China Taiping Ins - Growth in Value of New Business outshines competitors
- FY23 VNB up 28% y-o-y, beating expectations of 12% growth
- Both agency and bancassurance channels saw robust growth
- Management guides for strong sales driven by its start-of-year sales campaign and positive VNB outlook in FY24F
- Revised up VNB growth by 2%/7% in FY24F/25F; Maintain BUY, TP unchanged at HK$9.5
China Taiping’s value of new business (VNB) rose by 28% y-o-y to HK$9.4b in FY23. Both agency and bancassurance channels demonstrated continuous improvements, with first-year regular premiums rising by 19% y-o-y and 52% y-o-y, respectively, in these two channels. Taiping also posted net profit based on IFRS17, which rose by 44% y-o-y to HK$6.2b in FY23, mainly driven by improved investment results, with a better 2.66% total investment yield (vs FY22 1.21%). However, the insurance service results was largely flat. Contractual service margin (CSM) released into P&L and CSM balance declined due to the downward adjustments on investment return and risk discount rate assumptions.
Upbeat start-of-year sales performance and positive VNB outlook in FY24F
China Taiping’s VNB is poised to maintain its VNB growth momentum in FY24F and FY25F based on 1) upbeat performance in the start-of-year sales campaign, where the insurer has met its VNB target for 1Q in only one month. Management guides for 5x VNB growth in the bancassurance channel and 2x increase in the agency channel in 1Q24, 2) a significant improvement of VNB margin in the bancassurance channel, benefitting from the regulatory requirement aligning reporting and actual commission fees paid to banks (“報行合一”). The insurer has already saved commission fees by 20% that would have been paid to banks, and thus achieved a positive fee spread (“費差益”) and enhanced VNB margin in 1Q24. As the insurer is focusing on quality growth with VNB contribution accounting for a 40% weighting in KPI, we believe bancassurance channel will become the major VNB growth driver in FY24F and onward, supported by the insurer collaborating with more bank partners. VNB margins have improved to c.30%, close to that of the agency channel. We expect the insurer to deliver 7%/11% y-o-y VNB growth in FY24F/25F.
Negatives on downward adjustment on actuarial assumptions largely priced in
Due to industry-wide downward adjustments on long-term investment returns and risk discount rate assumptions, China Taiping’s VNB and embedded value (EV) have decreased by 20%/7%, respectively. We think the share price has largely priced in the negatives from downward adjustment as Taiping’s share price has corrected 9% since a regional insurer had cut actuarial assumptions for the China market, which has been sufficient to cover the EV decline of 7%. We believe the adjustment will mitigate the pressure on negative investment variances for in-force policies and hence allay investors’ concerns over the insurer’s inflated EV under a higher investment return assumption. At this juncture, we don’t expect a further cut in actuarial assumptions for Chinese life insurers.
Solvency ratio remained healthy, leaving room for a higher dividend payout
China Taiping’s major subsidiaries, Taiping Life, Taiping P&C, Taiping Pension and Taiping Re, have maintained healthy levels of core and comprehensive solvency ratios in FY23, ranging from 108%-152% and 215%-284%, respectively, substantially above regulatory requirements of 50% and 100%. Taiping Life obtained approval to issue Rmb20b perpetual capital bonds in Dec 23, which is expected to supplement the insurer’s Tier 2 capital and further improve the solvency ratio. The insurer raised the DPS from HK$0.26 in FY22 to HK$0.30 in FY23, equivalent to a 4.6% dividend yield. We believe the improving solvency ratios provide room for the insurer to further increase cash dividends and enhance shareholder returns. DPS is expected to maintain a steady growth trajectory.
Maintain BUY, TP at HK$9.5
Driven by the upbeat start-of-year sales campaign and improvement in the bancassurance channel, we revised up China Taiping’s VNB growth by 2% and 7% in FY24F/25F. We also finetuned our IFRS17 net profit forecasts to better align with the insurer’s latest financials. We believe the negative impact from downward adjustment on actuarial assumptions are largely priced in. With a positive outlook in FY24F and onward, we maintain BUY with unchanged TP of HK$9.5. Our valuation is based on 0.1x FY24F P/EV for life business and 0.3x FY24F P/B for other businesses.
