EPS increased 25%
China Taiping announced its 2023 results on March 25. EPS HKD1.5 comparable caliber increased 25% year over year, but fell short of our expectations of HKD2.3. The company raised DPS to HKD0.3 (2022:
HKD0.26), 20% dividend rate. The comparable value of life insurance's new business value (NBV) increased 26% year over year, better than our expectations of 17%. The company lowered its embedded value (EV) actuarial assumption, and the adjusted NBV was roughly the same as last year. The comprehensive cost ratio (COR) for property insurance was 98.4%, and the comparable caliber increased by 1.2 pct over the same period last year. Taking into account investment fluctuations, we reduced the 2024/2025/2026 EPS to 1.81/1.73/1.88 (previous value: RMB2.76/3.06/-) and the target price based on the SOTP method to HKD10.4 (previous value HKD12.0).
2H23 Life Insurance NBV volume and price have risen sharply
Under comparable standards, life insurance NBV increased 26% year over year (1H23/ 2H23:19%/32%). 2H23 faced an unfavorable environment caused by a reduction in pricing interest rates, and NBV growth accelerated further, showing a strong growth momentum. New policy premiums (FYP) increased 19% year over year, indicating an improvement in NBV profit margins.
Considering the decline in profit margins for 1H23 products, the 2H23 margin improvement is particularly significant. We estimate the NBV profit margin (FYP basis) for 1H23/2H23 to be 11.9%/34.5% (1H22/2H22:
13.3%/25.4%). The company lowered the return on value-inclusive investment/ discount rate, respectively, assuming 50 bps/ 200bps to 4.5%/9%. The adjustment ratio was 1:4, and the discount rate adjustment was greater than Ping An.
Assuming that the adjusted NBV was reduced by about 20%, the adjusted NBV was roughly the same as the number reported last year. We expect NBV to grow 13% in 2024.
Overseas property insurance underwriting performance improved
Under comparable standards, the COR of mainland insurance increased by 1.2 pct to 98.4% year on year, mainly because COR deteriorated significantly during 1H23 (2.4 pct). Total insurance premiums in mainland China increased by 1.4% (car insurance/non-car insurance:
-2.0%/7.5%), auto insurance growth was weak. The underwriting performance of the overseas industrial insurance business is excellent. We estimate COR to be 89.6% in 2023. The underwriting performance in all overseas markets is excellent, and the UK business COR is even only 68.5%. The reinsurance COR was 95.6%, and the performance was healthy. In particular, there was a significant improvement in 2H23. We estimate that 2H23COR was only 85.4% (1H23:105.8%). Improved performance of overseas industrial insurance and reinsurance underwriting has led to an increase in profits in the overall industrial insurance sector. We expect mainland insurance/overseas production insurance/reinsurance COR to be 98.2%/92%/95% respectively in 2024.
The return on capital has improved
China Taiping's solvency is stable. The comprehensive solvency ratio of the life insurance business was 284% at the end of 2023 (2022:194%), and the mainland industrial insurance business was 229% (2022:224%). China Taiping's ROE in 2023 was 8.5%, a slight increase over the previous year in comparable terms (2022:7.3%). We expect an ROE of 8.4% in 2025.
Risk warning: NBV growth deteriorated sharply, industrial insurance COR deteriorated sharply, and investment losses were significant.