CPIC’s performance in 2019 was largely in line. Operating profit (first-time release) increased 13.1% YoY to RMB 27.88bn and group embedded value was up 17.8% YoY. Market environment remains challenging due to COVID-19 wiping out some of the insurance demand and lower interest rate weighing on investment returns. However, we think the Company is well positioned to cope with these challenges via disciplined underwriting quality and active investment asset allocation. Lastly, miserable valuation at below 0.4x FY20E P/EV offers a thick cushion.
- Result highlights. 1) Strong momentum in long-term health insurance, of which GWP increased 33% YoY, contributing to 21% of GWP. 2) Sound P&C margin. Combined ratio of P&C improved 0.1ppt to 98.3% against industry and macro headwinds. Specifically, expense ratio declined 4.1ppt to 38.1% offsetting the worsening of loss ratio. Combined ratio of auto insurance improved 0.4ppt to 97.9% thanks primarily to reduction in expense ratio. 3) Solid investment performance and asset allocation. NIY/TIY was 4.9%/5.4%, up 0/0.8ppt YoY, respectively. The Company has actively stepped up allocation in equity securities (equity fund and securities ~8.2% of total investment funds) and non-standard assets (~20.7%) as well as lengthening bond duration to prepare for the low interest environment. 4) third-party AUM surged 44.3% attributable mainly to Changjiang Pension (+68.9%) whereas fee income derived rose 40.7%.
- Negatives and challenges. 1) NBV declined 9.3% YoY (vs. CMBIS est. -6%) due both to FYRP retreat and margin compression, albeit mild by 0.4ppt from the previous year. 2) Life insurance agent headcount, measured by monthly average # of insurance agent was 790,000, a decline of 6.7% YoY. But reassuringly, the decline narrowed in 2H19 (1H19 = 796,000). 3) Surge in life benefit payment. Annuity, maturity and surviving benefit payments of CPIC Life rose over 40% as existing policies expanded.
- Risks. 1) FYRP and NBV growth under pressure due to COVID-19. 2) Lower bond yield denting yield on new money. 3) Equity market volatilities.
- Valuation. We trimmed TP to HK$33.93 to reflect revised NBV/EV growth and CoE assumptions. The H-share is now trading at 0.37x FY20E P/EV and over 35% discount to its A-share price (vs. historical avg. at ~20%). We think too much of the negatives have been priced in unfairly at this level. Maintain BUY.
