Fact
· Earned premiums increased $13B or 5% to $274B from 9M 2012, ok but not impressive.
· Incurred losses increased $17B or 7% to $258B, slightly higher than earned premium increase.
· Surrenders increased $21B or 68% to $50B with surrender rate of 3%, slightly higher than earned premium increase, primarily due to product sold through bancassurance channel. This is not a good sight. Management should take action & stop developing such trends.
· OCI decreased $8B or 30% to $19B, since equity market recovered in Q4, I will expect OCI to be flat by the end of 20113
· Investment income increased $24B or 24% to $72B, it was just realized gains, not a solid increase.
· Gross investment yield increased 218bps to 4.97%, fairly good return.
· Asset increased 3% to $1,960B from Dec 2012, fairly ok (with asset switch from AFS to HTM, I guess management try to smooth its future earnings).
· Equity increased 7% to $236B. Embedded value (as of Jun 30) is $363B or HK$16.3 per share, estimate EV as of Sep 30 should be $367B or HK$16.6, +9% higher than end of 2012.
Comments & Analysis
Insurance company relies on two sources of income: 1) underwriting (depends on pricing and premium persistence, most of the life insurance companies have negative earning); 2) investment return (for conservative purpose, insurance companies invest majority in bonds, heavily driven by the rise + fall of interest rate.
· Underwriting: start seeing 10% increase in value of new business as China Life switch its business towards non-participating products. Although such strategy hurt its earned premium growth, it still has over 35% market shares and in long run, it should make a higher earning.
· Investment: low interest rate and poor performance in equity market continue to hurt China Life's earnings.
Based on x1.5 forward embedded value, my target price of China Life will be US$50.6 or HK$26.1. However, since the stock price is higher volatile due to China equity market, my recommendation is a HOLD, instead of buy.
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