This article comes from the snowball number "Fantasy Sky NKS" of Snowball Network.

The first feeling to see China Taiping (00966) third quarter solvency report is to jump! Although many people do not read it, because many people do not understand.

First of all, I would like to thank the wise CIRC that insurance companies should not only disclose the regular financial statements of listed companies, but also disclose monthly premium classification data, annual information disclosure announcements, capital related party transactions information, listed company information, non-insurance subsidiary information, and, most importantly, regular solvency reports.

This report is so important in the second generation that if you read my article, you will know why my research method of insurance companies is not based on premium income, net profit and net assets, but on profitability, value and solvency. These three variables support each other, in which solvency is the touchstone of everything.

The following figure is the solvency report for the third quarter of China Taiping Life.

According to the several data disclosed here:

How much can Taiping Life's net profit increase?

The net profit was 1.755 billion in the single quarter, an increase of 165.9% over the previous quarter. I think the most important thing is the rise in interest rates and a substantial increase in investment income. Taiping's investment is conservative (in fact, it was good in the past, but very bad recently, indicating that it is not a value investor, and none of the fund managers whose performance is less than 30% this year are value investors), which is highly related to the trend of interest rates on treasury bonds. The reference object is Guoshou (02628). Unlike Ping an (02318), Xinhua (01336) and Taikang Investment, equity and fixed income are relatively balanced.

Comparison between China Life Insurance Company Limited's net investment return and the annual weighted interest rate of ten-year treasury bonds

Therefore, it is not surprising that Taiping Life's quarterly profit has increased from 660 million to 1.755 billion. With 1.1 billion yuan in a single quarter, if today's treasury bond interest rate exceeds 3.92%, it will be higher than 3.60% for the whole year, that is, higher than in the third quarter. This is very helpful for insurance companies to reinvest maturing assets and raise the interest rate of agreed deposits.

More information is disclosed in Guoshou's three-quarter report. If we expect interest rates on fixed-income bond investments to rise, are the changes in the performance of Taiping Life consistent?

As can be seen from the above, Taiping's net profit is closely related to the interest rate on government bonds. After all, 80% of the assets of insurance companies are fixed income assets. But why are the net profits of 2016 Q4, 2017, Q1 and Q2 so low, with interest rates starting to pick up in the first half of 2017? This is because the discount rate used for reserve replenishment is the 750-day moving average of treasury bonds. Although interest rates on treasury bonds bottomed out in the fourth quarter of 2016, the three-year average of 750-day treasury averages hit bottom in these three quarters, so reserve replenishment is the strongest in these quarters. There will be additional provisions in the third and fourth quarters of this year, and the amount has been significantly reduced.

Ten-year Treasury yield bottomed out in the fourth quarter of 2016

The influence of Reserve replenishment in Taiping Group

As a result, the half-year net profit of 2017 Taiping listed companies of HK $2.37 billion was affected by reserve replenishment of about HK $1.755 billion, in addition to an one-time floating loss, confirming a loss of HK $1.325 billion for securities and funds, compared with HK $1.145 billion in the first half of 2016. Taiping Q2 performance low in 2017 is basically established.

The return on investment in the first half of the year was only 4.02%, and now the ten-year treasury bonds are 3.92%. China Life Insurance Company Limited's net investment return also rose to 4.99%, Xinhua 5.2%, Ping an 5.5%. It is estimated that Taiping's annual investment return should be raised to 4.5%. Blue chips are also good in the second half of the year, and there should be no big problem.

Then China Taiping Life's full-year net profit will reach 5.411 billion yuan, corresponding to 6.353 billion Hong Kong dollars. If the current national debt interest rate is maintained in 2018, it is very likely that 2 billion yuan per quarter, then the discount annual net profit is expected to be 7 billion yuan, corresponding to HK $8.19 billion. This figure should be conservative.

Based on other data disclosed by solvency, we can also know:

Don't ask me where I came from. I opened the reports one by one and pasted them myself!

In other words, Taiping property Insurance (including domestic and foreign), pension and reinsurance should have HK $1.47 billion for 16 years, and this year's net profit except life insurance should be calculated at HK $1 billion.

According to China Taiping listed companies account for 75.1% of Taiping Life + 100% of property, pension and reinsurance. This year, the net profit of China Taiping listed companies is expected to be 5.76 billion Hong Kong dollars, corresponding to PE15.7 times, 18 years is expected to be 7.15 billion Hong Kong dollars, corresponding to 12.5 times PE.

By the end of the year, the embedded value per share was about HK $33.50, or 0.75 times PEV, the lowest among major life insurance companies.

Solvency verifies that the company's transformation is more reliable than expected.

How to look at solvency is very important. After switching to the second generation of compensation, the actual capital and solvency of the major high-value companies increased to a certain extent in 2016, of course, the average level of compensation of the second generation of the whole industry is basically the same, that is, the solvency of good companies is high, and the comprehensive ability of poor companies and large companies in disguise is poor.

Taiping began to transform after 16 years, and it is still very early. Xinhua has actually reduced the bulk delivery of bancassurance for two years and nearly four years. The repayment rate of Taiping has begun to pick up since the fourth quarter of 2016. The original lies in the new development of the business has a higher value, in that year can directly contribute capital, improve the capital adequacy ratio. I admire Xinhua for this. It paid dividends in the third quarter, and its solvency has improved.

The improvement of solvency accelerated from Q2 to Q3 in 2017, but the new premiums in the third quarter were actually lower than those in the first and second quarters, accounting for the majority in the first half of the year, indicating that the quality of new premiums has further improved, as well as other reasons for changes in capital sources.

Actual capital = recognized assets-recognized liabilities = new business margin + effective business expected income + operation deviation + investment deviation + fair value adjustment

Taiping had such a large fair value floating loss in the second quarter, and the investment income was only 4%. At the lower limit of the expected return of 4-4.5%, the repayment rate did not fall, indicating the contribution of the new business value and the expected income of the original business.

What needs to be discussed here is why Q1's solvency declined significantly in 2017. It may be a mathematical problem. Taiping's payment rate has always been high. In 2017, Q1 developed 57.295 billion new premiums, increased 5.3 billion of the minimum capital, contributed 9.3 billion of the real capital (about 1 prime 10 of the new premiums, and 2 times the minimum capital), and in 2017 Q2 developed 216.57 new premiums, increased 1.6 billion of the minimum capital, contributed 5.45 billion of the real capital (about 1 prime 14 of the new premiums, and more than 3 times the minimum capital). In 2017, Q3 developed 18.8 billion new premiums, increased 1.5 billion of the minimum capital, and contributed 6.5 billion of the real capital (approximately the minimum capital of the new premium is 12% of the new premium, and the real capital is more than 4 times the minimum capital)

What can be explained is that the capital contribution brought by the recent premium is stronger, in which there is a difference between investment and fair value changes, but the return on Taiping investment this year is really average, mainly due to the contribution of new premiums.

However, from the perspective of minimum capital, the minimum capital required for each development of premiums decreases, indicating that the proportion of high-value policies has increased. You can go ahead and test it.

The overall conclusion is that Taiping's three-quarter report exceeded expectations, and the perspective of solvency also verified the reliability of the transformation, but it took a long time for the transformation to be completed, so I hope to continue to observe.

Attachment: comparison of main data between China Taiping and other companies

(editor: Wang Mengyan)