China Insurance Sector: August premium – Accelerated growth for both Life and P&C

Deutsche Bank Markets Research Asia Hong Kong Banking / Finance Insurance Industry China Insurance Sector Date 20 September 2016 Industry Update August premium – Accelerated growth for both Life and P&C Growth momentum picks up for Life and P&C ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Esther Chwei Research Analyst (+852 ) 2203 6200 esther.chwei@db.com Lexie Zhou Research Associate (+852 ) 2203 6180 lexie.zhou@db.com Top picks China Life (2628.HK),HKD21.50 Buy CTIH (0966.HK),HKD16.42 Buy Source: Deutsche Bank Companies Featured China Life (2628.HK),HKD21.50 Buy Ping An (2318.HK),HKD42.25 Buy CPIC (2601.HK),HKD29.05 Buy NCI (1336.HK),HKD34.10 Buy CTIH (0966.HK),HKD16.42 Buy PICC Group (1339.HK),HKD3.30 PICC P & C (2328.HK),HKD13.36 China Re (1508.HK),HKD1.90 Hold China Life (601628.SS),CNY21.65 Buy Ping An (601318.SS),CNY34.97 Buy CPIC (601601.SS),CNY28.58 Buy NCI (601336.SS),CNY41.30 Hold Source: Deutsche Bank Life premium growth accelerated in August, ranging from 1.3% to 72.2% (July: -14.2-30.0%). CPIC recorded the strongest growth at 72.2% due to the rollout of the new product 'Anxingbao 2.0', a LT accident product launched on 18 July. Ping An continued to maintain strong growth of 37.6% and other life insurers all saw growth picking up. P&C underlying growth improved, with key players at 6.7-19.6% (vs. 3.5-12.7% in July). While the industry claim payout ratio dropped 4.6ppt to 55.0%, this may not sustain given the increased natural catastrophes in July/August. We see upside risks in P&C claims and prefer Life over P&C. Top picks: CL and Taiping. Life – growth accelerates CPIC led August growth at 72.2% (vs. 15.8% in July) due to the launch of ’Anxingbao 2.0’. This was followed by Ping An at +37.6% (+30.0%), PICC Group at 31.3% (-14.2%), Taiping at 26.6% (+16.9%), China Life at 20.4% (+4.8%), and NCI at 1.3% (-8.4%). The relatively slow growth of NCI was mainly due to its continued efforts to improve product mix, and hence should not be a concern. According to Ch Taiping’s disclosure, August premium was mainly driven by regular premium (individual +26.7% and bancassurance +21.5%), while bancassurance single premium was down 5.6%. In terms of 8M16 performance, CPIC led at 32.9% (vs. 29.3% in 7M16), followed by Ping An at +32.6% (+32.1%), PICC Group at 26.6% (+26.3%), China Life at +23.2% (+23.4%), Taiping at +21.3% (+20.8%), and NCI at -2.5% (-2.8%). P&C – premium growth continues to pick up August P&C premium growth continued to show improvement, with headline growth ranging from 0.7% to 31.7% and an underlying (ex-VAT impact) growth range of 6.7% to 39.6%. Ch Continent led August growth at 39.6% (vs. +31.8% in July), Taiping followed at 24.2% (+8.3%), Ping An at 19.6% (+12.6%), PICC at 18.1% (+12.7%), and CPIC at 6.7% (+3.5%). 8M16 underlying growth was led by Ch Continent at 24.3% (vs. +22.4% in 7M16), followed by Taiping at 17.4% (+16.5%), PICC at 13.5% (+12.9%), Ping An at 7.5% (+5.9%), and CPIC at 4.1% (+3.7%). Stay positive on life on attractive valuation and strong fundamentals We continue to prefer life insurers as we believe market concerns are more than priced in, while the strong fundamental growth outlook has been ignored. We believe Chinese life insurers are well-positioned to manage the downward trend in interest rates, helped by their semi-flexible liability cost structure. The sector is currently trading at an attractive valuation of 1.0x 2016E P/EV, which we see as unjustified given the sector’s robust 2016E growth outlook on VNB (average ~36.8%). We have Buy ratings on all listed Chinese life insurers and our top picks remain China Life and Ch Taiping. We believe the market is overly concerned about China Life’s HGR products. We note that China Life cut its Universal Life crediting rates by 125bps during March-August to 3.75%, the lowest among listed players, indicating its flexibility to pass investment pressure to policyholders. We still see Ch Taiping as a deep value play. Investment risks include significant weakness in China’s investment markets, asset quality risks, and weaker-than-expected growth. Distributed on: 20/09/2016 04:31:26 GMT 20 September 2016 Insurance China Insurance Sector Page 2 Deutsche Bank AG/