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China Insurance Sector
Mar 19, 2018 Equity Research | Financials
Positive (maintained)
Industry focus shifting from scale to quality
Wang Wen SFC CE No. BGL298 [email protected] +86 755 8826 1286 With contribution from the GF A-share research team. GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong
Agency channel still key for product promotion The insurance industry in China
started with the direct marketing model (1982-1992), but moved on when AIA Group (1299 HK) first introduced the agent system (1992-2000), and was strengthened further when Ping An began exploring bancassurance (2000-2013). As regulatory requirements change, bancassurance and the agent model have developed in turn. Although insurance product promotion continues to evolve along with increased use of the internet and other new technologies, the agent channel remains the key driver for insurance sales and is seeing a significant rise in scale (number of agents) and quality (NBV per agent). Independent brokers dominate sales in mature insurance markets US: The US market was the birthplace of the independent agent system. This
intermediary system meant the coexistence of professional agents (life insurance salespeople) and independent agents (life insurance brokers), with the latter accounting for the majority of sales. UK: British life insurance is typically sold through direct marketing and intermediary
sales, with the latter accounting for over 80% of new premiums during 2004-12. Listed insurance companies: both agent number and NBV per agent have risen
The number of agents at the four A-share listed insurance companies continues to grow, rising to 1.33m, 1.94m, 0.87m and 0.33m at China Ping An (601318 CH), China Life (601628 CH), China Pacific (601601 CH) and New China Life Insurance (601336 CH) by end-1H17, meaning CAGRs of 17.9%, 16.9%, 17.5% and 10.2% respectively during 2011-16. NBV per agent at these insurers also rose significantly, at CAGRs of between 2.3%-8.1% during the five years. China Ping An and China Pacific posted the highest growth in agent size and NBV per agent. Outlook: focus shifting to building high quality agent teams The cancellation of
insurance sales tests in 2015 led to a sharp increase in the number of insurance agents, but this rapid growth may not continue over the long term as the proportion of insurance agents in urban areas is already close to that in developed insurance markets. According to the China Insurance Regulatory Commission (CIRC), there were 8.07m insurance agents in China as of end-2017, or 0.82% of the urban population, compared to no more than 1% of urban populations in the US and Japan. The pursuit of a large number of agents could mean high human resource costs for insurers, so building a high quality agent team and improving NBV per agent is now key for sales channel development. Investment In the short term, number of agents will continue to play a key role in
industry premium growth, whereas over the long run the industry will focus more on building efficient and high-quality agent teams, as well as on the transformation of product offerings and the shift from the pursuit of premium scale to quality premiums. Listed insurance companies will continue to dominate amid this industry transition and have a competitive advantage given their early channel establishment. We recommend China Ping An, China Pacific, New China Life Insurance and China Life Insurance. Risks Slower-than-expected agent growth and adjustment of product offerings may lead
to a decrease in premium growth; improvements in quality in agent teams miss expectations; interest rate volatility and investment uncertainty affect performance at insurance companies.
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Agent channel comparison for the four insurance companies
According to New China Life Insurance's chairman Wan Feng, despite there being over 100m
insurance clients in China, there is still significant market space given an insurance policy per
person rate of only 0.3, compared to 8 in Japan and 3 in the US. At present, the agent channel
dominates insurance sales and is seeing a significant rise in quantity (agent size) and quality
(NBV per agent).
Quantity: agent scale continues to grow
The number of agents at the four listed insurers has continued to grow: as of end-1H17, the
number of agents at China Ping An, China Life, China Pacific and New China Life Insurance
reached 1.3255m, 1.937m, 870,000 and 333,000 respectively. China Ping An and China Life
insurance took the lead in terms of agent number, while China Pacific has posted strong stable
growth in its number of agents, rising at a CAGR of 18.1% during 2011-16.
Figure 1: Four listed insurance companies' agent numbers (’10,000)
Sources: Company data, GF Securities Research
Figure 2: Agent number growth comparison
Sources: Company data, GF Securities Research
China Ping An’s agent number has seen strong growth, rising at a CAGR of 21.3% during 2012-
16. As of end-Sept 2017, the company had more than 1.4m agents, up 26% since the beginning
of the year. China Ping An has adopted questionnaires, face recognition and other new
technologies to bring about efficient and accurate staff increases. As of end-June 2017, China Life
had 1.937m agents, up 6.8% since the beginning of the year. The company’s agent retention rate
was below China Ping An’s but comparable to other peers.
