except for China Life and CPIC. 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 Fig. 1: Stocks for action Ticker Ratings Current price (HKD) TP (HKD) potential up/downside (%) PICC 2328 HK Buy ( ) ( ) 19 CPIC 261 HK Neutral ( ) China Life 2628 HK Neutral ( ) Ping An 2318 HK Neutral (4) AIA 1299 HK Buy ( ) 17 CTIH 966 HK Buy Note: closing prices as of 31 Jan 213. Source: Bloomberg, Nomura research See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

3 Nomura China insurance February 7, 213 Contents 3 Valuation table 3 Performance table 4 Sustainable re-rating of life insurers more likely in 215F 5 Potential rate rise in 2H13F another key headwind 6 New policy products may disappoint commercially 6 Non-life profitability should trend well in 213F 7 Key operating trends in 1H12 9 FY12 preview/1q13 outlook 9 FY12 results unlikely to trigger further re-rating 1 PICC Property & Casualty 14 China Pacific Insurance 19 China Life Insurance 24 Ping An Insurance Group 29 AIA 33 China Tai Ping Insurance 37 Appendix A-1 2

4 Nomura China insurance February 7, 213 Valuation table Fig. 2: Insurers valuation table Current price Potential up/ NB Multiple Bloomberg Mkt cap TP P/EV (X) P/B(X) P/E (X) Div. Y ROE ROA ticker (USDmn) Rating (HKD) (HKD) downside 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F Insurance China Life 2628 HK 91,478 Neutral % % 1.5% 6% 12%.8% 1.4% Ping An 2318 HK 63,71 Neutral % % 1.% 15% 17%.9% 1.% CPIC 261 HK 32,422 Neutral % % 1.2% 6% 9%.7% 1.% PICC 2328 HK 18,447 Buy % na na na %.% 26% 23% 3.5% 3.2% CTIH 966 HK 3,465 Buy % %.% 11% 14%.6%.8% AIA 1299 HK 47,493 Buy % % 1.3% 12% 11% 2.1% 2.1% Sector mean % 1.2% 11% 14% 1.2% 1.5% Note: closing price as of 31 January 213; P/EV for Ping An Life, CPIC Life and Taiping Life Source: Bloomberg, Nomura research Performance table Fig. 3: Insurers - performance table (%) 1m 2m 3m YTD China Life Ping An CPIC CTIH PICC AIA HSI Index SHCOMP Note: closing price as of 31 January 213 Source: Bloomberg, Nomura research Fig. 4: China outlook summary table % y-y unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q Real GDP Consumer prices Core CPI Retail sales (nominal) Fixed-asset investment (nominal, ytd) Industrial production (real) Exports (value) Imports (value) Trade surplus (US$bn) Current account (% of GDP) Fiscal balance (% of GDP) New increased RMB loans yr bank lending rate (%) yr bank deposit rate (%) Reserve requirement ratio (%) Exchange rate (CNY/USD) Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 1 January 213. Source: CEIC, Nomura Economics Team 3

5 Nomura China insurance February 7, 213 Sustainable re-rating of life insurers more likely in 215F We highlight one common misperception in the market: interest rate cuts or easing liquidity that lead to falling yields of wealth management/trust products will help make life insurance products incrementally more competitive. In our opinion, lack of growth in 2H12 since the benchmark rate cuts has already reflected the fallacy of this proposition. We think the disconnect lies in the perception that sluggish investment yields of insurers in 211 meant that insurers could not provide competitive crediting rates for new policies in 212. We note from the charts below that premium growth appears to lag behind A- share price movement by a year or so generally. Given the prices of A-share insurers only really rallied towards the end of 212, we expect premium growth to really pick up from at least 214F. Fig. 5: Sector investment yield vs life premium growth Fig. 6: Life premium growth vs SHCOMP (%) investment yield (LHS) (%) (%) life premium y-y growth (LHS) life premium y-y growth (RHS) 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q SHCOMP (RHS) Jul-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 7, 6, 5, 4, 3, 2, 1, Source: CEIC, Company data, Nomura research Source: CEIC, Bloomberg, Nomura research A more blue sky scenario, however, would be for the shares of A-share insurers to rally in 213 and then collapse in 214, suggesting that life policies crediting rates (based on 213 investment yields) would compare very favourably with the share-price performance of A-share insurers similar to the trend seen in However, note that since the share-price performance of the A-share market was actually very poor in 28, insurers share prices generally de-rated in 28 and only picked up in 29. Fig. 7: 27-9 sector PEV vs life premium growth Fig. 8: 27-9 sector PEV vs SHCOMP (x) sector 12m forward PEV (LHS) life premium y-y growth (RHS) Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 (%) (x) Jan-7 Apr-7 Jul-7 sector 12m forward PEV (LHS) SHCOMP (RHS) Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 7, 6, 5, 4, 3, 2, 1, Source: CEIC, Bloomberg, Nomura research Source: Bloomberg, Nomura estimates 4

