China Insurance Sector 26 November 2018 2 China Insurance Sector2UBS Research THESIS MAP a guide to our thinking and what's where in this reportMOST FAVOUREDLEAST FAVOURED Ping An China LifePIVOTAL QUESTIONS Q: Could internet giants reshape insurance sector’s landscape and disrupt NBV growthWe believe internet giants’ path to disrupt the insurance industry is clear, in terms of distribution,products and financial services. We believe there is potential for a shift in the distribution mix andview the offering of mutual insurance as a long-term risk to sector profitability and the competitivelandscape. We estimate medium-term NBV growth of 13%. That said, insurers with high-qualityagents and risk pricing would be more resilient and may capture up-selling opportunities from theinternet channel (eg, Ping An). more Q: How will technology differentiate insurersIn many ways. In addition to agency quality, we believe insurers will increasingly differentiate ontechnology and connectivity with the rest of the health ecosystem. We think selection and pricing ofrisks remain the core competitive advantages of insurers versus internet companies. We expect theuse of big data and artificial intelligence (AI) to substantially polarise the insurance industry, wherethe winner may take all. We estimate Ping An’s market share by life NBV to increase from 20% in2017 to 25% in 2020. more Q: Is agency retention a risk for business mix transformationWe think headcount pressure from regulatory tightening on short-term savings products provides agood opportunity for insurers to enhance the quality of their agency force, which almost doubledover 2014-17. We expect industry headcount growth to pick up to about 10%/year from 2019E.UBS Evidence Lab: Industry transformation – a reality check 6/21/2018UBS VIEWWe believe internet giants, especially Ant Financial and Tencent, are becoming more disruptive toChinese insurers. Their ambitions for insurance distribution and the recent offering of mutualinsurance could have material implications on sector profitability and the competitive landscape. Wereduce our sector medium-term NBV growth forecast by 2pt to 13%. EVIDENCEBased on our premium decomposition analysis, internet giants may accelerate product unbundling ofthe savings element from protection products, which could be a new headwind for traditionalinsurers. Source: Company data, UBS estimatesWHAT'S PRICED IN Sector valuation of only 0.8x 2018E P/EV (excluding Ping An) is close to the historical trough, whichwe think mainly reflects concerns on the macro environment and investment risks. At current shareprices, adjusted P/EV would still be below 1.0x even under a combination of 12-13% risk discountrates and investment yields of below 4.25%. The potential disruption of insurers’ growth outlook bythe internet thus does not change our positive view on the sector, but could limit upside for insurersthat lag on technology.18 18 18542510 2310 10 20 30 40 50 60 70 80 90 100 Traditional bundled C.I.Traditional unbundled C.I.Xianghu Bao ClaimsBenefitExpense loadingProfit In theory noshareholder profit (pays for the high cash value of bundled CIproduct) China Insurance Sector 26 November 2018 3China insurance sector UBS Research Sector Q1PIVOTAL QUESTIONS return Q: Could internet giants reshape insurance sector’slandscape and disrupt sector NBV growth UBS VIEWWe believe internet giants’ path to disrupt the insurance industry is clear, interms of distribution, products and financial services. We expect a shift in thedistribution mix and view the offering of mutual insurance as a long-term risk tomargins and market share of traditional insurers. We estimate medium-term NBVgrowth of 13%. That said, insurers that deliver quality advisory services throughtheir agents and have a competitive edge on risk pricing are likely to be moreresilient and may even capture up-selling opportunities from the millennials inthe internet channel (eg, Ping An). EVIDENCEIndustry