New China Life
InsuranceChina Ping An
China Life
Insurance
China Pacific
Life Insurance
2014 20.6 63.56 89.4 34.2
2015 30.1 86.99 121.1 48.3
2016 32.8 111.08 181.4 65.3
1H17 33.3 132.55 193.7 87
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China Life Insurance China Pacific Life Insurance
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China Life’s bancassurance channel and its group insurance agents continued to grow,
accounting for 18.3% as of end-June 2017, while China Ping An saw an increase in telephone
sales.
China Ping An took a leading market share in first-tier cities while the other three have focused on
more undeveloped areas in China. China Pacific Life favored agents with proven sales success in
industries other than insurance, whereas China Ping An has established a more mature training
system which has equipped newcomers with industry knowledge and sales skills in a short period
of time.
Figure 3: Agent number and growth for China Ping An and China Life
Sources: Company data, GF Securities Research
Figure 4: Channel breakdown for China Life (thousand agents) Figure 5: Channel breakdown for China life (thousand agents)
Sources: Company data, GF Securities Research Sources: Company data, GF Securities Research
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Quality: boosting agent productivity and structural optimization
The four listed insurance companies have also emphasized agent quality improvements as well
as an increase in overall agent number.
Figure 6: Productivity per capita (Rmb per month)
Sources: Company data, GF Securities Research
China Ping An: agent team has the best productivity With an agent number of over 1.5m and
high staff turnover, China Ping An manages agents in groups and evaluates agents according to
their productivity and behavior risk. Thanks to a mature cross-selling system and the group’s rich
business resources, monthly per capita productivity for Ping An agents reached Rmb12,438 in
1H17, up 59% compared to the beginning of the year, and ahead of others in the industry.
Meanwhile, first year premiums per agent grew by 18.2% and monthly income per agent
increased by 14%. On the risk management side, the company will give greater autonomy to
reliable agents and put in place special management measures and supervision for the 2% of
agents with higher risk to improve overall agent quality.
Figure 7: Monthly income per agent at China Ping An (Rmb)
Sources: Company data, GF Securities Research
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New China Life Unlike its peers who focus on agent numbers to drive premium growth, New
China Life has put more emphasis on agent quality. At end-Sept 2017, the company had 330,000
personal insurance agents, up 13% YoY, generating monthly comprehensive productivity of
Rmb7,093, up 13% YoY. The agents in New China Life had a monthly average performance rate
of over 50% compared with the industry average of 30%. Aiming for a high performance rate, high
productivity and a high retention rate, productivity per agent has quickly improved despite a
relatively small agent number.
China Pacific China Pacific has also continued to increase agent productivity through core KPIs
and staff structure improvements while expanding its agent size. New premiums per agent
amounted to over Rmb6,000 as of end-Sept 2017 and has risen at a CAGR of 9.7% during 2011-
16. Retention rate was 42.1% in 9M17, up 6.9% YoY. In 1H17, insurance policies sold per agent
reached 2.54 per month, far higher than at China Ping An.
Figure 8: Monthly new insurance policies per agent
Sources: Company data, GF Securities Research
There are three major challenges when developing an insurance agent team in China: high staff
mobility; dispersed agent distribution, which is hard to manage; lack of training resources in some
remote areas. The listed insurance companies have explored different ways of overcoming these
challenges: China Ping An relied on big data and cloud platform technologies to improve its
management capabilities as well as agent training quality.
New China life designed an incentive system around sales, service, organization and
management to improve overall productivity. China Pacific accelerated the development of its
long-term protection-type insurance products and optimized regional distribution, instead of simply
increasing commission incentives as it had done previously.
