China Pacific Insurance:Becoming a yield play

Is the new dividend sustainable? The company has not described thedividend as “special” but equally has not set out a formal dividend policy. TheChairman stated that he would like to push the dividend higher in future andnoted CPIC’s payout ratio above that of peers. However Rmb1/sharerepresents 51% of FY15 EPS and almost 7% of BVPS. To sustain thedividend at Rmb1/share, the company would need to further lift its payout ratioto 66% of FY16E EPS. So whilst we have rebased our dividend forecasts atthese new high levels, we believe the company needs to start generatingmore free surplus to support this in the long term without significant ongoingdeclines in its 280% solvency ratio.

Life – Strong volumes, weaker margins: VNB rose 38% in FY15 (37% yoyin 2H15), driven largely by volumes (APE up 43%). In 2H15, agent marginsfell significantly (we estimate by 8ppts of APE) from a record high base as thecompany traded some of its high margins for volume gains. We note that thenear-term EV invmt assumption was lifted (by 10bps to 5.2%pa) and thatpolicyholder crediting rates remain flat, all of which highlights the company’sown confidence in its investment outlook despite lower risk free rates. Mgmtcontinue to target above-peer VNB growth and margins. We forecast VNBrises 30% in FY16.

P&C – Back in black. After a year of actively shedding market share,underwriting profits finally broke even (COR 99.8%). Motor margins improvedagain HoH and were within 2ppts of its major peers in 2H15. There was littleevidence to suggest non-motor has turned the corner and we do not expectthe company to seek non-motor growth this year. We are reticent to declarethat CPIC has put the worst behind it; adjusting for the large reserve injectionin 2H14, margins would have been broadly flat YoY.