China Insurance:Profit decline well flagged;focus on growth and quality for results

Profit decline well expected; Easier comp from 2H17

We update our estimates for FY16-FY18and introduce FY19estimates.China Life, NCI, and Taiping announced negative profit warnings inJanuary, forecasting their respective FY16net profits to decline 40-50%,45%, and 25%. This should not be a surprise in our view, given mostChinese insurers had been reporting profit declines since 4Q15due tohigher reserve charges from declining bond yield. As we explained in ourNovember 23, 2016report (Rates – The cause of, and solution to, most ofInsurance’s problems. China Life to CL-Buy), the IFRS reserve discount rateis calculated based on 750-day average yield, so it is already largely lockedin for 2016and 1H17. Given the recovery in long bond yield in 2H16, theyoy profit comparison will get easier from 2H17and we expect to seepositive profit growth in FY17/18E.

Still robust NBV growth with better quality to start the year

With the headline risks on profit removed in Jan, we believe investors cannow look beyond short-term earnings and focus on growth and microquality uplift. For FY16results (22-31, March), we expect most Chinese lifeinsurers to continue the strong new business growth momentum in 1H16,and report 22-41% NBV growth for 2H16(except PICC Group, 11%). Wealso observed underwriting quality improvement for most listed lifeinsurers. Since 2H16, the insurance regulator has issued a series of deriskingmeasures, which we believe could mean listed life insurersbenefiting from less irrational competition from small-medium insurers, asthey are in general more disciplined. This is already evident through thelower funding cost of the listed insurers’ new products during the new yearcampaign (we estimate average guaranteed rates 50-75bps lower vs. 2016).

Assumption revisions / better disclosure on rate sensitivities coulddrive sentiment and valuation recovery

We believe China Life and other life insurers may review and reduce longterm investment yield/discount rate assumptions. This, in our view, couldgive investors more confidence in EV reporting. We also see a possibilitythat the life insurers could increase the liquidity discount used to calculateIFRS reserves, thereby reducing the negative earnings pressure. Wereiterate CL-Buy for China Life (H) given macro/rate tailwind and microimprovements. Among the H-share life insurers, we continue to rate PingAn (H) Buy. We retain CL-Buy for PICC on attractive valuation.