6 Nomura China insurance February 7, 213 As a result, we remain very sceptical over whether there will be a genuine and sustainable recovery in Chinese life insurers share prices in 213. While we understand it is difficult not to own the shares of insurers when the A-share market is rising, we continue to advise caution as we believe fundamentals have run ahead of expectations and could no longer justify the current valuations. As well, we believe that more headwinds lie ahead for the life sector in 213F and an A-share rally alone will not help to alleviate the pressure. Given this backdrop, we tend to favour the non-life names over the life insurers and see PICC as a better alternative for investors seeking A-share exposure. Potential rate rise in 2H13F another key headwind We note that life insurance sales have been hindered much from the relatively high interest rate environment seen over the last couple of years. Although investors expected eased liquidity from the interest rate cuts last year to prop up sales, it didn t materialise. Given market expectations of rising benchmark rates in 2H13 (or in any case at least further rate cuts seem unlikely in the near future, in our view), our China economist is expecting two rate hikes in 2H13; as a result we continue to see pressure for life insurance sales in the near term. Indeed, we see continued rising policy surrender risk for the life sector generally. Fig. 9: 1-year time deposit rate vs life premium growth Fig. 1: CPI vs life premium growth (%) 1-year time deposit rate (LHS) life premium y-y growth (RHS) Jul-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 (%) (%) CPI (LHS) life premium y-y growth (RHS) Jul-5 Nov-5 Mar-6 Jul-6 Nov-6 Mar-7 Jul-7 Nov-7 Mar-8 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 (%) Source: CEIC, Nomura research Source: CEIC, Nomura research Fig. 11: Real interest rate vs life premium growth Fig. 12: Sector PEV vs investment yield (%) real interest rate (LHS) life premium y-y growth (RHS) Jul-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 (%) (x) sector 12m forward PEV (LHS) investment yield (RHS) 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 (%) Source: CEIC, Nomura research Source: CEIC, Company data, Bloomberg, Nomura research 5

7 Nomura China insurance February 7, 213 New policy products may disappoint commercially In this section, we analyse two types of critical illness product one is a rider attached to a policy and supported by the local governments while another is designed from a more commercial perspective and generally sold through agents. For the rider, we use Xiangyang ( 襄 阳 ) as an example. In Xiangyang, the social healthcare security fund will contribute CNY2 each month per person. For the first CNY3, of the medical expenses, both the patient and social healthcare security fund will be responsible (5:5). For medical expenses in the range of CNY3,-9,, the insurer will pay 6-65% of the cost with a cap at CNY9,. Thus, putting this into perspective, medical claims exposed by an insurer are as much as 162x that of the policy s annual premium, on our numbers. For the commercial critical illness product, we take China Life s popular Kangning critical illness product as an example. If the sum assured of a whole-life product is CNY3,, covering critical illness and death, with premiums payable for 1 years, the annual premium would be CNY16,35. Thus, the sum exposed from the insurer s point of view is only 18x that of the annual premium. As such, it appears that insurers are exposed to a much higher level of contingent liability with policy-type critical illness products compared to the commercial types. While admittedly, our analysis is somewhat primitive, we hope to illustrate to investors that with this backdrop, insurers are likely to be generally quite cautious in developing these types of products. Hence, we do not expect insurers to be very active in developing such products. Even if they do, we believe it would be necessary to understand better the underlying motives; in our view, such products tend to offer very limited returns on capital even if we were to assume that the insurers manage their potential tail risk appropriately. Another important point to realize is that protection-type products are really only highmargin products when they are selectively sold. When it comes to mass market distribution, we believe the margins are very much unlikely to be high enough to justify selling them on a commercial basis. Non-life profitability should trend well in 213F We believe the insurance regulator will remain strict on commission rates for motor insurance in 213F to clamp down on aggressive competition stemming from a more profitable market, and likely to relax them only over time as part of the pricing deregulation process and/or when it gets more comfortable with the industry s competitive landscape, for example, when insurers understand that vicious competition tends to lead to profitability being passed to intermediaries in terms of higher commission rates while detrimental to the sustainability of the industry. Additionally, it is also worthwhile to highlight on this note that even if there is a pricing reform, profitability for the motor insurance business is also unlikely to immediately take a deep dive from current levels, as we believe an ultimate loss ratio will be set by the regulator and insurers can only price their policies above this level. Hence, as long as the commission war does not blow out of proportion, we think generally profitability for the non-life sector will trend quite well in 213F. 6

