China Insurance Sector:2018outlook -rising competition,protection focus is key
Trimmed VNB growth forecasts, downgrading China Life to Hold.
In our view, the easy growth enjoyed by Chinese life insurers since 2015 maybe ending, on higher deposit competition from banks. Given ongoingdeleveraging initiatives, 1Y WMP yields have risen, and surpassed averagecrediting rates offered by listed life insurers in July-17. Inevitably, this willlower the relative attractiveness of insurance savings products. Thus, we cutour VNB forecasts by 5% in 2H17E and 7% in 2018E. We D/G China Life toHold but keep our positive sector stance, on inexpensive valuations. We preferinsurers with a stronger protection focus and keep Ping An and NCI as our toppicks. We stay neutral on P&C as we see upward pressure on combined ratio.
Life: Downside risk to growth.
The relative attractiveness of insurance savings products (measured by thedifference between the average crediting rates of listed insurers and 1Y WMPyields) started to decrease in Jan 2017 and turned negative in Jul 2017.
Historically, this has had a strong correlation to VNB growth and will likely hitsavings product sales. To account for this, we have lowered our 2018E VNBforecasts by 4-10% and revised down our target multiples for some insurers.
We believe insurers with a stronger protection focus should be relativelyresilient. We have analyzed the 9M17 change in listed Chinese life insurers’risk exposure based on C-ROSS. Our analysis shows NCI as having the highestproportion of insurance risk (an indicator for protection focus) at 63%, followedby Ping An at 44%, Taiping at 33%, CPIC at 30% and China Life at a mere 4%.
P&C: Upward pressure on combined ratio (CR).
We maintain a neutral view on the P&C business as we expect the autoinsurance CR to trend up in 2018E/2019E. We expect a second round of autopremium reform in Jun-2017 to result in: (i) a higher auto loss ratio due tolower premium rates, and (ii) a lower expense ratio as a result of tighter CIRCscrutiny on expenses. We note that there are timing differences