China Insurance
Due North – When the Worst Is Over and the Engines Are
Refueled
 Stay positive despite recent rally — We reiterate our positive view on Chinese life
insurers and continue to prefer life over P&C, and see any pullbacks as buying
opportunities (see also our sector report dated 26 Dec 2012). We believe improving
fundamentals, policy tailwinds, still-reasonable valuation, and high-beta nature
should bode well for life insurance stocks. We like small/mid-cap pure life plays.
Among big-cap names, we prefer Ping An and CPIC. We have rolled our price
targets over to 2013.
 Worst likely over; low base effect to come — Since early 2012, we have argued
that mid-2012 would mark the inflection point for life insurers. We believe the
troughs for NBV growth, investment return and valuation had taken place. NBV and
earnings will likely enjoy a low base for comparison in 2013.
 Life growth gradually picking up — FYP/NBV growth should gradually improve in
2013: (1) insurers’ business mix improvement; (2) gradually easing liquidity and
improving economic growth; (3) slowly reducing competitive pressure from WMPs.
 Earnings rebound; geared to A-shares — Earnings of life insurers could grow
sharply in 2013, as investment returns rise off a low base in 2012. While brokers are
directly linked to the A-share market, we also see life insurers as a good play on Ashares
given life insurers’ much higher leverage (asset-to-equity ratio) and share
liquidity (8X-9X brokers). Life insurers are also more sensitive than P&C insurers to
A-shares due to lower profit base. NCI has higher sensitivity to A-shares than peers.
 Policy tailwinds — (a) Pension reform could be launched in 2013; (b) investment
channels for insurers continue to widen; (c) the recently announced Critical Illness
Insurance Scheme will likely be implemented; (d) life and P&C insurers should
benefit from urbanization and the government’s boost to domestic demand.
 Valuation still well below historical average — Despite recent rally, Chinese
insurers still trade at 0.5 to 1 SD below historical average P/EV or P/B. A-share
rebound, if sustained, should raise EV and make valuation more benign.
 P&C likely to underperform on the way up — We continue to hold the view that
the P&C cycle has peaked and the combined ratio will further (but gradually)
deteriorate in 2013 due to rising acquisition cost and potential auto insurance
pricing deregulation. That said, P&C bottom-line profit could still grow in 2013 as
investment return rises.
 Key risks — Renewed weakness in A/H-share markets; sharp rebound in returns of
WMPs; weaker-than-expected economic growth in China.