8 Nomura China insurance February 7, 213 Fig. 13: PICC combined ratio Fig. 14: VoNB growth of life insurers vs NPAT growth of PICC (%) loss ratio expense ratio H9 2H9 1H1 2H1 1H11 2H11 1H12 Source: Company data, Nomura research (%) FY12F FY13F FY14F PICC AIA CPIC Life Taiping Life Source: Nomura estimates China Life Ping An Life Key operating trends in 1H12 Fig. 15: New policies per agent per month 2.5 Ping An Life CPIC Life New China Life Taiping Life Fig. 16: Insurers average policy size vs income per capita and GDP per capita (CNY) 8, 6, 4, 2, Ping An Life (LHS) CPIC Life (LHS) New China Life (LHS) Income per capita (RHS) GDP per capita (RHS) (CNY) 4, 35, 3, 25, 2, 15, 1, 5,. FY6 FY7 FY8 FY9 FY1 FY11 1H12 FY6 FY7 FY8 FY9 FY1 FY11 Source: Company data, Nomura research Note: NCI 211 policy size is not available, 1H11 data is used Source: Company data, CEIC, Nomura research Fig. 17: Number of agents (') China Life Ping An Life China Pacific Life New China Life Taiping Life FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 1H12 Source: Company data, Nomura research Fig. 18: Average new individual life policy size (CNY) 8, 6, 4, 2, 4,126 3,765 1,162 Ping An Life CPIC Life New China Life Taiping Life 4,87 2,127 Source: Company data, Nomura research 5,642 3,119 1,898 1,635 1,823 7,141 7,131 7,15 2,456 5,824 3,26 2,89 3,749 3,239 FY6 FY7 FY8 FY9 FY1 FY11 1H12 7

9 Nomura China insurance February 7, 213 Fig. 19: VoNB growth Ping An Life (%) CPIC Life 6 AIA Taiping Life China Life New China Life Fig. 2: VoNB as % of EV 1H12 (%) VoNB by EV VONB & expected return on EV as % of EV FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 1H12 Ping An Life Taiping Life CPIC Life China Life AIA New China Life Source: Company data, Nomura research Note: FY11 expected return on EV for Ping An Life, Taiping Life and CPIC Life Source: Company data, Nomura research Fig. 21: Total premium mix by product 1H12 1H12 (%) Single Regular-new Regular-renewal Source: Company data, Nomura research China Life Ping An Life CPIC Life NCI TPL Fig. 22: Total premium mix by distribution 1H12 (%) Individual Bancassurance Group/Other channel Source: Company data, Nomura research China Life Ping An Life CPIC Life NCI TPL

10 Nomura China insurance February 7, 213 FY12 preview/1q13 outlook FY12 results unlikely to trigger further re-rating The insurers under our coverage are scheduled to release their FY12 results by the end of March 213. We are generally not expecting a lot of positives from this but we highlight that with the recent rally in the A-share market, on a y-y basis, the A-share index is back to positive territory since late December and hence should help to alleviate some pressure from impairment charges on earnings. However, other than investment, we see limited positive catalysts in terms of top-line premium growth, for example, given that on a monthly incremental basis, retail deposits still appear difficult to come by which should make strong premium growth unlikely, in our view. Fig. 23: Life premium vs retail deposits by year Fig. 24: Life premium growth vs monthly net retail deposit (CNYbn) 1,2 1, Life premium (LHS) Net new demand deposits (RHS) Net new time deposits (RHS) (CNYbn) 4, 3,5 3, 2,5 2, 1,5 1, 5 (%) monthly net retail demand deposits (RHS) (CNYbn) 14 monthly net retail time deposits (RHS) life premium y-y growth (LHS) 1,5 12 1, Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec , Source: CEIC, Nomura research Source: CEIC, Nomura research Fig. 25: SHCOMP y-y movement (%) Jan Jan-12 1-Feb Feb Feb Mar Mar Apr Apr-12 9-May May-12 6-Jun-12 2-Jun-12 4-Jul Jul-12 1-Aug Aug Aug Sep Sep-12 1-Oct Oct-12 7-Nov Nov-12 5-Dec Dec-12 2-Jan Jan-13 3-Jan-13 Source: Bloomberg, Nomura research 9

