The importance of life insurance reinsurance increases
According to our calculations, the profit contribution of China re's life insurance reinsurance business has steadily increased from 33% in 2015 to 42% in 2021. We believe that it is driven by the guaranteed life insurance reinsurance business, which is the highest quality asset in China re's diversified business portfolio. The low profit margin of domestic property reinsurance business and the large fluctuation of international property reinsurance business make this sector contribute almost no underwriting profit. In the past two years, the underwriting performance of China re property insurance direct insurance business has declined due to the increasingly fierce competitive environment in the mainland property insurance market. Taking into account the fluctuations in the investment market, we have lowered our 2022 EPS 2023 / 2024 forecast to RMB 0.16 / 0.21 / 0.26 (previous value: RMB 0.18 / 0.25 / -).
We have lowered our target price based on the SOTP method to HK $1.0 (previous target price: HK $1.10) and maintained our "buy" rating.
Life Insurance Reinsurance: guaranteed Business drives profitability
China re's indemnificatory life insurance reinsurance business is mainly concentrated in health insurance, including serious illness insurance and medical insurance. Supported by strong demand from direct insurance companies, premiums in this sector increased sevenfold between 2015 and 2021, accounting for 38 per cent of the company's total life insurance reinsurance premiums last year, up from 16 per cent in 2015. In the past three years, this is the best performing business of the three main businesses of China re, and the life insurance reinsurance business ROE has remained stable at more than 10%. We expect this trend to continue in the next 2-3 years.
Property reinsurance: underwriting break-even
About 2/3 of the company's property reinsurance premiums come from the domestic market, which is affected by fierce competition in the direct insurance market. We believe that large direct insurance companies in the industry have a greater competitive advantage than small companies and have stronger bargaining power over reinsurance companies. In the past few years, China re's domestic property reinsurance business has made almost no contribution to underwriting profits, even if it has not lost money, while the international business has contributed 1/3 of property reinsurance premiums, but its underwriting performance has been greatly affected by catastrophes. We expect the comprehensive cost rate (COR) of property reinsurance to be 99.7% in 2022.
Direct property insurance: facing underwriting loss
China re's property insurance direct insurance business suffered a substantial underwriting loss in 2021, with a COR of 107 per cent. We believe that the comprehensive car insurance reform of 3Q20 may have a negative impact on China again. The car insurance premium of the direct insurance business fell 17% year-on-year in 2021, significantly higher than that of other large listed peers. We believe that after the reform, large direct insurance companies have a greater competitive advantage than small and medium-sized companies in car insurance business by virtue of their distribution network and brand awareness. We believe that China re's property insurance direct insurance business may continue to lose money in the next 2-3 years.
Risk tips: premium growth significantly deteriorated; significant underwriting losses.
