China Insurance: New Business Growth Is Accelerating as Expected, but Growth Quality Diverges

We are maintaining our fair value estimates of CNY 65 per A share and HKD 71 per H share for Ping An 601318 ; CNY 23 per A share and HKD 26 per H share for New China Life or NCI; and HKD 4 per share for PICC Group and HKD 11 per share for PICC P&C following interim results. As expected, China’s insurers reported stronger new business value, or VNB, growth for first-half 2023 of 18%-33% year on year, as customers rushed to buy high-yield savings products before the pricing rate cut by end-July. We continue to expect Ping An and PICC P&C to deliver above-peer results in coming quarters. Both stocks are undervalued, trading at 0.5 times 2023 price to embedded value for H-share Ping An and 0.8 times 2023 price/book ratio for PICC P&C. We prefer Ping An as our top pick given its larger discount to our fair value estimate, better growth prospects following the successful implementation of the four-year in-depth life insurance reform and low earnings sensitivity to the volatile stock market.

The weaker equity market performance and falling interest rates in the second quarter weighed on the first-half net profits, resulting in a 1.2% decline for Ping An, and 8.6%, 8.7% and 5.4% respective growths for NCI, PICC Group and PICC P&C against the year-ago period. Ping An and PICC P&C delivered better-than-expected results. Ping An reported one of the highest VNB year-on-year growth at 33% for the first half, beating our expectation for 25%. PICC P&C’s underwriting profitability continued to stand out. The improvement in nonauto insurance business margin was ahead of our expectation. First-half combined ratio in both auto and nonauto insurance business stayed well below peers. We are not overexcited about PICC Group’s 64% year-on-year VNB growth, as it was mainly driven by the bancassurance sales. NCI continued to underperform as its 17.7% year-on-year first-half VNB missed our expectation, and it was the only company in our coverage to see a slide in agent VNB growth.