China Insurance Report - Q3 2013.pdf

Q3 2013 www.businessmonitor.com CHINA INSURANCE REPORT INCLUDES 10-YEAR FORECASTS TO 2022 ISSN 1750-5623 Published by:Business Monitor International China Insurance Report Q3 2013 INCLUDES 10-YEAR FORECASTS TO 2022 Part of BMIs Industry Report leverage of new (and existing) distribution channels to boost sales; engagement of first time users of products; ageing demographics (meaning a rise in demand for retirement income products); and, growing demand for financial advice. Savings Accumulate For Now Current Account Balance as % of GDP 2010 2011 2012 2013f 2014f 2015f 2016f 2017f -1 0 1 2 3 4 Source: National Bureau of Statistics/BMI China Insurance Report Q3 2013 © Business Monitor InternationalPage 17 Life Insurance Still A Small Part Of The Savings Picture Life Premiums And Total Bank Liabilities And Capital Total liabilities and capital, CNYmn (LHS) Total life premiums, CNYmn (RHS) 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f 0M 100M 200M 800,000 1,000,000 1,200,000 Source: People's Bank of China/CIRC/BMI Non Life Table: Total Non-Life Premiums, 2010-2017 201020112012e2013f2014f2015f2016f2017f Total non-life premiums, CNYmn484,846573,281664,356749,209839,134932,380 1,033,534 1,145,903 - % change y-o-y31.818.215.912.812.011.110.810.9 - CNY per capita361425491551615681752831 - % of GDP1.21.21.31.31.31.41.41.4 - % of total premiums33.439.743.244.545.145.747.349.1 Total non-life premiums, US$mn71,62788,681105,318119,491131,629144,555157,791173,622 - % change y-o-y33.023.818.813.510.29.89.210.0 - US$ per capita5366788896106115126 Total non-life premiums, EURmn53,99863,79982,92789,172103,645117,524131,493144,685 - % change y-o-y40.318.230.07.516.213.411.910.0 China Insurance Report Q3 2013 © Business Monitor InternationalPage 18 Total Non-Life Premiums, 2010-2017 - Continued 201020112012e2013f2014f2015f2016f2017f - EUR per capita40476166768696105 Source: CIRC/BMI The 15% growth in non-life premiums (in which we include health and accident insurance) during 2012 confirms that penetration (premiums as a percentage of GDP) continue to rise rapidly - and from what is already quite a high level given overall per capita incomes in China. As the table shows, growth in China's non-life segment has slowed quite dramatically over the last two years or so - but this is in the context that the sector had been expanding at breakneck speed, with premiums in 200 one-third higher than they had been in 2009. A comparison of (recent) past and forecast non-life premiums with BMI's forecasts for vehicle sales highlights two issues. First, the deceleration in growth is in part due to the sharp slowdown in overall sales of vehicles - which, of course, need to be insured. Second, non-life insurance premiums appear set to rise more rapidly than vehicle sales. This makes sense to us, because we would expect pressure on prices and rates in relation to insurance for motor-related lines to be in a downwards direction. China Insurance Report Q3 2013 © Business Monitor InternationalPage 19 Much More Than Just Motoring Growth In Vehicle Sales And Non-Life Premiums % Vehicle sales, units % chg y-o-y (RHS) Total non-life premiums, CNY % change y-o-y (LHS) 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 0 5 10 15 20 25 30 35 0 10 20 30 40 Source: CAAM/CIRC/BMI Similarly, we expect that continuing investment in the country's infrastructure in general (and building/ construction in particular) will be a significant, but not overwhelmingly important driver of growth. A comparison of the relevant projections from BMI suggests that non-life premiums should continue to rise faster. Although it appears not to have been commented on by many of China's leading property the restrictions on bancassurance that had been imposed by the China Banking Regulatory Commission (CBRC - which has mandated that sales of insurance products in banks must be undertaken by appropriately qualified employees of the banks); and, competition for life insurance from wealth management products (distributed by the banks) and other conduits for organised savings in China. China Life has responded to this difficult environment in a number of ways. It has changed the mix of its business in order to boost embedded value and value of new business (VONB). In short, the 5.1% fall in gross written premiums in H112 (and consequent loss of market share) was a part of a deliberate policy to focus on profits rather than on growth for its own sake. As we explain in the profile of the company elsewhere in this report, China Life has introduced new products. It has boosted the productivity of its sales force. It has grown corporate business in the direct channel. It has also boosted the E-China Life mobile marketing system and nurtured telemarketing (where premiums continue to grow at double-digit rates, if from a low base. China Insurance Report Q3 2013 © Business Monitor InternationalPage 27 We highlight two other key developments. First, China Life (and, by extension, the other Chinese majors) have access to the capital that they need at a time that their businesses are growing (if not necessarily in terms of gross written premiums). This is in spite of their huge absolute size. In June 2012, the market leader boosted its solvency ratio by successfully undertaking a massive CNY28bn issue of sub-ordinated term debt. Secondly, during the first six months of the year, China Life exploited the liberalisation of CIRC's rules governing investment by insurance companies. It has made investments (or taken the first steps towards doing so) in unlisted equity, Private Equity, infrastructure debt products and real estate. This is encouraging, because China Life's profitability in H112 suffered as a result of the often challenging conditions in financial markets. Many of the themes highlighted by China Pacific in its reports for H112 and the first three quarters of 2012 were similar to those that were mentioned by China Life. In essence, the company has been able to counter a sharp contraction in sales through bancassurance with a rise in sales through the agency channel - thanks in part to deliberate efforts to boost the productivity of its agency network. In relation to the first nine months of 2012, the company noted that its life premiums were more or less unchanged (in comparison with those of the previous corresponding period) at CNY74,988mn: 'In particular, premiums from new insurance policies amounted to CNY31,424mn, while premiums from renewed policies amounted to CNY43,514mn. The individual channel maintained its rapid growth and premiums from new policies reached CNY9,631mn, representing an increase of 11.2%, among which the premiums from new regular insurance policies of the individual channel amounted to CNY9,033mn.' Ping An, too, has emphasised that different parts of its business have been developing at different speeds. In the first nine months of 2012, the company's overall life premiums were CNY157,568mn, or 6% more than in the corresponding period of 2011. However, this growth was driven by 'the more profitable' individual life products, whose premiums rose by 9.8% to CNY138,709mn. Relative to the local life insurance companies, most of the foreign majors that are operating in China (almost invariably through joint ventures) have been upbeat. AEGON, for instance, commented on the growth of new life sales in H112 thanks to, 'the strong performance of distribution partners in the brokerage channel'. Ageas noted that inflows of Taiping Life in H112 were, at EUR2.4bn, 21% higher than they had been in H111. Taiping Life has benefited from management's new focus on profitability and persistency at a time that sales through the bancassurance channel remain suppressed. AIA notes that it is developing its reputation in China as 'the protection expert'. AIA's new sales from comprehensive protection products were 31% higher in the six months to the end of May 2012 than they had been in the corresponding period of 2011. AXA announced the formation of a new joint venture (JV) with banking giant Industrial increasing insurance penetration in Tier 2 and 3 cities; and, the developing employee benefits market. In terms of its geographic presence, MetLife said it 'had access to 37% of (China's) insurance market at the end of 2011'. Direct marketing accounted for about 55% of the JV's ANP in H112 and bancassurance for just over one quarter. MetLife calls itself the 'market leader in direct marketing'. It has over 3,000 telemarketing sales representatives (TSRs) selling accident increase telemarketing and Internet marketing; standardising the look and operations of its urban outlets; opening new outlets in rural areas; looking at ways to improve customer service; and, it said, 'continued improvement of underwriting profitability'. PICC noted that it has faced 'increased competition in certain regional markets'. China Insurance Report Q3 2013 © Business Monitor InternationalPage 30 Industry Trends And Developments Life Growth Drivers and Risk Management Projections Population Table: Insurance Key Drivers, Demographics, 2010-2017 201020112012e2013f2014f2015f2016f2017f Population, mn1,3411,3481,3541,3591,3651,3701,3741,378 - % change y-o-y0.480.460.450.430.400.360.330.29 Population, total, male, '000696,341 699,631 702,802 705,812 708,606 711,145 713,410 715,408 Population, total, female, '000644,994 647,934 650,798 653,556 656,167 658,598 660,837 662,885 Population by age group, '000 0-4 years81,59682,20581,99881,15680,09579,10078,01876,783 5-9 years84,05082,51781,60181,27081,25281,12580,88280,543 10-14 years95,31392,94190,42687,86985,55683,77082,55381,820 15-19 years105,348 102,491 100,40498,78997,08594,97192,63190,059 20-24 years119,963 119,300 116,532 112,418 108,237 104,812 102,01999,930 25-29 years100,759 104,845 109,647 114,337 117,719 119,075 118,508 115,765 30-34 years92,06090,41590,90893,11896,27799,826 103,985 108,794 35-39 years119,321 114,215 107,666 100,70894,90391,24789,67490,177 