China Insurance Sector – Valuations at multi year low
· China government’s reform agenda for the sector will increasingly provide more benefit to the government-owned top insurers as they are the largest players in the market and are at a stage of reducing business inefficiencies. We expect the new internet life insurance regulations to facilitate a healthy development environment, inhibiting improper business practices (such as allowance for high customer complaints, unsustainable pricing, unreasonable innovation, misleading sales, regulatory arbitrage) from smaller but more aggressive insurers.
· Limited impact from property slowdown. There have been concerns that insurers could face further asset writedowns from investments in the property sector, which is currently undergoing a slowdown due to deleveraging. However, we note that Ping An Group (2318 HK) did not recognize further losses related to ots investment in China Fortune Land in its 3Q21 earnings report. Also, on the latest China Life (2628 HK) results earnings call: management commented that direct exposure to the property sector was below 2% of invested assets.
· Valuations at close to 5-year low. Leading Chinese insurers (see chart) are trading close to their lows in terms of P/B valuations and are forecast to deliver yields of 5-7% (vs FCN coupon rate of 10% p.a.).
Price to book value – Current vs 5-year High/Low