Operating profit remains stable
China Taibao announced its 2023 results on March 28. EPS RMB2.83 under the new accounting standards, the comparable caliber fell 27% year on year. It was also lower than our forecast of RMB3.11, mainly due to investment fluctuations.
Total return on investment fell to 2.6% from 4.1% in 2022. Operating profit was relatively stable, with a year-on-year decrease of only 0.4%; DPS RMB1.02 was the same as in 2022, which is basically in line with operating profit.
The comparable value of life insurance's new business (NBV) increased 31% year over year, with strong growth. The company lowered the embedded value (EV) actuarial assumption, and the impact on NBV was around 9% (based on 2023 data).
The comprehensive cost ratio (COR) for property insurance was 97.7%, up 0.7 pct from the previous year. Considering investment fluctuations, we expect 2024-2026 EPS to be RMB3.13/3.43/3.61 (previous value: RMB3.75/4.05/-), with a target price of RMB35 (A) /HKD25 (H), maintaining the purchase rating.
Increased production capacity drives NBV growth
Life insurance NBV increased 31% year over year under the same actuarial assumptions. Considering that the 2023 New Policy Premium (FYP) and Annualized New Policy Premium (APE) increased by 21%/27%, respectively, the NBV profit margin increased.
NBV increased 36.8% year-on-year in the first three quarters of the year, reflecting a decrease in growth in the fourth quarter. Looking at the banking insurance NBV by channel, the growth rate of banking insurance NBV is relatively fast, and we estimate that it has more than doubled; the NBV growth rate for agent channels may be close to 20%, which is also a relatively fast level. The average number of agents per month was 210,000, a year-on-year decrease of 24.7%, which meant that per capita NBV production capacity increased sharply, reflecting the continued results of the transformation and upgrading of agents. The company lowered the return on investment/discount rate by 50/200 bps to 4.5%/9%, respectively, and the adjustment ratio for the two hypotheses was 1:4. We expect the NBV to grow by 12.1% in 2024.
Property insurance COR maintains a healthy level
Taibao Insurance's COR increased slightly by 0.8 pct to 97.7%. We believe this is a healthy level, and it has also been at a good level in history. Among these, the loss rate increased by 1.1 pct, partially offset by a decrease in the cost rate (-0.3 pct).
By business, car insurance COR was 97.6%, up 1.1 pct from the previous year. This is due to the increase in loss rates and may be affected by the increase in travel last year. Among non-car insurance, agricultural insurance (COR: 98.8%) and health insurance (COR:
99.2%) Guaranteed profit, liability insurance covered loss (COR: 100.6%). In 2023, the total premium of Taibao Insurance increased by 11.4% year-on-year, with auto insurance increasing by 5.6%; non-auto insurance increased 19.3%, which is a faster growth rate. Among non-auto insurance, insurance premiums for liability insurance (31%), agricultural insurance (29%), and health insurance (19%) are growing faster. We expect COR of 97.6% in 2024.
Good return on capital
The contract service margin (CSM), which reflects the future profit of life insurance, was RMB324bn at the end of 2023, down 0.8% year on year, mainly due to weak growth in new business over the past few years. As new businesses resume growth, we expect CSM to gradually recover steadily. The company's operating ROE in 2023 was 14.9%, which is a good level. We expect the operating ROE to be 16.2% in 2024.
Risk warning: The growth rate of NBV deteriorated sharply, COR deteriorated drastically, and there was a significant loss of investment.