11 PICC Property & Casualty 2328.HK 2328 HK INSURANCE EQUITY RESEARCH Upgrade to Buy; negatives well priced in Our preferred play for investors seeking A-share exposure February 7, 213 Rating Up from Neutral Target price Increased from 11. Closing price January 31, 213 Buy HKD 14. HKD 11.8 Potential upside +18.6% Perhaps Street is too pessimistic on non-life but vice versa for life While we have to be honest and admit that we would probably have higher conviction on this upgrade if PICC P&C s FY13F P/B were nearer 2x rather than the current 2.2x, we believe that given our view the Chinese insurance sector can no longer be considered as cheap on an absolute basis, we see relatively more downside risks in terms of the fundamentals for the life business relative to non-life now. This is especially evident in the quite clear consensus on the life over non-life view for 213 from investors we have met over the past month. At this point, we would recommend investors if they have to pick an insurer for an A-share proxy to select PICC P&C given our view that the market has probably built in too negative an assumption for the non-life business and that nonlife is unlikely to deteriorate too much in 213F. We have upgraded our recommendation to Buy with a target price of HKD14.. Underwriting profit still solid; more direct benefit from investment We revise up our earnings by 18% for 213F and 21% for 214F, assuming a higher investment yield of 4.54%. While we expect the combined ratio for 2H12F to be higher, we do not expect the combined ratio to deteriorate materially in 213F given our view that the regulator will remain strict on commission rates and pricing. We believe assuming a combined ratio of 96.8% for 213F is sufficient to account for the competitive landscape at this stage. On the other hand, we do expect a more stable investment environment to help support earnings growth for 213F. Indeed, for non-life insurers, this impact will come more directly relative to life insurers given policyholders do not get to share the investment gains of non-life insurers. Anchor themes Following the recent re-rating of the sector on the back of the A- share rally, we believe expectations have run ahead of fundamentals. We see downside risk for the life sector and recommend investors to switch to PICC P&C. Nomura vs consensus Our FY13F earnings forecast is in line with 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 Dec FY11 FY12F FY13F FY14F Currency (CNY) Actual Old New Old New Old New Net premium (mn) 133, ,47 142,47 157,1 157,1 173, ,484 Reported net profit (mn) 8,27 9,345 1,83 9,266 1,92 9,391 11,366 Normalised net profit (mn) 8,27 9,345 1,83 9,266 1,92 9,391 11,366 FD normalised EPS 68.61c 76.25c 82.27c 75.6c 89.1c 76.62c 92.74c FD norm. EPS growth (%) FD normalised P/E (x) 14.3 N/A 11.6 N/A 1.7 N/A 1.2 Price/EV (x) na N/A na N/A na N/A na Price/implied VNB (x) na N/A na N/A na N/A na Dividend yield (%) 2.3 N/A 2.2 N/A na N/A na ROE (%) ROA (%) 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.

12 Nomura PICC Property & Casualty February 7, 213 Key data on PICC Property & Casualty Profit and Loss (CNYmn) Year-end 31 Dec FY1 FY11 FY12F FY13F FY14F Gross premiums 154,37 173, ,47 21, ,872 Government charges -31,317-4,828-48,641-53,582-59,388 Reinsurance ceded Net written premium 122,99 133, ,47 157,1 173,484 Change in unearned premium reserves Net earned premium 122,99 133, ,47 157,1 173,484 Claims and benefit payments -82,98-87,546-89,851-99, ,454 Change in reserves Commission and DAC expenses -23,412-2,29-27,719-32,493-36,66 Other expenses -14,144-21,541-2,699-21,572-23,7 Underwriting surplus 2,526 3,757 4,138 3,283 1,724 Recurrent investment income 2,89 9,129 9,783 1,711 12,841 Realised and unrealised gains 1,78-2,6-1, Investment income 3,968 6,529 8,783 1,711 12,841 Other income Employee share expense Operating profit 6,494 1,286 12,92 13,994 14,565 Amortisation Other non-operating income Associates and JCEs Pre-tax profit 6,494 1,286 12,92 13,994 14,565 Income tax -1,282-2,259-2,838-3,73-3,199 Net profit after tax 5,212 8,27 1,83 1,92 11,366 Minority interests Other items Preferred dividends Normalised NPAT 5,212 8,27 1,83 1,92 11,366 Extraordinary items Reported NPAT 5,212 8,27 1,83 1,92 11,366 Dividends -2,57-2,574 Transfer to retained earnings 5,212 5,52 7,59 1,92 11,366 Relative performance chart (one year) Source: ThomsonReuters, Nomura research (%) 1M 3M 12M Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn) 16,949.3 Estimated free float (%) week range (HKD) 12.28/ mth avg daily turnover (USDmn) Major shareholders (%) PICC Group 69. UST 9.9 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 (%) na na na Price/book (x) Investment return (%) Recurrent investment return (%) Non-recurrent return/invt. return (%) Price/EV (x) na na na na na Price/implied VNB (x) na na na na na Loss ratio (%) Combined ratio (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) ROR (%) Growth (%) Life premiums na na na na na Non life premiums Net profit Normalised EPS Normalised FDEPS Source: Company data, Nomura estimates 11

