China life insurers buoyed by stable interest rates – Jefferies

The surge is due to PBOC supporting long-term yields and positive equity market sentiment.

Chinese life insurance stocks have surged 20% to 40% year-to-date, buoyed by stabilising interest rates and improving market sentiment, according to a Jefferies Equity Research note. 

However, structural challenges persist, prompting caution among investors. Second-quarter sector earnings are expected to improve year-on-year (YoY), although the value of new business (VNB) metric faces tough comparisons. 

Ping An is preferred due to improved balance sheet clarity and stronger underwriting profitability.

The recent surge in Chinese life insurers' stocks is attributed to the People's Bank of China's move to support long-term yields and positive equity market sentiment, offering short-term relief amid light investor positioning. 

First-quarter earnings beat expectations, and with a more favourable macroeconomic environment, lifers are poised for positive earnings growth this year, especially considering a low base in the second half of 2023. 

Despite decent VNB growth in the first quarter, the second quarter will be a critical test due to high comparative figures from last year.

Structural challenges persist despite near-term relief. Insurance demand remains, particularly from a household wealth reallocation perspective, but concerns exist regarding the long-term profitability of policies underwritten to meet this demand. 

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Key challenges include interest rate risks, with Chinese lifers running a duration gap of three to 8 years and facing a low-yield environment. 

The critical illness segment also poses risks, with some insurers experiencing higher-than-expected claims. Ping An has been proactive in managing these risks through prudent assumptions and reinsurance arrangements.

Looking ahead to the second quarter of 2024, results are expected to be mixed.

Whildy seasonal dividend income and low base effects in equity gains may drive a quarter-on-quarter and year-on-year recovery in investment income, VNB growth may be challenged due to high base effects from the previous year. 

Notably, Ping An is expected to benefit from improved clarity on its investment book and stronger underwriting profitability.

In terms of stock recommendations, Ping An is favoured for its undemanding valuation and robust operational performance. 

CPIC was tactically upgraded in January, but Ping An now appears to offer more attractive relative value. China Life's rating has been upgraded as long-term interest rates stabilise and second-quarter earnings are anticipated to improve. 

PICC P&C maintains a ‘buy’ rating, whilst NCI remains ‘underperform’.

Investors are advised to remain selective in the Chinese life insurance sector given the ongoing challenges and varying operational performances among companies.