For US and European insurers, it is more common to look at PBR and ROE as they operate in mature markets with limited growth potential, and hence are more sensitive to investment performance. In fact, most US insurers do not disclose their EV, which makes it difficult to make a global comparison based on P/EV.
For PBRs, we argue that the China insurers’ higher PBRs are justified by their much higher ROEs than their US and European peers.
(60%) (40%) (20%) 0% 20% 40% 60%
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
China Life Ping An CPIC NCI
China/Hong Kong insurance companies generally trade at higher multiples than their global peers due to their growth prospects
Global insurance companies: valuation comparison
Company Ticker Market cap Rating Current PBR PER ROE (%) ROA (%) Leverage (x)
(USDbn) price FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E
CHINA / HK - H SHARE
AIA Group 1299 HK 101 Buy 65.25 2.5 2.4 20.5 18.5 13.1 13.2 2.5 2.6 5.2 5.1
China Life 2628 HK 121 Buy 24.50 1.7 1.6 18.9 14.7 9.6 11.5 1.1 1.3 8.9 9.1
Ping An 2318 HK 195 Hold 81.60 2.6 2.4 17.2 13.9 16.9 17.8 1.2 1.2 14.3 14.4
CPIC 2601 HK 54 Buy 37.90 2.0 1.8 18.9 14.3 10.9 13.2 1.4 1.6 7.9 8.0
PICC Group 1339 HK 21 Buy 3.83 0.9 0.8 7.9 7.5 12.7 11.8 1.7 1.7 7.2 7.1
PICC P&C 2328 HK 28 Hold 14.98 1.3 1.1 8.4 8.3 17.1 14.8 4.3 3.8 3.9 3.9
New China Life 1336 HK 29 Buy 53.40 2.1 1.8 22.3 15.3 10.0 12.7 0.9 1.2 11.5 10.7
Taiping 966 HK 13 Buy 29.20 1.6 1.5 18.7 12.7 9.3 12.3 1.0 1.2 9.5 10.6
Zhong An 6060 HK 13 Hold 68.90 5.5 4.4 -402.7 184.1 -1.7 2.6 -1.4 2.1 1.3 1.2
Sector 576 2.2 2.0 8.4 18.3 13.0 14.1 1.5 1.7 9.6 9.7
CHINA - A SHARE
China Life 601628 CH 121 N/A 30.65 2.6 2.4 29.0 23.2 9.5 11.3 1.1 1.3 8.8 8.6
Ping An 601318 CH 195 N/A 70.59 2.9 2.5 17.1 14.2 18.3 18.9 1.3 1.4 14.3 14.4
CPIC 601601 CH 54 N/A 42.42 2.7 2.5 26.1 21.4 10.7 12.2 1.3 1.4 8.2 8.0
New China Life 601336 CH 29 N/A 69.56 3.4 3.0 35.7 27.2 10.1 12.3 0.9 1.1 10.8 10.7
Sector 399 2.8 2.5 23.3 18.8 14.0 15.2 1.2 1.3 11.7 11.4
Regional
Tokio Marine 8766 JT 34 Outperform 5,130 1.0 0.9 14.4 12.4 6.7 7.8 1.5 1.9 4.6 4.1 Dai-ichi Life 8750 JT 25 Outperform 2,326 0.8 0.7 12.2 12.7 6.6 6.0 0.4 0.5 16.4 12.0 Samsung Life 032830 KS 23 N/A 124,500 0.7 0.7 15.7 13.8 5.0 5.2 0.6 0.6 8.7 8.1 MS&AD Holdings 8725 JT 20 Hold 3,788 0.8 0.7 12.8 9.4 5.8 8.0 1.1 1.5 5.1 5.3 Cathay Financial 2882 TT 23 Buy 53.8 1.2 1.2 12.4 12.4 10.1 9.6 0.7 0.6 15.1 15.4 Fubon Financial 2881 TT 17 Outperform 50.8 1.1 1.1 9.9 9.3 11.8 11.6 0.8 0.8 15.0 14.7
Sompo Holdings 8630 JT 16 Buy 4,347.0 0.9 0.8 10.3 8.4 8.5 9.5 1.7 1.8 5.1 5.4
Japan Post 7181 JT 14 Outperform 2,646.0 0.8 0.8 17.1 17.1 5.1 5.0 0.2 0.2 33.8 25.0 Samsung Fire & Marine 000810 KS 12 N/A 267,000 1.0 0.9 10.6 10.5 9.8 9.3 1.6 1.5 6.2 6.2 T&D Holdings 8795 JT 11 Outperform 1,932.0 0.9 0.9 14.8 14.0 6.8 6.4 0.7 0.9 10.5 7.1
Great Eastern GE SP 10 N/A 27.4 N/A N/A 14.0 16.2 N/A N/A N/A N/A N/A N/A
ICICI Prudential Life IPRU IN 9 N/A 390.0 7.8 7.0 32.1 28.9 25.8 23.8 1.4 1.4 18.7 17.5
