Life insurance business under pressure
1) Shareholder’s net profit increased by 15.5% yoy but total comprehensive income dropped by 15.7% yoy in the first three quarters of 2021. 2) Growth of life insurance segment was under pressure in the third quarter. Agent channel first year regular premium dropped by 39.8% yoy in the third quarter of 2021 (although rose by 15.8% yoy in the first three quarters of 2021). The main reasons include: The stricter regulation on customer protection and the tightened supervision on eliminating fake agents/policies/expenses; the sharp decline in sales force, partly due to the Company’s own strategy to build a professional and higher performance agent team; and the weakened demand, particularly that the proportion of protection products has declined after the upgrade of the critical illness insurance. 3) For the P&C segment, automobile insurance premiums dropped by 8.0% yoy partly due to the auto insurance pricing reform. However, the management indicated that automobile insurance premiums have resumed positive growth recently. In contrast, non-auto P&C premiums increased by 21.4% yoy. 4) In summary, CPIC’s results in the third quarter showed immense pressure on life business, in line with the sector’s performance.
Management discussion
On life business management: The Company will switch to the new Basic Law from the beginning of 2022. The Basic Law will emphasize and reward the high-productivity operation model, the long-term sales performance, and the real business quality such as policy persistency. The Company will also launch four systems, including need-based sales system (NBS) aiming for sales to change from product-driven to customer-driven, activity volume manage system which can track sales’ performance, a recruitment platform to be launched soon to manage recruitment process, and a customer management platform for sales to manage customers and operations. Looking forward to the future, CPIC will build a professional and higher performance agent team, and to focus more on “products + services” model to achieve better results.
Valuation undemanding; Maintain BUY
CPIC is trading at ~0.38x 21E P/EV, or ~0.84x 21E P/B, valuation undemanding. Our test further shows, if we eliminate CPIC’s entire VIF on the market’s concern that life insurers’ VIF assumptions will not be met, its P/EV ratio only slightly higher than 1x (Fig. 7) . We revised financial forecast for CPIC (Fig. 2). Maintain BUY for CPIC on valuation. Slightly revised down EV-based TP by 1% to HKD31.25, equivalent to 0.50x 21E P/EV, representing a ~30% discount to past 5-year avg. P/EV of 0.71x, or equivalent to ~1.1x 21E P/B. Key catalysts: a good capital market, higher- than-expected NBV growth; Key downside risks: an adverse capital market, lower-than-expected NBV growth.