40-44 years121,976 124,062 124,778 124,041 121,808 118,166 113,179 106,699 45-49 years94,42499,360 105,294 111,467 116,741 120,385 122,524 123,258 50-54 years80,75581,35482,81485,17788,45792,60197,522 103,389 55-59 years80,61981,49380,84479,39978,30078,26478,93080,387 60-64 years55,30759,45664,49569,67873,88176,47277,29976,696 65-69 years38,99840,31241,98244,13046,95250,51154,39559,101 70-74 years30,84530,98731,15031,47632,15333,29834,55436,060 75+ years40,00241,61143,06244,33645,35846,11947,57648,834 Dependent and active populations, '000 Dependent population, total370,803 370,572 370,219 370,236 371,366 373,923 377,978 383,140 - % of total working age38.2137.9337.6537.4337.3837.5537.9438.50 Active population, total970,532 976,993 983,382 989,132 993,407 995,819 996,270 995,154 - % of total72.3672.5072.6572.7672.7972.7072.5072.20 Youth and Pensionable populations, '000 Youth population, total260,958 257,663 254,024 250,294 246,903 243,996 241,453 239,146 China Insurance Report Q3 2013 © Business Monitor InternationalPage 31 Insurance Key Drivers, Demographics, 2010-2017 - Continued 201020112012e2013f2014f2015f2016f2017f - % of total working age26.8926.3725.8325.3024.8524.5024.2424.03 Pensionable population, total109,845 112,910 116,194 119,942 124,463 129,928 136,525 143,994 - % of total working age11.3211.5611.8212.1312.5313.0513.7014.47 Life expectancy at birth, male, years71.1071.2971.4971.6871.8872.0772.2572.43 Life expectancy at birth, female, years74.4574.6874.9175.1575.3875.6175.8276.03 Urban popn. % of total44.9045.7846.6647.5448.4249.3050.1651.02 Rural popn. % of total55.1054.2253.3452.4651.5850.7049.8448.98 Urban popn, total, '000602,259 616,915 631,590 646,244 660,823 675,283 689,323 703,205 Rural popn, total, '000739,076 730,650 722,011 713,125 703,950 694,459 684,925 675,088 Source: World Bank/UN/BMI Non Life Growth Drivers and Risk Management Projections Macroeconomic Outlook Reform Momentum Bittersweet For Growth Outlook BMI View: We are starting to see signs of a broader realisation on the part of Beijing that the previous government's state investment-led policies were inherently unsustainable and have provoked risk of a systemic crisis. Should the new leadership reduce support for loss-making state-dominated industries, this would mean a much weaker H213 and 2014 for China's economy than the consensus currently expects. Extensive structural reform, while unlikely, could trigger a near-term growth collapse but lead to a major improvement in the country's long-term prospects. For several months now BMI has been calling for a bounce in China's real economy (see 'Growth: Upside Risks Amid Structural Downturn', November 12 2012). As we saw it, Beijing's renewed efforts to ignite both credit markets and infrastructure spending would lead to a tangible - if inherently unsustainable - rekindling in economic activity. Latest purchasing managers' index (PMI) data would suggest that this growth upturn is now well under way. If we strip out the Chinese New Year-distorted months of January and February, the simple average of China's official and unofficial PMI headline readings are at their highest level since May 2011, with new orders leading the charge. China Insurance Report Q3 2013 © Business Monitor InternationalPage 32 The encouraging PMI data beg the question as to why we are sticking to our relatively downbeat real GDP growth forecast of 7.5% for 2013, which would not only imply a further deceleration from 2012's 7.7% print, but also sits some way off consensus projections of 8.1%. We could point to the fact that China's PMI is only just back above water (ie, the 50 expansion-contraction threshold) despite Beijing's renewed expansionary efforts last year. Measured against the credit-induced PMI surge of 2009, the recent uptick has been trivial, underlining our long-held concern about the diminishing returns of stimulus. However, there is potentially an even more important story at work and, as has been our approach in recent times, we take our macro cues from the dynamics under way at an industry level. Three developments, in particular, have caught our attention. Farewell Ministry Of Railways: The government announced in mid-March that the state behemoth Ministry of Railways (MoR) would be split into two smaller entities: the China Railway Corporation (CRC) and the State Railway Administration (see ' Benefits Of Rail Ministry Break-Up Not Immediate', March 22 2013 in our infrastructure service). We have been tracking the MoR's fall from grace since first warning of an impending collapse in China's high-speed rail sector in early 2011. The ministry had more in common with a state-owned enterprise (SOE) than a government agency, and had been racking up debt for many years to fuel unprofitable railway development. The MoR's poor balance sheet health and alleged widespread practice of corruption are well known. The fact that the new leadership of President Xi Jinping and Premier Li Keqiang allowed the pol