Sector 214 1.2 1.1 13.9 12.9 7.9 8.1 0.9 1.0 8.8 7.8
GLOBAL
Berkshire Hathaway BRK/B US 490 N/A 198.7 1.6 1.4 31.7 24.3 4.5 6.1 1.2 2.2 3.8 2.8
Allianz ALV GR 102 N/A 194.3 1.3 1.2 12.1 11.4 10.7 10.9 0.8 0.8 12.8 13.3
AIG AIG US 54 N/A 59.5 0.7 0.7 22.0 11.8 3.7 6.8 N/A N/A N/A N/A
Chubb CB US 68 N/A 146.2 1.3 1.3 20.0 13.6 7.3 9.6 2.1 3.0 3.5 3.2
AXA CS FP 73 N/A 25.1 0.9 0.8 10.1 9.6 9.1 9.4 0.7 0.7 13.6 14.3
MetLife Inc. MET US 53 N/A 50.8 1.0 1.0 11.5 10.7 8.9 9.6 N/A N/A N/A N/A
Prudential PRU LN 65 N/A 1,874.5 2.9 2.6 13.2 12.5 21.6 20.6 0.7 0.7 30.0 28.1
The Travelers TRV US 37 N/A 134.8 1.5 1.5 19.3 13.9 7.4 9.7 2.1 2.5 3.5 3.9
Prudential Financial PRU US 49 N/A 115.3 1.1 1.0 11.0 10.0 11.8 11.8 0.9 0.9 13.1 13.1 Manulife Financial MFC CN 41 N/A N/A N/A N/A N/A N/A 9.7 12.2 0.3 0.6 32.4 20.3
Allstate ALL US 38 N/A 104.6 1.8 1.7 16.7 14.0 11.3 12.1 2.2 2.4 5.1 5.0
Generali G IM 29 N/A 15.4 1.0 0.9 10.7 9.8 8.6 9.3 0.4 0.5 22.9 20.4
Sector 1,098 1.4 1.3 21.6 16.9 7.7 8.9 1.0 1.6 7.4 5.7
Source: Bloomberg, Daiwa
Note: Daiwa forecasts for China Life, Ping An, CPIC, PICC Group, PICC P&C, New China Life, Taiping and Zhong An H-share; Bloomberg consensus for other stocks. Priced as of 28 December 2017 (27 December 2017 for US-listed stocks).
Risk 1: Mark-to-market losses on bond investments due to rapidly rising
interest rates
Some investors worry about the bond holdings in China insurers’ investment portfolios if interest rates are rising, and hence bond prices declining. Listed China insurers had around 49% of their investment book in bond investments as of end-1H17. A rapid rise in interest rates might lead to substantial declines in the market price of these bond holdings, which would negatively impact insurers’ attributable net profits and net assets.
We argue that the impact from fair-value declines in bonds on insurance companies would be very limited compared with brokers or mutual funds, because:
Accounting classification. Most of the bond holdings at insurers are classified as HTM assets and do not affect either their net profits or net assets. As long as such bonds do not default, there is no impact at all on insurers even in terms of the time distribution of net profit.
A 5% decline in the fair value of insurers’ bond investments would have a 1.5% negative impact on their pre-tax profit and a 2.2% negative impact on their net assets
Low credit risk appetite. Listed insurers generally have a low credit risk appetite due to their steady investment goals. Over 95% of their corporate bond holdings have AA or above ratings.
Low leverage. Insurance companies have very low leverage in their bond investments because the purpose of insurers’ investments is asset allocation rather than beating any market index or hurdle investment return. On our estimates, the leverage in listed insurers’ bond portfolios should be at the most 1.1x, compared with 1.5-2.0x for brokers and mutual funds.
