Maintaining DPS growth
Ping An of China announced its 2023 results, and the comparable caliber of the new EPS RMB4.84 standard fell 24% year on year.
Operating profit (OPAT) fell 19.7% year over year. With the exception of banking, OPAT declined in all business lines, and the asset management business sector (including securities, trusts, leasing, and asset management) declined particularly sharply. However, it is worth mentioning that Ping An raised DPS to RMB2.43 (2022: RMB2.42), reflecting the importance it attaches to shareholder returns. Life insurance's new business value (NBV) grew strongly, growing 36.2% on a comparable scale.
Ping An lowered the NBV investment income and discount rate assumptions, and the adjusted NBV increased 7.8% over the previous year.
The comprehensive cost ratio (COR) for property insurance was 100.7%, up 1.1 pct from the previous year, mainly due to the deterioration in car insurance underwriting performance. Considering investment fluctuations, we lowered 2024/2025/2026EPS to RMB7.46/8.08/8.30 (previous value RMB8.23/9.64/-) and the target price to RMB70 (A) /HKD69 (H) (previous value: RMB75 (A) /HKD90 (H)) to maintain our buying rating.
Life insurance NBV is growing strongly and profit margins are stable
The comparable caliber of life insurance NBV increased 36.2% year over year, narrowing from 40.9% in the first three quarters of 2023, reflecting a slowdown in growth in 4Q23 (13.8%). Product profit margins have rebounded steadily, and the new business value ratio of 32.9% (ANP benchmark) has increased 2.8 pcts from the previous year (30.1%) under a comparable caliber, reversing the trend that has continued to decline since 2019. We believe that expanding product margins is a top priority for the life insurance industry, so that we can deal with the risk of long-term interest spreads and losses. Ping An lowered the value-inclusive investment return hypothesis/discount rate assumption of 50 bps/ 150 bps to 4.5%/9.5% to reflect long-term investment prospects, reducing the 2023 NBV by about 21%. At a time when industry pricing interest rates are being lowered, we think it is a logical step to lower investment-related assumptions. We expect Ping An's NBV to grow 10.1% in 2024.
Property insurance COR is under pressure
Industrial insurance COR of 100.7% increased significantly from 99.3% in the first three quarters of 2023. We estimate that 4Q24 COR may be as high as 104% to 105%. The annual COR for car insurance was 97.7%, a significant increase from 97.4% in the previous three quarters, and may have been greatly affected by the catastrophe last summer. Among non-auto insurance, liability insurance and corporate financial insurance both experienced underwriting losses in 2H23; the main reason for the business is that Lujin's credit guarantee insurance already had underwriting losses in the first half of the year (1H23 COR 117.7%) and expanded in the second half of the year (2023 COR 131.1%), making it the biggest source of underwriting losses. Ping An announced the cessation of financial credit guarantee insurance business in 4Q23, and the pressure on underwriting profits is expected to decrease in 2024.
We expect the Pyongan production line COR of 97.7% in 2024.
Operating profit under pressure
Large-scale losses in the asset management sector (RMB20.7mn) were the main reason for OPAT's 19.7% year-on-year decline. We believe OPAT is expected to stabilize in the future against the backdrop of continued growth in new life insurance businesses and improvements in property insurance coverage, and we expect OPAT to resume growth in 2024.
Risk warning: Life insurance NBV has declined sharply, industrial insurance COR has deteriorated sharply, and investment has deteriorated drastically.