13 Nomura PICC Property & Casualty February 7, 213 Balance Sheet (CNYmn) As at 31 Dec FY1 FY11 FY12F FY13F FY14F Cash and deposits 32,29 58,638 72,328 87,372 13,845 Bonds 92,567 98,62 12, , ,663 Equities 19,1 22,512 27,768 33,544 39,868 Unit trusts Loans and mortgages Foreign investments Real estate Other investments 3,194 6,625 8,172 9,871 11,733 Total investments 146, , , ,93 329,18 Deferred acquisition costs Prepaid and unearned prem. reserves Debtors and prepayments Fixed assets Goodwill Separate account assets Other assets 54,814 79,87 8,383 88,473 97,465 Total assets 21, ,644 39,68 365, ,574 Insurance reserves Catastrophe reserves Insurance protection fund Deposit and investment contracts Separate account liabilities Provision for Unearned Premiums Provision for Outstanding Claims Interest bearing liabilities Other liabilities 176,951 23, , ,113 36,88 Total liabilities 176,951 23, , ,113 36,88 Minority interest Common stock 11,142 12,256 12,256 12,256 12,256 Preferred stock Retained earnings 8,612 1,221 16,29 22,169 28,75 Proposed dividends Other equity 5,8 12,683 12,75 18,838 25,435 Shareholders' equity 24,834 35,16 41,251 53,263 65,766 Total liabilities and equity 21, ,644 39,68 365, ,574 Notes Balance sheet ratios (%) Life solvency margin na na na na na 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) 46.78c 68.61c 82.27c 89.1c 92.74c Norm EPS (CNY) 46.78c 68.61c 82.27c 89.1c 92.74c Fully diluted norm EPS (CNY) 46.78c 68.61c 82.27c 89.1c 92.74c DPS (CNY) BVPS (CNY) Life/LT EVPS (CNY)..... Life/LT VNBPS (CNY)..... Value of non-life bus. PS (CNY)..... Source: Company data, Nomura estimates 12

14 Nomura PICC Property & Casualty February 7, 213 Negatives should be well priced in; actual results may not be as bad as consensus expects Fig. 26: PICC half-yearly results P&L 1H11 2H11 1H12 2H11 y-y 1H12 y-y Comments (CNYmn) (%) Net premiums earned 65,946 67,188 73, For 2H12/1H13, we are expecting around double digit y-y premium growth on gross basis while on net basis the growth should perhaps be higher given relatively lesser use of reinsurance. Net claims incurred (42,784) (44,762) (45,193) () 6 While we are expecting further pressure on claims for 2H12 largely due to seasonality, we are expecting more moderate rise for 1H13 as PICC continues to improve its claims process. Acquisition costs and other underwriting expenses (1,292) (9,998) (14,639) (12) 42 We are looking for PICC to manage its expense better and we think there will be support from the regulator which is trying to clamp down on commission rates. General and administrative (7,934) (9,348) (8,96) 13 2 expenses Underwriting profit 4,936 3,8 5, Investment income 2,933 3,596 4, Net realized and unrealized losses on investments (332) (2,268) (4) na 2 While we expect there maybe some investment losses in 2H12 still, we are anticipating a better 213 investment performance with less impairment. Investment expenses (85) (74) (95) (38) 12 Interest expenses credited to (5) (12) (5) 71 policyholders' deposits Exchange gains/(losses), net (234) (94) 21 (64) na Sundry income (19) (23) Sundry expenses (4) (127) (45) (51) 13 Finance costs (514) (82) (825) Share of profits of associates (15) 11 PBT 6,763 3,523 8, Income tax (1,475) (784) (1,879) Net profit attributed to shareholders 5,288 2,739 6, Overall, while we are expecting a weaker 2H12 due to seasonality, we are more optimistic on 1H13 which we think the likely lower underwriting profitabilty will be offset by better investment performance. Source: Company data, Nomura research Valuation methodology Our revised TP of HKD14 (from HKD11) is based on 2.5x our FY13F BVPS forecast of CNY4.35 and a sustainable ROE of 22.9%. We lift the TP mainly based on a higher investment yield assumption. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV, assuming a cost of equity of 11% and a long-term growth rate of 3%. (Previously we valued PICC by using a present value of the net profit after tax and cost of capital approach) Investment risks Key downside risks include a worse-than-expected combined ratio from intensifying competition and poor returns from the A-share market, which would affect sentiment of insurers in general. 13

