China Insurance-Alert: Benign Combination of Monetary Easing, Life Upcycle and Supportive Policies;

Confirmation of a monetary easing cycle; stay positive: Following the rate cut inNovember 2014, the PBoC just announced a 50bp RRR cut effective from Feb 5.Our China economists expect two more rate cuts and two to three more RRR cutsfor the rest of the year. We reiterate our positive view on China insurers givenmonetary easing, a life insurance upcycle and likely supportive policies. Top picksare Ping An and CPIC, and we also see value with NCI.。

    Monetary easing should benefit life insurers in particular: On the liability side,life insurance policies in China remain skewed towards savings-type products,where liquidity is a key driver for the demand. Hence, an improvement in liquidityarising from rate/RRR cuts should propel stronger product sales (e.g., the robustpremium growth in January partly benefited from cut rate in Nov 2014, in our view).On the asset side, MTM gains on bonds as interest rates fall would be reflected oninsurers’ book value and EV immediately. On the other hand, it will take time for theimpact of lower interest income to be fully reflected given >5yrs of asset duration.。

    But more important, positive to supportable valuation: (1) Monetary easingshould help stabilize economic growth and reduce cost of capital in China, hencelikely positive to asset quality. This in turn should reduce investor concerns oninsurers’ exposure to non-standard assets. (2) Liquidity loosening should be positiveto the A-share market, in turn supporting insurers’ earnings, book value and EV.。

    Life insurance upcycle and potential supportive policies: (a) We reiterate ourview that the life insurance sector should enter the second stage of upcycle in 2015.NBV growth should stay strong driven by accelerating agent expansion but sloweragent productivity gains, as well as a turnaround of bancassurance growth. (b) Wealso believe tax policies for pension and health insurance could be announced inthe next 12-24 months.。

    Return to historical average valuation justified. We think sector fundamentalshave returned to, if not exceeded, normalized levels (NBV growth and ROEs backto mid-teens; life business mix and investment channels much better than before;positive A-share market momentum). However, China insurers currently trade at1.1x-1.5x 2015E P/EV, still meaningfully below the historical average of c.1.8x.。

    Please also refer to our sector reports dated 16 January 2015, 5 January, 2015, 24November 2014.