Meanwhile, with the insurance industry returning to being more protection oriented, product
structure will continue to be optimized, with a rise in regular premiums and personal insurance,
thereby helping NBV per agent to rise. CAGRs for NBV per agent were 15.04%, 2.66%, 6.53%
and 7.22% for China Ping An, China Life, New China Insurance and China Pacific respectively
during 2014-2016. Overall, China Ping An took the lead in the overall amount and growth of NBV
per agent. In the short term, the quantity and quality of insurers’ agent teams will continue to be
the two key drivers for premium growth in insurance industry.
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Figure 9: NBV per capita (Rmb thousand/agent)
Sources: Company data, GF Securities Research
Outlook: focus shifting to building high-quality agent teams
Rapid growth in insurance agent numbers may not be sustainable
The number of insurance agents stood at 8.0694m at end-2017, according to the CIRC, up 22.8%
YoY. The cancellation of insurance sales tests in 2015 led to a sharp increase in the number of
insurance agents. Given increasing awareness of protection-style insurance and supportive
government industry policies, rapid growth in the number of agents has directly driven high growth
in premiums and new business value.
Figure 20: Insurance agent numbers and growth rates
Sources: Company data, GF Securities Research
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Figure 11: Insurance company NBV growth rate
Sources: Company data, GF Securities Research
But the rapid growth in agents may not continue over the long term as the proportion of insurance
agents in the urban population in China is already close to that in developed insurance markets.
The number of insurance agents grew at a CAGR of 12.04% during 2009-17 while the urban
population grew by just 3%. In mature insurance markets, there is a relatively stable proportion of
insurance agents of around 1%. As of end-2017, the CIRC announced that there were 8.07m
insurance agents in China, or 0.82% of the urban population, whereas this was 1% in the US in
2016 and 0.86% in Japan in 2015. This implies that the rapid growth in agent numbers may slow
and no longer be the main premium driver going forward.
Figure 32: Insurance agents/urban population in China, US and Japan
Sources: Company data, GF Securities Research
Jan premiums contribution may decline
Jan premium income is typically a significant indicator of insurers’ annual performance, and has
accounted for an increasing proportion of total premiums during 2011-16 (except at New China
Life), coming in between 19%-29% in 2016. Products promoted in Jan are usually short-term
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financial products with high premium contributions but a low value contribution. Given that Jan
sales play an important role in indicating whole-year performance, insurers have arranged product
promotion and agent recruitment accordingly. Therefore, the extensive sales of low value
insurance products in Jan encourage insurers to hire more agents regardless of agent quality to
further strengthen sales of the low value insurance products.
However, these kinds of products are not in line with the direction of development towards
protective insurance products and require a high number of agents to achieve sales. The pursuit
of a large number of agents could mean high human resource costs for insurers, so building a
high quality agent team and improving NBV per agent is now key for sales channel development.
Therefore, as growth in the number of agents levels off and product lines continue to be optimized,
Jan sales may no longer be a good indicator for whole-year performance. In Jan 2018, there was
a slowdown in YoY premium growth following the issuance of No. 134 Document as well as other
regulatory guidance.
Figure 13: Jan premiums/total premiums
Sources: Company data, GF Securities Research
Figure 44: YoY growth in Jan premium income
Sources: Company data, GF Securities Research
Insurance brokers to play a bigger role
Decreasing bancassurance contribution Bancassurance used to play an important role in
insurance product promotion. However, with increasing emphasis on protection-oriented
insurance products in recent years, the proportion of premiums sold via bancassurance has
declined significantly for listed insurance companies. At New China Life, bancassurance
contributed 67.53% of total premiums in 2010 but this had decreased to 19.2% in 1H17. In the
current market environment, we expect the contribution from bancassurance to continue to
decline.
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China Ping An China Life
2012 2013 2014 2015 2016 2017 2018
China Life 12% -5% 73% 6% 44% 30% -21%
China Ping An 17% 22% 45% 28% 42% 40% 21%
China Pacific 4% -9% 32% 11% 60% 56% 24%
New China Life 20% -10% 130% 6% -25% -22% 10%
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Figure 55: Premium proportion from bank channel
Sources: Company data, GF Securities Research
Insurance brokers positioned for growth We expect the number of insurance brokers to rise
significantly to become one of the most important channels for insurance product promotion in
China.