15 China Pacific Insurance 261.HK 261 HK INSURANCE EQUITY RESEARCH Downgrading to Neutral on valuation Still our preferred pick among life insurers February 7, 213 Rating Down from Buy Neutral Target price Remains HKD 32. Closing price January 31, 213 HKD 3.3 Potential upside +5.6% Lacking conviction, not withstanding A-share rally at current levels We downgrade CPIC to Neutral on a valuation basis as we see limited absolute upside from the current level, although CPIC remains our preferred pick for investors seeking life insurance exposure. While we continue to like CPIC for its capital position and still higher-than-peers life insurance new business growth, we find it difficult to further upgrade the stock at current valuation amid the uncertainty facing the industry in 213. We also believe it may be difficult to find marginal buyers not withstanding a further rally in the A-share index. The second prime beneficiary from our non-life over life call Our calculation indicates that CPIC can derive as much as a fifth to a quarter of its fair value from the non-life business. Hence, if our non-life over life sector call is correct, then CPIC would also be in a prime position to benefit other than PICC (2328 HK, Buy), although we do highlight the difference between the two non-life insurers operationally and as a result, the extent to which they will benefit from the continued strict regulatory control in the non-life segment might differ. Anchor themes Following the recent re-rating of the sector on the back of the A- share rally, we believe expectations have run ahead of fundamentals. We see downside risk for the life sector and recommend investors to switch to PICC P&C. Nomura vs consensus Our FY13F earnings forecast is 27% lower than consensus due to consensus's higher premium growth and lower impairment forecasts. 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 Dec FY11 FY12F FY13F FY14F Currency (CNY) Actual Old New Old New Old New Net premium (mn) 141, ,34 155,34 18,138 18,138 29,82 29,82 Reported net profit (mn) 8,313 4,485 4,485 7,313 7,313 6,676 6,676 Normalised net profit (mn) 8,313 4,485 4,485 7,313 7,313 6,676 6,676 FD normalised EPS 96.66c 52.16c 52.16c 82.81c 82.81c 73.67c 73.67c FD norm. EPS growth (%) FD normalised P/E (x) 25.3 N/A 46.7 N/A 29.3 N/A 33. Price/EV (x) 1.8 N/A 1.6 N/A 1.4 N/A 1.2 Price/implied VNB (x) 14.4 N/A 1.8 N/A 8.3 N/A 4.5 Dividend yield (%) 1.4 N/A.8 N/A 1.2 N/A 1.1 ROE (%) ROA (%) 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.

16 Nomura China Pacific Insurance February 7, 213 Key data on China Pacific Insurance Profit and Loss (CNYmn) Year-end 31 Dec FY1 FY11 FY12F FY13F FY14F Gross premiums 139, ,958 17, ,471 23,747 Government charges Reinsurance ceded -13,422-13,384-15,523-18,333-21,665 Net written premium 126, , ,34 18,138 29,82 Change in unearned premium reserves -6,382-4,336-4,4-5,222-6,23 Net earned premium 119, ,238 15, ,916 22,879 Claims and benefit payments Change in reserves -59,241-56,63-68,68-73,229-84,564 Commission and DAC expenses Other expenses -71,44-89,55-15, ,93-146,763 Underwriting surplus -1,894-8,375-23,13-23,47-28,448 Recurrent investment income 16,952 21,119 26,377 3,185 34,437 Realised and unrealised gains Investment income 16,952 21,119 26,377 3,185 34,437 Other income 4,624-2,84 1,887 1,887 1,887 Employee share expense Operating profit 1,682 9,94 5,162 8,665 7,876 Amortisation Other non-operating income Associates and JCEs Pre-tax profit 1,67 1,399 5,657 9,16 8,371 Income tax -2,5-2,6-1,91-1,767-1,615 Net profit after tax 8,665 8,393 4,565 7,393 6,756 Minority interests Other items Preferred dividends Normalised NPAT 8,557 8,313 4,485 7,313 6,676 Extraordinary items Reported NPAT 8,557 8,313 4,485 7,313 6,676 Dividends -3,1-3,1-1,624-2,717-2,417 Transfer to retained earnings 5,547 5,33 2,861 4,596 4,259 Relative performance chart (one year) Source: ThomsonReuters, Nomura research (%) 1M 3M 12M Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn) 33,135.9 Estimated free float (%) week range (HKD) 32.5/ mth avg daily turnover (USDmn) 55.6 Major shareholders (%) Fortune Investment 14.9 Shenergy Group 14.3 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 15

17 Nomura China Pacific Insurance February 7, 213 Balance Sheet (CNYmn) As at 31 Dec FY1 FY11 FY12F FY13F FY14F Cash and deposits 126, , ,861 22,417 23,251 Bonds 226, ,121 37,32 349, ,842 Equities 54,18 52,18 59,54 67,719 77,31 Unit trusts Loans and mortgages Foreign investments Real estate Other investments 17,851 31,257 35,694 4,622 46,27 Total investments 425,266 58,24 58,378 66,56 751,331 Deferred acquisition costs Prepaid and unearned prem. reserves Debtors and prepayments Fixed assets 6,831 7,833 Goodwill Separate account assets Other assets 43,465 53,577 73,995 89,631 16,858 Total assets 475,711 57, ,374 75, ,189 Insurance reserves 267, , , , ,419 Catastrophe reserves Insurance protection fund Deposit and investment contracts 51,272 47,182 5,64 54,548 59,73 Separate account liabilities Provision for Unearned Premiums Provision for Outstanding Claims Interest bearing liabilities Other liabilities 74, , , , ,315 Total liabilities 394,16 492, , , ,88 Minority interest 1,254 1,259 1,313 1,49 1,49 Common stock 8,6 8,6 8,6 9,62 9,62 Preferred stock Retained earnings 13,221 17,993 2,854 25,52 29,779 Proposed dividends Other equity 58,476 5,23 5,652 51,383 52,51 Shareholders' equity 8,297 76,796 8,16 85,965 9,891 Total liabilities and equity 475,711 57, ,374 75, ,189 Notes Balance sheet ratios (%) Life solvency margin na na na 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) c 52.16c 82.81c 73.67c Norm EPS (CNY) c 52.16c 82.81c 73.67c Fully diluted norm EPS (CNY) c 52.16c 82.81c 73.67c DPS (CNY) BVPS (CNY) Life/LT EVPS (CNY) Life/LT VNBPS (CNY) Value of non-life bus. PS (CNY)..... Source: Company data, Nomura estimates 16