Please see below the summary of the Q&As during the earnings call.
Q1: What have you done to drive VNB growth to be ahead of peers in the past few years?
A1: We focus on quality growth, with VNB being one of the KPIs to measure the performance of the sales team and management team. Since 2015, we have implemented a Value Management System (VMS) 1.0 version, which is focused on the marginal contribution to VNB by the sales team but excludes operating expenses and commission fees. We have upgraded the VMS to 5.0 version in this year, where we currently measure overall VNB by deducting the fixed and variable operating expenses and commission fees when selling the policies. This way, we are able to exactly manage daily operations based on the economic value contribution and optimize our business structure.
One point to highlight is that 5.0 version is based on the regulatory requirement of the alignment of reported and actual commission fees, particularly in the bancassurance channels.
Q2: Start-of-year sales performance and 2024 outlook in the life segment
A2: We launched the start-of-year sales campaign since Dec 2023, which yielded robust VNB growth in 1Q24. The bancassurance channel has seen a five-fold increase in VNB, while the agency channel’s VNB has doubled. The growth trajectory is expected to continue throughout the year.
Q3: Could you elaborate on the strategic positioning of the bancassurance channel and impact on the agency channel under the regulatory requirement aligning reported and actual commission fees (“報行合一”)?
A3: We consider the alignment of reported and actual commission fees as positive to the long-term growth of the life business. The implementation of the requirement has helped us improve the VNB margin and product profitability as we have made commission fee savings of more than 20% that were previously paid to the bank partners. We have achieved positive fee spread (“費差益”) of more than Rmb200m since the implementation. As banks are facing increasing pressure on fee income growth, we have successfully expanded the partnerships to more bank outlets and improved product structures with higher portion of policies having a 5-year payment term.
The bancassurance channel is becoming more and more important. This had contributed less than 10% of group VNB in 2022, while the proportion had improved to 21% in FY23 and 32% in 1Q24, and the bancassurance’s VNB margin also saw a significant improvement to 30% in 1Q24.
Q4: Could you provide more colour on profit volatility under IFRS9/17?
A4: The insurance results will be impacted by CSM amortization. We have maintained a stable CSM amortization rate of c.8% in the past two years. We believe our robust growth in new business will contribute to a higher CSM balance in the further. Net profit will also be impacted by investment market volatility. We are actively enhancing our asset liability management, and have increased the equity allocation of high-dividend-yielding stocks to mitigate the volatility and improve recurring yield at the same time.
Q5: How will you manage investment portfolio under a low interest rate environment?
A5: In response to the prevailing low-interest-rate environment, we are focusing on active management of both assets and liabilities. The experience in Japan and Europe where both experienced a long period of low interest rates, signalled to us that insurers should actively manage the liability side. On the asset side, we have raised 1) the allocation of high-dividend-yield stocks in our equity portfolio and 2) the allocation of long-duration rate bonds as well as exploring 3) opportunities for offshore investments, and 4) long-duration ABS with healthy cashflows.
Q6: What is your expectation of impairment provision?
A6: We review our risky assets on a regular basis and implement prudent provisions to mitigate potential risks arising from macroeconomic factors and turmoil in certain sectors. We believe we have less concerns on this year’s impairment.
Q7: What is the reinsurance business outlook?
A7: Reinsurance is expected to further benefit from the reinsurance hard cycle, where premium rate remains at a high level. In FY23, reinsurance revenue increased by 8.6% y-o-y and COR remained healthy at 95.6%. We also actively adjust our business lines in P&C reinsurance and underwrite less savings in the life reinsurance. We will also expand our footprint in Asia.
Q8: Will you increase DPS payout ratio?
A8: Our dividend policy remains stable, with consideration given to our net profit and solvency ratios. We are committed to deliver steady and sustainable growth in dividends to our shareholders.
(Note: Primary analyst changed from Ken Shih to Iris Gao)
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