China insurance:Time to explore P&C

Prefer P&C over life on visible earnings and valuation.

The market has shown a strong risk appetite since the rate cut, buying uplife insurers despite lack of further fundamental improvement. While weraise TP across the board on MTM gain and higher multiple, the upsidelooks stretched. We keep the UW view and downgrade NCI to SELL fromU-PF. By contrast, P&C offers more opportunities due to better earningsvisibility and less demanding valuation. We upgrade PICC P&C to O-PFfrom U-PF; and keep the BUY call for Ping An.

Improving sentiment on life.

Life insurers have had a great run following the rate cut. Though the outlook isclearly better than a year ago, the shares have run ahead of fundamentals.

We keep NBV forecast unchanged but raise multiples on more risk appetite.

Together with adjustment in 2014 MTM, TP goes up across the board.

Yet, the upside still looks stretched. We downgrade NCI to SELL from U-PF.

Pressure on life margin.

While life insurers do benefit from MTM, we shall not expect much increase in profitor book as they have to share at least 70% of the gain with customers.

Besides, there would be investment yield pressure from lower interest rates andfurther pricing liberalization.

To compete with other financial products, life insurers have to keep policyholderreturn high and margin will be squeezed.

Better earnings visibility in P&C.

Life earnings are too dependent on markets and therefore volatile. By contrast, P&Cenjoys better visibility as the risk underwriting provides a solid profit anchor.

For PICC P&C, underwriting accounts for about 40% of operating profit. Thoughcombined ratio is to rise, the company can stay disciplined and keep it under 100%.

ROE, despite trending down, will still beat life’s. After the strong rally in life, P&Coffers better opportunities.

Top picks – Ping An and PICC P&C.

We upgrade PICC P&C to O-PF from U-PF. The stock trades at 1.8x PB with ROE of16.5%, less demanding than its life peers at 1.6-2.3x PB and ROE of 9-15% ROE.

For Ping An, we raise the TP to HK$101 from HK$80 after removing the discount forfundraising. We continue to be a BUYer of this stock.

We do recognize the strong trading momentum on pure life names. However, PICCP&C and Ping An offer more solid LT investment in the insurance space.