Profits fell 31% in the third quarter
Ping An Insurance reported weak 3Q21 results and held a meeting of analysts on October 27.
Its third-quarter profit fell 31.2% from a year earlier (1H21 was-15.5%), mainly due to short-term investment losses. However, operating profit was more resilient, rising 7.3 per cent from a year earlier (while 1H21 was up 10.1 per cent).
New business value (NBV) of life insurance fell 33.5 per cent year-on-year after contracting 11.7 per cent in the first half of the year. The comprehensive cost rate (COR) of 3Q21 property insurance rose to about 100 per cent from 95.9 per cent of 1H21. We downgrade our EPS forecast from RMB 9.10 pound 9.83 pound 11.30 yuan to RMB 6.40 pound 9.23 pound 11.44 yuan to reflect the investment loss. Our valuation method based on SOTP is based on both accounting and embedded value indicators. We have lowered the target price from HK $110to HK $100,0.56 times the 2022 forecast PEV. Keep buying.
Life insurance reform is still the top priority
The company continues to phase out low-productivity agents. As a result, as of 3Q21, the number of agents fell to 706000 from 878000 of 1H21 and 1.024 million at the beginning of the year. Since the beginning of the year, the size of its agency team has shrunk by nearly 1/3. However, the increase in agent production capacity partly offset the decline in the sales force.
As a result, total premiums fell by only 4.5 per cent in the first nine months compared with the same period a year earlier. Product profit margins have also fallen as premiums from high-margin critically ill businesses have fallen this year. Changes in the product mix are a drag on average profit margins. We believe that as the reform extends to all agency outlets, the number of agents should continue to decline.
We expect NBV to decline by 16.5% for the whole of 2021 and grow by 1.5% in 2022.
Property insurance COR may be affected by flood
The introduction of auto insurance reform by regulators in September last year led to a 7.5% drop in premiums in 1H21's property insurance business, a 12% drop in premiums in 3Q21 compared with the same period last year. We predict that 3Q21's COR will rise from 95.9% of 1H21 to about 100%. The deterioration may have been caused by torrential rains in the current season, such as floods in Henan Province. The COR for the first nine months was 97.3%, which we think is a reasonable level. We expect its property insurance premium growth to warm up and recover from 4Q21, as the high base disappears one year after the launch of auto insurance reform. We estimate that the COR of 2021 / 2022 / 2023 will be 97.6% / 97.7% / 97.7% respectively.
The negative impact on valuation is too great.
We use the SOTP method to value Ping An Insurance, which is based on accounting and embedded value indicators. We have a "buy" rating with a target price of HK $100.00, corresponding to 0.94 times the 2022 forecast PEV. According to our forecast, the company's current share price corresponds to 0.56 times the 2022 forecast PEV, we think the valuation is not high.
Risk hint: failure of life insurance reform and major investment losses.