China Insurance
Quality is the name of the game
China
Insurance
Michael ChanAC
(852) 2800-8592
michael.cf.chan@jpmorgan.com
Sunil Garg
(852) 2800-8518
sunil.garg@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
See page 24 for analyst certification and important disclosures, including non-US analyst disclosures.
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Share price performance (1 year)
40
60
80
100
120
140
160
Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09
China Life Ping An PICC
Source: Datastream.
• It’s quality that matters. Premium growth will decelerate this year but
we are positive that the refocus on selling long-term, regular-premium
risk-type policies will benefit the long-term profitability of insurance
companies. This resembles the business restructuring exercise in 2004-
06 which resulted in multi-year of expansion in new business margins
and value of one-year sales growth. We maintain our Overweight rating
on China Life and Ping An.
• Earnings recovery and the focus on LT profitability generation are
the key investment theme. We forecast embedded value to resume
growth this year and to increase by approximately 17-19% for the two
lifers while earnings recovery will be significant at Ping An due to the
impairment losses on Fortis. The top-down story of low penetration rate
and further widening of investment channels remains intact.
• The threat of a low interest rate environment is overplayed, in our
view due to 1) the industry is regulated with a cap of 2.5% on guarantee
return, 2) the immediate re-investment risk is low for both life insurers
because maturities of their bonds investments are predominantly more
than five years and in the case of China Life, 46% are more than ten
years, and 3) both life insurers have the capacity to return to equities
after the significant reductions last year. Ping An remains more leverage
to investment performance than China Life.
• China Life is commanding a valuation premium to Ping An on all
yardsticks, which we expect to prevail due to 1) stronger capitalization,
2) zero legacy negative spread business, and 3) a slightly more defensive
investment portfolio. Overweight both China Life and Ping. China Life
is our top pick.

Table of Contents
Quality is the name of the game..............................................3
Positive earnings momentum and limited asset quality risk ........................................3
Top picks .....................................................................................................................3
Deserve to take a second look ................................................3
Slowdown in premium growth appears inevitable ................4
Regular rather than single; risk rather than savings are key.........................................5
Investment deregulation is expected to continue .........................................................6
Concerns about declining interest rates are overplayed ...............................................6
Embedded value to resume growth........................................8
Asset mix likely to gradually shift back to equities .....................................................9
Overseas acquisitions...................................................................................................9
Change in accounting for premium income recognition............................................10
Valuations ...............................................................................10
Stock summary.......................................................................11
Share price performance .......................................................12
Companies
China Life Insurance Co. Ltd.....................................................................................16
Ping An Insurance......................................................................................................20