Ping An Insurance - At the break of dawn
- FY23 results a mixed bag, with robust VNB growth of +36% y-o-y in line and net profit decline of 23% missing expectations
- Net profit decline driven by net losses from asset management and earnings decline in P&C and technology segments
- Expect positive VNB growth in life business and group’s net profit to bottom out from FY23’s low in FY24F
- Lower net profit forecasts by 22%/24% based on weaker investment performance across core segments; slightly revise up VNB growth by 1%/2% in FY24F/25F. Maintain BUY, cut TP to HK$58
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FY23 net profit missed, while life business remains resilient.
Ping An’s net profit declined 22.8% y-o-y to Rmb85.7bn in FY23, indicating a net loss of Rmb1.9bn in 4Q23. The net profit decline was mainly driven by significant losses of Rmb20.7bm in the asset management segment and an earnings decline of 3%, 11%, and 43% in the life & health (L&H), property & casualty (P&C), and technology segments, respectively. The asset management business has been facing multiple macro headwinds. Some assets came under pressure due to rising credit risks and volatile capital markets in 2023. The insurer actively and prudently made provisions that translated into a devaluation of certain assets and a net loss of Rmb20.7bn in the asset management segment in FY23.
Robust growth in the L&H to continue in FY24F.Its life business saw a structural recovery in FY23, with VNB rising by 36.2% y-o-y to Rmb39.3bn on a like-for-like basis. Agent productivity improved substantially with VNB per agent increasing by 89.5% y-o-y. Ping An made significant progress in its life agent reforms that led to an increase in the proportion of high-quality new agents by 25.2ppt and average agent income per month rose 39.2% y-o-y to Rmb9.8k. Bancassurance sales rose by 77.7% y-o-y in FY23, mainly driven by the new bancassurance team, which has been partnered with Ping An’s private bank. With 1) the continuous improvement in agent productivity and stabilising agent headcount; 2) the bancassurance channel expected to deliver robust growth from a low base, 3) savings offering attractive returns compared to other bank products, and 4) rising penetration of the healthcare+insurance ecosystem to capture more customer profit from existing customers, we expect Ping An’s VNB to further grow by 7%/11% y-o-y in 24F/25F, respectively, on a high base, ahead of its Chinese peers.
Expect underwriting performance to improve in P&C segment.P&C’s net profit declined by 11% y-o-y to Rmb8.8bn in FY23, mainly due to guarantee insurance, which was negatively impacted by the worsening customer credit profile under the macro headwinds. If excluding guarantee insurance, the gross written premium increased by 9% y-o-y to Rmb301bn and combined ratio (COR) was 98.4%. As the insurer has already stopped underwriting its guarantee insurance business since 4Q23, and given the one-year-long tail nature of guarantee insurance, we expect an improvement in the COR to 100%/99.8% in FY24F/25F, respectively, and expect P&C to improve its underwriting performance in FY24F and onward.
Net profit expected to bottom out in FY24F.We expect Ping An’s net profit to bottom out in FY24F, mainly benefitting from 1) robust VNB growth in the life segment, 2) the expected improvement in the P&C segment’s underwriting performance, and 3) the prudent provision and sufficient devaluation in asset management that are expected to translate into improved profit in FY24F with mitigated macro headwinds.
Lower TP to HK$58, maintain BUY. Our TP is based on a SOTP valuation, where we consider a) 0.9x FY24 P/EV for the life business, b) DBS TP of Rmb12.8 for PAB, c) 0.8x for P&C and 0.8x for asset management segment (previously 0.4x), and d) MTM being listed as a fintech business. After the devaluation of its investment portfolio in the asset management segment in FY23, we believe the insurer’s balance sheet has become more reliable and robust growth in the life business and a turnaround in other segments are likely to support a share price re-rating. Cut TP to HK$58, maintain BUY.
Please see below the summary of the Q&As during the earnings call.
Q1: There’s a noticeable loss recognised in the asset management business. Could you elaborate on the cause of this and the outlook on the asset management business in FY24F?