18 Nomura China Pacific Insurance February 7, 213 Well capitalized, still faster-than-peers growth for life, and now our view that non-life will likely trend better than life in 213 keep CPIC as our preferred play for those seeking exposure to the China insurance space Fig. 27: CPIC quarterly P&L P&L 4Q11 1Q12 2Q12 3Q12 4Q11 y-y 1Q12 y-y Comments Premiums earned 3,764 44,57 36,333 33, Generally, we continue to see pressure for the bancassurance channel. However, we expect CPIC's agency channel to continue to report better than peers growth as it continues to benefit from the recent reform. Net Investment Income 4,264 4,627 6,147 5,832 (48) (15) Fair value gains/(losses) (11) na na Foreign exchange gains/(losses) (12) (1) 3 4 (8) (96) Other income Operating income 35,56 49,49 42,85 39,767 (3) 4 Surrenders (2,528) (3,22) (2,973) (3,126) We see continued rising pressure in surrenders as well given CPIC also has a rather high bancassurance reliance. Claims expense (1,415) (9,424) (1,423) (11,1) Given our fundamental view that nonlife might perform better than life this year, we are expecting more moderate rise in claims rather than a significant increase. Increase in insurance contracts (9,31) (22,967) (14,37) (12,256) (28) (3) reserve Policyholder dividends (1,11) (1,28) (755) (1,72) 22 Reinsurance expenses (8) (1) (6) (1) 33 1 Business tax and surcharges (871) (1,2) (1,54) (994) (5) 1 Underwriting and policy acquisition (2,887) (4,539) (3,571) (3,359) 7 22 costs Operating and administrative (4,69) (4,16) (4,529) (4,694) expenses Interest expenses (277) (59) (563) (561) Impairment losses (874) (1,373) (1,23) (1,599) 65 1,35 Other operating expenses (1,173) (42) (789) (66) 88 (54) Operating expenses (34,35) (48,598) (4,236) (39,287) 7 12 Operating profit 1, , (67) (79) Non-operating items 88 (5) PBT 1, , (65) (79) Income tax (32) (233) (58) 14 (68) (69) Minority interest (16) (2) (28) 1 (71) (96) Net profit attributed to shareholders Source: Company data, Nomura research (CNYmn) (%) 1, , (65) (81) It is interesting to highlight that the y-y comparison for 1Q13 might already be better for CPIC given the relative low base in 1Q12. 17

19 Nomura China Pacific Insurance February 7, 213 Fig. 28: CPIC NBV breakdown (CNYmn, except %) 1H11 2H11 FY11 1H12 1H11 2H11 FY11 1H12 Comments y-y change (%) Agent 6,523 4,616 11,139 7, Single First Year Regular 6,134 4,239 1,373 7, Agency premium growth remains healthy as the value focus continues to be communicated from HQ to the branch level and frontline staff are incentivised to sell longer term products. Bancassurance 2,718 9,794 3,512 12,582 (18) (38) (26) (39) Single 16,837 7,828 24,665 1,257 (18) (35) (24) (39) Bancassurance will still be under pressure this year. First Year Regular 3,881 1,966 5,847 2,325 (17) (48) (31) (4) Others 3,112 2,173 5,285 4, (1) Single 3,15 2,166 5,271 4,88 72 (1) First Year Regular (3) 27 3 New Business Premium 3,353 16,583 46,936 24,942 (5) (25) (13) (18) New Business Value 3,83 2,884 6,714 4, CPIC will likely continue to outpace its peers in terms of NBV growth as it continues to benefit from its reform, which is more value focused. y-y change (pp) New Business Margin (%) Source: Company data, Nomura research Valuation methodology Our target price of HKD32 is premised on a sum-of-the-parts (SOTP) valuation. For the life business, our target NB multiple of 7.5x is derived by a risk discount rate (RDR) of 11.5%, according to CPIC s EV assumptions. We use our explicit VoNB growth forecasts for FY12-14F, and assume 7% NBV growth for the next 9 years (FY15-23F). We apply the target NB multiple to the FY14F new business value and then add the FY13F embedded value. We value CPIC s P&C business by applying 1x P/E to its FY12F NPAT and add the free capital available. Investment risks Key upside risks: 1) sales of bancassurance products supporting higher VoNB growth; and 2) stronger-than-expected returns from the A-share market, which would likely boost general sentiment toward insurers. Key downside risks: 1) sales of bancassurance products being unable to support higher VoNB growth; and 2) poor returns from the A-share market, which would likely hurt general sentiment toward insurers. 18

