Insurance in Asia
CATALYST ALERT
EV updates: a new line in the sand
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Over the next two months, life insurers in China and Taiwan will update
their actuarial valuations. In this report, we provide a summary of our
forecasts for embedded value (EV), along with the value of new
business (VNB) for one year and review the sensitivity to assumption
changes.
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The disruption in global capital markets is expected to undermine the
progression in EVs in 2008. Despite solid trends in premium growth
(and hence VNB), we expect EV to contract for the large life insurers,
given the NAV hit associated with sharp declines in equity markets.
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Excluding market-driven NAV hits, we see a solid underlying
progression in EV, especially in China, where operating margins
remain attractive. Stabilisation of the equity markets should enable EV
growth to return to ‘normal’ (15-20% per annum), making the current
P/EV multiples (i.e. below 2x) relatively attractive.
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Lower bond yields do suggest potential for an alteration of key
assumptions, like investment return and discount rate. The companies
most exposed to this are Shin Kong and Cathay, where legacy books
of high guarantee policies make value extremely sensitive to
movements in our investment return assumptions. Our valuations of
both China and Taiwan insurers have already incorporated changes to
our assumptions to reflect a lower-investment-return outlook.
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We prefer China to Taiwan in the life insurance sector. In our view,
current bond yields are supportive of EV assumptions. The equity
market gains, so far in 2009, should underpin improved EV and
earnings progression, and the strong start to the year, in terms of
premium growth, bodes well for upside risk to our VNB growth
expectations. We continue to like Ping An and China Life and take the
opportunity to upgrade CIIH to OUTPERFORM, given its strong value
growth credentials and undemanding valuation multiples.