China Insurance Sector:Reading beyond 3Q15results

Regular FYP for the sector surged by 44% YoY on the back of a 20% agent headcount increase during 9M15

    Auto premium growth continues to moderate, but agriculture picked up in 3Q15; auto reform to start in another 12 provinces in 2016

    Total investment yield up by 1.95pp YoY; we think the lower proportion of deposits and bonds (-6.0pp in 9M15) is the key to mitigate falling yields

    What’s new: CIRC released some key operating figures for the China insurance sector, after A-share listed insurers reported their 3Q15 results last Friday (to see our recent notes on the China insurance sector and company results, click on the note titles on the right).

    What’s the impact: Regular FYP for the sector surged by 44.1% YoY in 9M15, the highest growth in 5 years. Only Ping An (2318 HK, HKD43.65, Buy [1]) and CPIC (2601HK, HKD31.00, Hold [3]) disclosed similar metrics for 3Q15 at a company level. Ping An achieved 52% YoY agency FYP growth (including deposits) and CPIC saw 71% YoY agency regular FYP growth in 9M15. We estimate that China Life (2628HK, HKD28.05, Buy[1]) recorded around 50% regular FYP growth YoY, judging from its commission trend.

    The number of life agents reached 3.92m by end-3Q15 in the sector, up by 20.4% in 9M15. This increase is a key reason for the strong growth of regular FYPs. We understand that China Life had the strongest agent-growth momentum of 27.7% HoH in 1H15, while PICC Life only had 5.8%.

    Auto premium growth moderated to 11.4% YoY. CIRC also announced that the auto insurance pricing reform currently piloting in 6 provinces will carry out its second phase from 1 Jan 2016, with another 12 provinces joining the pilot run. Agriculture premium accelerated in 3Q15 with 9.9% QoQ growth (15.2% YoY for 9M15). We believe PICC P&C (2328HK, HKD17.7, Hold [3]) would be the biggest beneficiary. Due to both slower sector growth and own underwriting quality issues, CPIC saw a 0.6% contraction in its non-auto premium and only recorded 0.4% growth in auto premium in 9M15.

    Total investment yield for the sector stood at 5.92% for 9M15, up by 1.95pp YoY, despite the A-share correction in 3Q15 and falling bond yields. The proportion of bank deposit and bond investments in insurers’ portfolio declined by 6.0pp during 9M15 to 59.3%, which we believe was a major reason for insurers’ resilient net investment yield. Ping An saw a 0.3pp YoY higher net investment yield in 9M15, and CPIC’s non-standard investments spiked from 11.2% at end-2014 to 14.4% at end-3Q15.

    What we recommend: Going into 4Q15, as most insurers have already achieved their “volume target” in 9M15, we expect slower top-line growth as they start to prepare for new-year sales for 2016. Margin uptick is also likely in 4Q15. We recommend life insurers with solid agent headcount growth and rising productivity, such as Taiping (966HK, HKD24.50, Buy [1]) and China Life.

    How we differ: We are more positive than the market on the sustained premium growth, especially the high-VNB-margin agency regular FYP growth of life insurers. We expect their 2015 VNB growth to be the highest since 2006.