At present, personal insurance product promotion mainly relies on insurance agents. But small
and medium-sized companies lost the opportunity to establish agent teams as the large insurance
companies have dominated the agent recruiting market. On the other hand, the insurance broker
channel is still developing in China.
Compared to insurance agents, insurance brokers have advantages in the following aspects: 1)
insurance brokers can sell products from multiple insurers and sign agreements with multiple
insurers at the same time, which makes insurance brokers more objective and more client-
oriented during insurance product marketing than insurance agents who have to serve a particular
insurer with limited product choice. 2) they are a lower cost sales channel for insurers as they only
need to pay commissions but not any fixed salaries or other benefits.
In addition, the number of high-net-worth (HNW) individuals is rising rapidly as China's economy
continues to grow. The Hurun Research Institute reported that the number of HNW individuals
with wealth of over Rmb10m was 1.34m at end-May 2016, up 10.7% compared with the beginning
of the year. HNW individuals demand more and complicated protection which is unlikely to be met
by just one insurer, whereas insurance brokers are able to flexibly combine insurance products
from various insurers and make an individually tailored insurance solution based on HNW clients’
diversified protection needs.
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Figure 17: The number of Chinese HNW individuals and YoY growth
Sources: Wind, GF Securities Research
New technologies to promote insurance sales
With the development of technologies and increasing internet penetration in China, online
channels will also become an important source of future life insurance sales in China. As of end-
2017, the number of internet users in mainland China had reached 772m, with a YoY growth rate
of 5.6% and there were 40.74m new internet users in 2017, indicating continuous steady growth.
The penetration rate was 55.8% in China, higher than the global average of 51.7% and the Asia
average of 46.7%.
Figure 68: The number of internet users in China (million people) and penetration rate (%)
Sources: China Internet Network Information Center, GF Securities Research
Given this market environment, insurance premiums sold online in China surged from Rmb3.2bn
in 2011 to Rmb234.7bn in 2016, indicating a five-year CAGR of 136% and representing an
increased contribution to total premiums, from 0.2% in 2011 to 7.6% in 2016. Life insurance
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overtook P&C insurance to account for the majority of insurance products sold online in 2015, and
has accounted for more than 80% of products sold since 2016.
Figure 79: China's insurance revenue from online sales (Rmb bn)
Sources: Wind, GF Securities Research
Figure 20: Life insurance accounts for more than 80% of all internet insurance premiums
Sources: Wind, GF Securities Research
Internet channel advantages for life insurance products
1) Lower costs: Costs related to selling life insurance products online are typically around 30%
lower than selling through other channels. There are three reasons for this. First, big data and
other technologies are used to optimize the design of online life insurance products for more
accurate definition of target clients and their real needs, resulting in a lower cost for the product
itself. Second, online selling involves greatly reduced intermediary commission and marketing
costs. Third, internet and related technologies, such as intelligent underwriting and rapid claims,
not only provide value-added services for insurance buyers, but also are convenient for insurers in
terms of reducing operating costs and improving operating efficiency.
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2) Client data accumulation: In traditional insurance sales, it is often not possible to accurately
record and store customer data, which makes it difficult for insurers to immediately recognize
changes in demand and the market situation. Instead, various kinds of client data can be
accurately and immediately recorded through internet insurance product sales, with less loss of
information and lower chance of errors. Comprehensive information accumulation enables
insurers to design better insurance products based on real needs. Moreover, internet and related
technologies make individually-tailored pricing possible with an applicant's historical data used to
judge the probability of an insured loss occurring.
3) C2B model emerging in online insurance selling: In the past, insurers designed and sold
products and consumers passively accepted information on products. The internet may change
this by allowing customers to self-tailor insurance products online according to the personal needs.
More customers will be able to take advantage of customized insurance that was previously only
available to HNW individuals. Insurers will also receive feedback from clients and enhance risk-
pricing capabilities through big data.
As industry leaders, the four listed insurers have actively explored the internet insurance business,
which has begun to bear fruit. China Ping An, one of the early adopters of the internet and other
related technologies, has established a comprehensive online financial services platform to
connect various business segments in the group and to better connect with its offline businesses.