20 China Life Insurance 2628.HK 2628 HK INSURANCE EQUITY RESEARCH Downgrading to Neutral on valuation Near-term upside from A-shares rather than fundamentals February 7, 213 Rating Down from Buy Target price Remains Closing price January 31, 213 Neutral HKD 27. HKD 26. Potential upside +3.8% Structural headwinds to limit upside near term We downgrade China Life to Neutral on a valuation basis as we still see structural headwinds for the life insurance industry which are likely to limit further upside from current levels. However, the insurer s exposure to A- shares in its investment portfolio together with investor expectations of incremental net asset growth for insurers on the recent A-share rally keeps us from taking a more negative view on the share price. We base this on our impression that most of the investors that we have met in the past couple of months understand that the fundamentals remain weak for life insurers but maintain some exposure to life insurers for Beta purposes. Hence, we believe there are likely still marginal buyers (albeit they would be, in our view, very much tied to market sentiment) for insurers shares, and China Life given its scale and market capitalization will likely continue to be welcomed by these marginal buyers in the near term. Fundamental improvements more likely in 214F than 213F While we continue to applaud the steps taken by management to improve shareholder returns, we believe the current low-growth period for the life insurance industry is likely to stretch out for at least one more year. While we see possibility for fundamentals to pick up in 214F, from a share price point of view, we expect the genuine re-rating supported by fundamentals to happen in 215F. 31 Dec FY11 FY12F FY13F FY14F Currency (CNY) Actual Old New Old New Old New Net premium (mn) 318,2 33,742 33, ,34 318,34 336, ,836 Reported net profit (mn) 18,331 12,532 12,532 25,11 25,11 3,62 3,62 Normalised net profit (mn) 18,331 12,532 12,532 25,11 25,11 3,62 3,62 FD normalised EPS 64.85c 44.34c 44.34c 88.84c 88.84c FD norm. EPS growth (%) FD normalised P/E (x) 33.2 N/A 47.4 N/A 23.5 N/A 19.2 Price/EV (x) 2. N/A 1.8 N/A 1.5 N/A 1.4 Price/implied VNB (x) 15. N/A 12.7 N/A 1. N/A 7.2 Dividend yield (%) 1.1 N/A.7 N/A 1.5 N/A 1.8 ROE (%) ROA (%) Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart. Anchor themes Following the recent re-rating of the sector on the back of the A- share rally, we believe expectations have ran ahead of fundamentals. We see downside risk for the life sector and recommend investors to switch to PICC P&C. Nomura vs consensus Our FY13F earnings forecast is 14% lower than consensus, as we expect the tighter liquidity environment and changes in distribution channels to affect the new business growth more than the market. 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 See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

21 Nomura China Life Insurance February 7, 213 Key data on China Life Insurance Profit and Loss (CNYmn) Year-end 31 Dec FY1 FY11 FY12F FY13F FY14F Gross premiums 318, ,252 33, , ,82 Government charges Reinsurance ceded Net written premium 318,52 318,2 33, ,34 336,836 Change in unearned premium reserves Net earned premium 318,88 318,276 33, ,56 337,17 Claims and benefit payments -199, , , ,49-158,991 Change in reserves Commission and DAC expenses Other expenses -146, ,2-188, ,64-234,273 Underwriting surplus -28,513-34,323-53,44-54,128-56,158 Recurrent investment income 48,872 6,722 71,12 79,146 87,467 Realised and unrealised gains 16,121-1,871-7,686 Investment income 64,993 49,851 63,416 79,146 87,467 Other income Employee share expense Operating profit 36,48 15,528 1,13 25,17 31,39 Amortisation Other non-operating income 2,757 2,772 2,787 2,82 2,817 Associates and JCEs 1,771 2,213 2,545 2,927 3,366 Pre-tax profit 41,8 2,513 15,345 3,746 37,492 Income tax -7,197-2,22-2,693-5,396-6,58 Net profit after tax 33,811 18,491 12,652 25,35 3,912 Minority interests Other items Preferred dividends Normalised NPAT 33,626 18,331 12,532 25,11 3,62 Extraordinary items Reported NPAT 33,626 18,331 12,532 25,11 3,62 Dividends -11,36-6,51-4,444-8,95-1,859 Transfer to retained earnings 22,32 11,83 8,88 16,25 19,761 Relative performance chart (one year) Source: ThomsonReuters, Nomura research (%) 1M 3M 12M Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn) 94,738. Estimated free float (%) week range (HKD) 27.35/17 3-mth avg daily turnover (USDmn) Major shareholders (%) CLIC 68.4 HKSCC 25.7 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 2