Chinese insurers will see valuations rebound as bond yields rise
Global bond yields surge as Trump’s presidential victory boosts interest spreads
Chinese insurers are likely to see a rebound in their valuations, thanks to the rising interest spreads as a result of Donald Trump’s victory in the US presidential election.
Shares in Chinese insurers were now trading at historical lows of 0.5 to 0.8 times their estimated embedded value in 2017, Citigroup analysts Darwin Lam and Michelle Ma wrote in a report on Sunday.
Most of them also traded at or even below a valuation that assumed long-term investment returns of just 3.5 per cent and zero new business value to perpetuity, they said.
Interest spreads in the industry had bottomed out, the analysts said, given that economic growth in China was stabilising and the rising commodity prices indicated a pick-up in inflation.
Yields in China’s bonds have increased 10 to 15 basis points after Trump’s presidential victory spurred a surge in global yields. If the US Federal Reserve continued to raise interest rates or the yield curve steepened further, bond yields in China could rise further, providing support to the insurers’ new money yields, Citigroup said.
The yield of China’s 10-year bonds now hovers at a five-month high of 2.9 per cent while those of 10- and 30-year US Treasuries have reached the highest level of the year.
China Life Insurance, the country’s largest life insurer, saw its A shares rise more than 10 per cent in the first two days of this week, while Ping An Insurance (Group) edged up 3 per cent in Shanghai.
Besides an improvement in investment returns, insurers also benefited from a fall in funding costs as they planned to cut the guaranteed returns of traditional products sold at the beginning of a year to 3.5 per cent next year from 4 per cent this year, Citigroup said.
“The recent regulatory clampdown on short-term savings products has reduced irrational competition, and we believe this has given listed insurers sufficient leeway to cut the guaranteed returns,” it said.
Citigroup said its top picks in the sector were Ping An and China Life. JPMorgan Securities, meanwhile, listed Ping An’s H shares as one of its seven top picks in the Hong Kong market for the next year.
“Expectations for an earnings recovery will be a major boost [for Chinese insurers in 2017], along with double-digit growth in new business value and improving public disclosure,” JPMorgan Securities analyst M.W. Kim wrote in a note.
The sector is expected to enjoy on average a 20 per cent year-on-year increase in net profit next year, thanks to in-force value gains, a growing mortality profit base and a relatively low earnings base this year.
“We think Ping An’s agency-based business model will help the insurer lead the sector in the fundamental re-rating of its stock. Currently, its shares have not priced in the benefits from the full-scale opening up of the health-care insurance market in China,” Kim wrote. “We also expect the company to be the largest property and casualty insurer in the country by 2020.”
China Merchants Securities said New China Life Insurance was also attractive, given the anticipated improvement in the growth of its new business value in the second half of this year as its business structure continued to evolve.
“The firm’s senior management expects to increase sales of short-term insurance products, which will help push up its valuations,” the brokerage said.
The H shares of New China Life are now trading at 0.69 times its estimated embedded value in 2017, compared with a price-to-embedded-value ratio of one.