The company has continued to hire experienced internet professionals and demonstrated a strong
internet strategy.
Investment
The number of insurance agents will continue to play a key role in the short term, but the rapid
growth in agent numbers will not be sustainable over the long run and the industry’s focus will shift
to building more efficient and high-quality agent teams. At the same time, product offerings will be
transformed, as companies focus more on protection-oriented products. Insurance brokers and
online sales will become increasingly important in the promotion of life insurance.
Listed insurance companies will continue to dominate amid this industry transition and have a
competitive advantage given their early channel establishment. We recommend China Ping An,
China Pacific, New China Life Insurance and China Life Insurance.
Figure 21: Key data
Sources: Wind, GF Securities Research
2015 2016 2017E 2018E 2015 2016 2017E 2018E 2015 2016 2017E 2018E 2015 2016 2017E 2018E
China Ping An 30.24 34.89 43.62 53.93 1.69 2.78 3.98 5.34 2.29 1.99 1.59 1.29 23.16 12.39 6.46 2.88
New China Life 33.10 41.49 48.36 57.16 2.12 3.35 4.18 5.08 1.63 1.30 1.11 0.94 9.79 3.70 1.32 -0.65
China Pacific 22.69 27.14 31.43 36.73 1.33 2.10 2.77 3.65 1.78 1.49 1.28 1.10 13.34 6.31 3.23 1.00
China Life 19.82 23.07 25.59 29.26 1.12 1.74 2.35 3.11 1.39 1.19 1.08 0.94 6.89 2.55 0.82 -0.56
Industry Average 1.27 1.07 2.96 0.67
2015 2016 2017E 2018E 2015 2016 2017E 2018E 2015 2016 2017E 2018E 2015 2016 2017E 2018E
China Ping An 2.97 3.41 4.20 5.68 16.85 19.96 22.95 28.16 23.38 20.31 16.49 12.21 4.11 3.47 3.02 2.46
New China Life 2.76 1.58 1.93 2.75 18.54 18.65 20.30 22.32 19.54 34.00 27.94 19.60 2.91 2.89 2.65 2.41
China Pacific 1.96 1.33 1.65 2.41 14.71 14.54 15.87 17.37 20.65 30.39 24.43 16.73 2.75 2.78 2.55 2.33
China Life 1.23 0.68 1.18 1.47 11.13 10.47 11.93 14.11 22.41 40.65 23.28 18.75 2.47 2.63 2.31 1.95
Industry Average 23.04 16.82 2.63 2.29
EV 1YrVNB P/EV VNBX
EPS BVPS PE PB
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Figure 22: Valuations
Sources: Wind, GF Securities Research
Risks Slower-than-expected agent growth and adjustment of product offerings may lead to a
decrease in premium growth; improvements in quality in agent teams miss expectations; interest
rate volatility and investment uncertainty affect performance at insurance companies.
16 17E 18E 16 17E 18E
China Ping An 69.32 83.50 97% 1.99 1.59 1.29 1.94 1.55 1.25
New China Life 53.87 45.85 69% 1.30 1.11 0.94 0.89 0.77 0.65
China Pacific 40.39 38.15 76% 1.49 1.28 1.10 1.14 0.98 0.84
China Life 27.51 23.15 68% 1.19 1.08 0.94 0.81 0.73 0.64
16 17E 18E 16 17E 18E
China Ping An 69.32 83.50 97% 3.47 3.02 2.46 3.39 2.94 2.40
New China Life 53.87 45.85 69% 2.89 2.65 2.41 1.99 1.83 1.66
China Pacific 40.39 38.15 76% 2.78 2.55 2.33 2.12 1.95 1.78
China Life 27.51 23.15 68% 2.63 2.31 1.95 1.79 1.57 1.33
A share
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Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months
Company ratings
Buy Stock expected to outperform benchmark by more than 15%
Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%
Hold Expected stock relative performance ranges between -5% and 5%
Underperform Stock expected to underperform benchmark by more than 5%
Sector ratings
Positive Sector expected to outperform benchmark by more than 10%
Neutral Expected sector relative performance ranges between -10% and 10%
Cautious Sector expected to underperform benchmark by more than 10%
Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.
Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report.
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