A1:The loss recognised under our asset management business was attributed to the following three reasons:
a) Impact from capital market volatility, with the China A-share and H-share having fallen by 11% and 14%, respectively, in FY23, which has affected the values of our equity investment position.
b) Rise in credit risk, especially deteriorating asset quality in retail-related inclusion loans. However, from the new NPL formation perspective, this has started to narrow. Hence, we do not expect any further deterioration.
c) Increase in provisioning due to our prudent provisioning policy.
Q2: While progress has been seen in your life business reforms, agent headcount continued to decline. What’s the reason behind this and what should be the optimal level?
A2:The continuous decline in agent headcount has been a common phenomenon and this is on the back of industry-wide life business reforms. However, we benefit from our “4+3” channel and product reforms strategy, and have now expanded our capabilities in the agent, bancassurance, community grid, and specialised wealth advisor channels. Our strategy is to focus on improving agent quality and productivity rather than quantity.
Q3: How has ‘open-year sales’ performed this year?
A3:To abide by the regulatory requirement on open-year sales, we have made some adjustments, particularly lengthening the sales campaign season from the previous first month to the first two months of the year. Despite the high base last year, we still achieved positive FYP growth this year, and the result is in line with our expectations.
Q4: Could the management elaborate on the company’s position in its China commercial real estate (CRE) investment and the current occupancy rate?
A4:The occupancy rate on average is at 90%; and given our prudent accounting, we used the cost-method to book these CRE positions in our books. Based on the current market price, there’s a substantial enhancement of these CRE values, and this is not recognised in our balance sheet. For example, for our Shenzhen HQ building, the cost-method recognised in our balance sheet is Rmn10bn, while the current market value is significantly higher than that.
Q5: The interest rate in China has continued to trend downward. What is the impact on Ping An and how are you dealing with this?
A5:On the asset side, Ping An has continued to focus on lengthening its asset duration to be as close as possible to the duration of the liability. Whenever there’s chance for us to allocate into longer duration assets, we almost always over allocate. As such, our current duration gap between asset and liability, under the effective duration measurement, is very low and the narrowest among our peers.
On the other hand, the value of our OCI bond position, given the decline in the interest rate, has substantially increased based on the current market value, but this is not reflected in our comprehensive investment yield calculation. We always adopt a balanced bond and equity allocation strategy and diversify our investments to minimise the risk.
On the liability side, the cost of liability level under current in-force book, excluding participating/unit-link business, is below 2.5%. Hence, there’s still a sufficient buffer to entering negative spread territory.
Q6: We see changes in the actuarial assumptions under the embedded value and CSM calculation. Why did the CSM balance decline in FY23?
A6:Changes were made as follows: a) Lowered the long-term investment assumption to 4.5%; b) adjusted risk-free rate and risk premium when deriving the discount rate, after which, the level remains higher than that of industry peers; and c) increased mortality assumption, especially for the critical illness book.
On CSM, the decline of the CSM balance was mainly due to the decline in new CSM growth in previous years, impacted by the industry-wide life business reforms. As we started to regain business momentum in FY23, we believe the CSM balance will start to increase in the near future. The assumptions we changed in the CSM calculation, which also resulted in a negative impact to the CSM balance, were the persistency rate assumption, long-term investment rate assumption, as well as mortality/morbidity assumption.
Q7: On the P&C business, we noticed there’s a substantial loss in the guaranteed insurance business. Will this loss continue in FY24F?
A7:The loss was mainly to reflect the business we underwrote previously, and starting from 4Q23, we have fully ceased underwriting any new guaranteed insurance businesses. We expect the risk of seeing another sizeable loss in the guaranteed insurance business to be low in FY24F.
Q8: The core solvency ratio declined to 105% in FY23. Despite still being above the regulatory requirement of 50%, is there any need for a capital replenishment plan in the near future?
A8:Our core solvency ratio has indeed declined moderately in FY23, and this is due to the impact from the CROSS II Phase 2 implementation, the 750-day moving average of the 10-year bond yield hovering lower, and capital market volatility. In 2M24, our core solvency ratio has remained at +100%. There are several capital replenishment instruments we can resort to issuing, nonetheless, we still have a sufficient buffer and we will take any necessary actions if needed.
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