2021 results miss our expectation
　　China Pacific Insurance’s (CPIC) 2021 new business value (NBV) fell 24.8% YoY to Rmb13.41bn, missing our expectation by 5.4% and market expectation by 4.6% due to worse-than-expected deterioration in NBV margin. Attributable net profit rose 9.2% YoY to Rmb26.83bn, missing our and the market’s expectation by 3.7% and 2.6%, as the evaluated changes of assumptions were worse than expected. The combined ratio of property and casualty (P&C) was 99.0%, in line with our expectation.Operating profit grew 13.5% YoY.
　　Trends to watch
　　Headwinds in NBV growth amid agent transformation; agent productivity measured by FYP improves. CPIC’s 2021 NBV fell 24.8%YoY, and NBV margin fell 15.4ppt to 23.5%. The balance of residual margin fell 0.8%, and monthly average headcount of agents declined 29.9% YoY to 525,000. Agent transformation weighed on NBV growth.Monthly average first-year premium (FYP) income rose 42.3% YoY to Rmb4,638 for agents, and monthly average first-year commission income grew 16.3% YoY to Rmb791. The number of top sellers whose productivity is at the level of the Million Dollar Round Table improved 170.1% YoY.
　　Combined ratio of property and casualty insurance in line with our expectation at 99.0%; improving quality of non-auto insurance　business. P&C gross written premiums rose 3.3% YoY in 2021, with that of auto insurance down 4.0% YoY and non-auto insurance up 16.9% YoY (health insurance up 37.3% YoY and liability insurance up 24.6% YoY).Due to comprehensive reforms, the combined ratio of auto insurance deteriorated 0.8ppt YoY to 98.7%. Meanwhile, the combined ratio improved 11.9ppt YoY for health insurance, 2.6ppt YoY for liability insurance to 98.5%, and 3ppt YoY to 95.1% for guarantee insurance, implying a notable improvement in business quality.
　　Payout ratio falling. Attributable net profit rose 9.2% YoY, but dividend per share declined 23.1% YoY (down 16.7% YoY after excluding special dividends for anniversaries in 2021). The payout ratio based on net profit declined 15ppt to 35.9%. Embedded value rose 8.5% compared with late- 2022, missing our expectation due to downside surprise in NBV contribution.
　　Financials and valuation
　　Due to capital market fluctuations in 1Q22, and the slowing balance of residual margin, we cut our EPS forecast for 2022 by 4.2% to Rmb3.19 and for 2023 by 9.5% to Rmb3.80. CPIC A-shares are trading at 0.41x 2022e and 0.38x 2023e P/EV, and H-share at 0.30x 2022e and 0.27x 2023e P/EV. We maintain OUTPERFORM for A- and H-shares with TP for A-shares of Rmb38 (0.67x 2022e and 0.62x 2023e P/EV offering 64.3% upside) and for H-shares of HK$33 (0.50x 2022e and 0.46x 2023e P/EV offering 67.9% upside).
　　Risks
　　Disappointing FYP growth; sharp decline in long-term interest rates; sharp A-share market fluctuations.