data from the Insurance Association of China (IAC) suggests internetdistribution already accounted for 5% of GWP in H118. While this was similar to2017, we notice a significant shift in the product mix from investment toprotection products. We see some early signs that could challenge the traditionalbelief that agency is the go-to channel for protection products. Internet giantsincluding Tencent and Alibaba have ramped up efforts in online insurancedistribution. Ant Financial has even launched a new mutual life product at TrustMutual Life, which it funded 51% (including 34.5% directly and 24% byTianhong AMC, an Ant Financial subsidiary). WHAT'S PRICED INSector valuation of only 0.8x 2018E P/EV (excluding Ping An) is close to thehistorical trough, which we think mainly reflects concerns on the macroenvironment and investment risks. At current share prices, adjusted P/EV wouldstill be below 1.0x even under a combination of 12-13% risk discount rates andinvestment yields of below 4.25%. The potential disruption of insurers’ growthoutlook by internet giants thus does not change our positive view on the sector,but could limit upside for insurers that lag on technologyFigure 2: China insurance sector valuations Rating PT (HK$) Price Upside Mkt cap Trading P/EV (adj) PE (x) P/BV (x) ROE (%) Core ROEV (%) Div yld (%)Company NewOld NewOld (HK$)(US$ m) 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E 18E 19EChina Life Neutral Buy 18.30 25.20 16.26 13% 58,720 0.73 0.67 15.6 10.6 1.23 1.16 7.6 11.3 14.7 14.4 1.9 2.9Ping An Buy Buy 100.00 103.00 74.45 34% 173,888 1.33 1.13 12.1 10.1 2.45 2.05 18.0 19.3 26.4 22.9 3.0 3.7CPIC Buy Buy 35.50 39.00 28.00 27% 32,461 0.84 0.72 14.5 11.2 1.61 1.50 10.7 13.9 17.8 17.2 3.4 4.4NCIBuy Buy 46.40 51.00 34.60 34% 13,792 0.83 0.73 11.2 9.7 1.66 1.43 13.3 15.5 17.0 17.1 2.2 2.6CTIH Buy Buy 32.90 36.10 25.10 31% 11,526 0.66 0.56 13.1 11.5 1.24 1.13 9.9 10.3 17.7 16.9 0.8 0.9PICC Group Buy Buy 4.20 4.60 3.34 26% 18,104 0.91 0.82 7.6 7.1 0.84 0.77 10.9 11.0 11.2 13.0 1.1 1.2China Re Neutral Neutral 1.71 1.71 1.54 11% 8,358 0.72 0.68 8.4 7.7 0.74 0.69 8.6 9.3 na na 4.1 4.5Zhong An Neutral Neutral 34.80 34.80 32.10 8% 6,025 na na -40.5 192.5 2.59 2.55 -5.9 1.3 na na 0.0 0.0 Note: Above data as of 23 November 2018. Source: Reuters, UBS estimatesChina Insurance Sector 26 November 2018 4Figure 3: Potential disruption from tech giants * translated by UBS, as English name is not available. Source:UBSHealthMotorLifeOthers Good Medical Insurance*(好医保) Health insurance underwritten byinsurance companies (eg, PICC,Guohua Life, Zhong An, etc) Motor insurance by PICC, CCIC,TianAn, AXA, China Insurance,Sunshine Whole life and term life products provided bydifferent insurers Travel, shipping return, homeowner,etc ProductsDescriptionDistribution channel Xianghu Bao(相护保, see Figure 10) The 1st CI mutual insurance in China withseveral innovative features Only distributed on Alipay Shuidi Huzhu (水滴互助) Similar to Ant's mutual insurance, but has notreceived insurance licence yet Through Shuidi's own website 5 product lines - travel, health,motor, consumer finance and lifestyleconsumption An online P&C insurer co-founded by Tencent,Ping An and Alibaba Mainly 3rd-party platforms and ownapps/websites Mostly traditional life, annuity,accidental products A life insurance company co-founded byTencent and others Online: online 3rd-party brokers (not onWeSure yet) Offline: mainly bancassurance Mainly traditional motor and shortterm medical, liability, accidentalproducts Previously the China P&C subsidiary of theTaiwan-based Cathay FHCMainly through Alipay and otherscenario based platforms (Ele.me,Gaode Map, etc) Not clear yetJD acquired 33% stake of Allianz China thisyear Not clear yet HealthCreditInfrastructure as a service (IaaS) Ali Health 阿里健康Credit databases by tech giantsFinancial clouds by tech giants Alibaba's health ecosystem includingonline pharmacies, online diagnosis,health management and healthinsur