China Taiping Insurance Winning Formula

While Goliaths dominate China Insurance Industry, there is plenty of scope for emerging competitors – the so-called Davids – to thrive. Hong Kong-listed China Taiping Insurance Company Limited has  taken on the behemoths of the domestic insurance industry and we have been impressed with the its growth strategy and execution – particularly on the agency front, growing both in terms of agents and productivity.

China's insurance industry is highly concentrated, with the top three players accounting for more than 50 per cent of the market. Growth prospects are expected to be underpinned by rising penetration rates (around 2 per cent of the population have an insurance policy versus 6-12 per cent in developed countries), a growing and large population, still strong economic growth and accelerating social development. Supportive policies from the ministry of finance are also underway, giving tax subsidies to health insurance carriers and pensioners.

Recent full-year numbers from the insurer beat expectations and were also ahead of results elsewhere in the sector. The driver was the company's agency channel which continues to deliver exceptional growth in value of new business (VNB). Management's thrust to improve agent quality is also paying off. Total premiums expanded 19.7 per cent (7.8 per cent in 2016) to HK$178.68 billion.

VNB surged 49.6 per cent year-on-year to HK$13.64 billion. This beat larger peers like China Ping An (up 33 per cent), China Life Insurance (up 22 per cent), and Xinhua Insurance (up 15 per cent). VNB is the profit the insurer hopes to make on policies written during the year after factoring in all the costs incurred.

The year-on-year improvement in VNB was mainly due to the growth of the agency channel where the company recruited more than 122,000 agents, taking the total to more than 384,000. Key metrics also show that the average agent quality is rising, based on average monthly production (sales) per agent, which improved 8.7 per cent year-on-year to HK$18,380.

Higher margins

Margins from the agency channel were substantially higher at 44.3 per cent and improved 150 basis points year-on-year. The company's agency channel has been able to deliver higher margins due to the focus on longer-term products (unit-linked and long-term care).

Better risk pricing and lower claims also helped the bottom line. Net profit attributable to owners came in at HK$6.14 billion, up 27 per cent due to profit growth across most segments (not including property and casualty) as well as higher investment income.

China Taiping's life insurance business still accounts for the lion's share of total income and benefits from the agency channel, bringing in more than half (73.9 per cent) of the total. The continued growth of the agency business has also led to a substantial  leap in individual customers (up 17.4 per cent) to over 9.63 million. Increased agent activity has also raised renewal rates to a sector-leading 95.8 per cent (up 80 basis points) over a 13-month period.

Comprehensive solvency ratios remained at comfortable levels at the end of the year, sitting at 246 per cent for the life insurance business and 216 per cent for the  property and casualty business, well above the regulatory requirements of 100 per cent.

The shares are reasonably priced on roughly 14 times the FY18 forecast earnings estimate, falling to around 12 times the following year. Strong growth prospects are underpinned by still low penetration rates for life insurance in mainland China and rising investment income as yields increase. The forward price to book value ratio is estimated at roughly 1.5 times.