NBV largely in line with our expectation; net profit beats
Ping An Insurance’s 1H22 new business value (NBV) fell 28.5% YoY, largely in line with our expectation. The combined ratio of P&C insurance was 97.3%, missing our expectation by 0.7ppt due to worse than expected deterioration in claims expenses for guarantee insurance. Operating profit rose 4.3% YoY and attributable net profit grew 3.9% YoY, the latter better than our expectation thanks to upside surprise in operating variances. The firm announced a dividend of Rmb0.92/sh, up 4.5% YoY.
　　Trends to watch
　　NBV of life insurance business largely in line with our expectation; significant improvement in agent quality. The NBV of the life insurance business fell 28.5% YoY in 1H22, with that of the agent channel down 30.6% YoY due to a 40.9% YoY decline in agent headcount. However, agent quality significantly improved with per-agent NBV and revenue rising 26.9% and 35.1% YoY in 1H22. The number of top performers rose 7.7% YoY, with the proportion of the insurer’s self-described “Talent +” new agents up 9ppt YoY.
　　Operating profit better than we expected; contribution of operating variance rebounding to highs after adjustment in assumption. The firm’s 1H22 operating profit grew 4.3% YoY. The operating profit of life insurance increased 18.0% YoY, beating our expectation as the positive contribution of operating variance recovered to a relatively high level following adjustments in actuarial assumptions. Net profit rose 3.9% YoY, as sharp fluctuations in capital markets led to increased negative investment variance and headwinds from reserve strengthening lingered.
　　Strong underwriting performance for auto insurance; overall combined ratio of P&C insurance lower than expected due to deterioration in claim expenses for guarantee insurance. The combined ratio of P&C insurance was 97.3% in 1H22. The combined ratio of auto insurance improved 3.0ppt YoY to 94.4% as COVID-19 impacted the volume of vehicles on roads and the firm’s advantages in operation improved following auto insurance reforms. The combined ratio of guarantee insurance rose 24.8ppt YoY to 113.0%, as claim expenses deteriorated due to COVID-19 control measures’ negative impact on operations of small and micro companies. We expect improvement in the external environment to prompt a recovery in the underwriting business.
　　Life insurance reform starts to pay off; we believe Ping An is currently undervalued. Structural changes in the industry in the past few years have led to pessimistic market sentiment, and Ping An’s valuation is now at an historical low. We think the stock is markedly undervalued. The significant improvement in agent productivity signals stabilization and enhancement in corporate fundamentals, in our view. We suggest watching investment opportunities in Ping An Insurance.
　　Financials and valuation
　　We maintain our 2022 EPS forecast and lower our 2023 EPS forecast 7% to Rmb7.90, as claim expenses for guarantee insurance have been higher than we expected and the performance of equity markets in 2H22 has thus far missed our expectation. A-shares are trading at 0.49x and 0.45x 2022e and 2023e P/EV, while H-shares are trading at 0.44x and 0.41x 2022e and 2023e P/EV. We reiterate OUTPERFORM for A-shares and H-shares and suggest watching investment opportunities. Considering valuation discounts related to market pessimism about sector NBV growth, we cut our A-share and H-share target prices by 11.8% and 21.1% to Rmb61.72 (0.74x 2022e P/EV with 51.6% upside) and HK$67.85 (0.70x 2022e P/EV with 58.0% upside).
　　Risks
　　Disappointing FYP growth; sharp declines in long-term interest rates; sharp fluctuations in A-share markets.