Profit-sharing with policyholders. For China insurance companies, around 2/3 of their insurance liabilities (and investment assets) are related to PAR products, where usually 75% of the investment return is shared with policyholders. Hence, only around half of the fluctuations of the profit from investments is borne by insurance companies themselves. This fact also further lowers the sensitivity of insurers’ profits and book values to bond yield.
Overall, if there is a 5% across-the-board decline in the fair value of bond investments held by listed China insurance companies, we would expect a 1.5% negative impact on listed insurers’ pre-tax profit, a 2.2% negative impact on their net asset, and a 1.2% impact on their EV (group) in aggregate. This is because: 1) only the bonds booked as trading assets (c.5%) on the balance sheet impact the P&L of insurers; 2) bonds booked as trading assets and available for sale (AFS) (c.29%) have an impact on the net assets and EV of insurers, and 3) fair value changes of bonds booked as HTM assets (c.66%) do not have any impact on the net profit, net assets or EV of insurers.
Additionally, around 66% of insurance companies’ bonds are used to back participating products, which usually share 75% of the investment returns with policyholders (namely the insurance company only takes/bears 25% of the investment returns/losses generated from such assets). Hence 50% (which is 66%*75%)of this fluctuation in investment income is passed on to policyholders, and does not directly impact the insurance companies’ own P&C and balance sheets.
China insurance companies: PBT, net asset and EV sensitivity to 5% decline in bond price (2017E)
(CNYm) China Life Ping An CPIC NCI PICC Group PICC P&C Taiping Aggregate Trading bonds (end-1H17) 79,153 80,746 2,389 1,055 2,401 1,529 8,759 174,806 AFS bonds (end-1H17) 453,097 223,421 194,704 55,247 131,804 75,660 48,310 1,175,480
5% fair value decline of trading bonds (3,958) (4,037) (119) (53) (120) (76) (438) (8,740) 5% fair value decline of AFS bonds (22,655) (11,171) (9,735) (2,762) (6,590) (3,783) (2,416) (58,774)
Proportion of investment return to be shared with policy holders
(% of PAR * sharing ratio of PAR) 50% 50% 50% 50% 50% 50% 50% 50%
PBT impact from 5% fair value decline of bonds (2017E) -5.1% -1.8% -0.3% -0.3% -0.2% -0.3% -2.1% -1.8% Net asset impact from 5% fair value decline of bonds (end-1H17) -4.3% -1.8% -3.7% -2.3% -2.5% -3.0% -2.3% -2.7% EV (group) impact from 5% fair value decline of bonds (end-
1H17) -1.9% -1.0% -1.8% -1.0% -2.2% -2.6% -1.0% -1.5%
Source: Daiwa estimates
Note: 1) assuming 66% of bond holdings are related to participating products and the average sharing ratio for policyholders of participating products is 75%; 2) Taiping’s currency is HKD; 3) PICC Group EV is estimated
Taking into consideration the recent market sensitivity between interest rates and bond prices, as well as the duration of insurers’ bond holdings, we estimate that a 50bps rise in interest rates would lead to around a 1.8% decline in listed-insurers’ net assets in
aggregate, or a 1.0% decline in their EV (Group). The MTM loss impact
should not be significant given most China insurers’ bond holdings are classified as HTM and due to the profit- sharing nature of PAR
China/Hong Kong insurance companies: bond classification
(end-1H17) AIA: PBT, net asset and EV sensitivity to 5% bond fair value change (end-1H FY17)
(USDm) AIA
Trading bonds (end-1H FY17) 24,408
AFS bonds (end-1H FY17) 97,370
5% fair value decline of trading bonds (1,220) 5% fair value decline of AFS bonds (4,869)
PBT impact from 5% fair value decline of bonds (FY17E) -4.1% Net asset impact from 5% fair value decline of bonds (end-1H FY17) -13.3% EV impact from 5% fair value decline of bonds (end-1H FY17) -11.0%
Source: Companies, Daiwa
Note: accounting classification as of end-1H FY17 for AIA, and end-1H17 for China insurers. Source: Daiwa estimates Note: AIA does disclose the type of products that its bond investments are backed by, so our estimation is based on AIA's disclosure. For participating funds, we assume a 75% sharing ratio.