September premium – moderated Life, stable P&C

Deutsche Bank Markets Research Asia Hong Kong Banking / Finance Insurance Industry China Insurance Sector Date 20 October 2016 Industry Update September premium – moderated Life, stable P&C Life growth moderated while P&C remained steady ________________________________________________________________________________________________________________ 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),HKD20.10 Buy CTIH (0966.HK),HKD15.72 Buy Source: Deutsche Bank Companies Featured China Life (2628.HK),HKD20.10 Buy Ping An (2318.HK),HKD40.30 Buy CPIC (2601.HK),HKD29.25 Buy NCI (1336.HK),HKD34.00 Buy CTIH (0966.HK),HKD15.72 Buy PICC Group (1339.HK),HKD3.11 PICC P & C (2328.HK),HKD12.88 China Re (1508.HK),HKD1.89 Hold China Life (601628.SS),CNY21.31 Buy Ping An (601318.SS),CNY34.14 Buy CPIC (601601.SS),CNY29.15 Buy NCI (601336.SS),CNY41.85 Hold Source: Deutsche Bank Life premium growth moderated in Sep, ranging from -14.0% to 30.7% (Aug: 1.3-72.2%). Most insurers recorded double-digit growth while China Life recorded slower growth of 4.6%. In our view, the slower growth is not a concern as insurers focus more on higher-margin (low volume) business in 2H16. P&C underlying growth was stable with key players at 7.0-19.4% (vs. 6.7-19.6% in Aug). Industry claim payout ratio improved 0.5ppt to 60.9% in Aug (vs. a 4.6ppt yoy improvement in July) and could deteriorate going forward given frequent weather events in Jul-Sep. We continue to prefer Life over P&C. Top Picks: CL and Taiping. Life – moderated growth Ping An led Sep growth at 30.7% (vs. +37.6% in Aug) and was followed by CPIC at 15.3% (+72.2%), Taiping at 14.7% (+26.6%), NCI at 10.7% (+1.3%), China Life at 4.6% (+20.6%) and PICC Group at -14.0% (+31.2%). CPIC also disclosed 3Q16 FYP, which appeared relatively weak at +5.8% yoy (individual +3.8%). This was mainly due to a relatively high base in 3Q15 (FYP +89.3% on strong sales of new savings products) and should not be a concern. According to Ch Taiping’s disclosure, Sep premiums were mainly driven by individual regular premiums (+15.2% yoy) as well as bancassurance (+19.7% yoy, with single +91.7% and regular +17.6%). In terms of 9M16 performance, Ping An led at 32.4% (vs. 32.6% in 8M16), followed by CPIC at +31.0% (+32.9%), PICC Grp at 24.5% (+26.6%), China Life at +21.2% (+23.2%), Taiping at +20.7% (+21.3%), and NCI at -1.3% (-2.5%). P&C – relatively stable Sep P&C recorded relatively stable growth, with headline growth ranging from 1.0% to 22.9% and underlying (ex-VAT impact) growth ranging from 7.0% to 30.3%. Ch Continent led Sep growth at 30.3% (vs. +39.6% in Aug), Taiping followed at 26.7% (+24.2%), PICC at 19.4% (+18.1%), Ping An at 13.5% (+19.6%) and CPIC at 7.0% (+6.7%). 9M16 underlying growth was led by Ch Continent at 25.1% (vs. +24.3% in 8M16), followed by Taiping at 18.5% (+17.4%), PICC at 14.1% (+13.5%), Ping An at 8.2% (+7.5%), and CPIC at 4.4% (+4.1%). 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 think is 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 since Mar 2016 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: 20/10/2016 12:06:32 GMT 20 October 2016 Insurance China Insurance Sector Page