CPIC Q1 2025: Strong Life NBV Growth Amid P&C Weakness – ADD Rating Maintained, TP Cut 1

CGS International Securities April 29, 2025
China Pacific Insurance (CPIC): Life Insurance Strength Offsets P&C Challenges, Target Price Adjusted

Executive Summary: CPIC’s Mixed 1Q25 Performance

China Pacific Insurance (CPIC) reported a resilient start to 2025, particularly in its life insurance division. The company announced a New Business Value (NBV) growth of 11% year-over-year for the first quarter, a figure that stands out favourably against a peer reporting flat growth during the same period. This continues CPIC’s trend of outperforming its large domestic peers in NBV growth since the end of FY22. Furthermore, the stabilization of its life insurance agent numbers qoq at 188,000 is viewed as a solid achievement, especially considering the seasonal difficulties typically faced in Q1 agent recruitment and retention. However, the Property & Casualty (P&C) segment presented a contrasting picture. While the 1Q25 combined ratio improved slightly by 0.6 percentage points year-over-year to 97.4%, this improvement was less significant compared to the gains reported by its major competitors, Ping An and PICC. Reflecting the P&C segment’s outlook, CGS International Securities has lowered its target price for CPIC to HK\$34 from HK\$37, primarily due to a reduced sustainable Return on Equity (ROE) assumption for the P&C business. Despite this adjustment, the ‘Add’ rating is reiterated, supported by an attractive forecast dividend yield of 5.7% for FY25, a stable dividend policy linked to operating profits, and continued appeal to Southbound investors.

Life Insurance: Sustaining Superior Growth Momentum

Strong NBV Growth Trajectory

CPIC’s life insurance arm delivered an 11% year-over-year increase in NBV for 1Q25, building upon impressive growth rates of 21% in FY24 and 19% in FY23. Since the close of FY22, CPIC has consistently demonstrated stronger NBV growth compared to the other two major domestic life insurers, China Life and Ping An.

The company also highlighted a “comparable” or “like-for-like” 1Q25 NBV growth figure of 39%. However, caution is advised when interpreting such metrics, as they may not fully account for the positive impacts on first-year premiums and NBV margins resulting from reductions in insurance policy guaranteed rates, which are often linked to a lower bond yield environment.

Figure 1: New business value and its growth yoy for the big three domestic insurers

Agent Force Stabilizes, But Future Challenges Loom

A significant development in 1Q25 was the stabilization of CPIC’s life insurance agent numbers, which remained flat quarter-over-quarter at 188,000. This is considered a positive outcome, as the first quarter is traditionally challenging for maintaining agent headcount. This stabilization brings the agent force back to levels last seen around 2006-2007, halting a steady decline observed since the end of FY17.

Figure 4: CPIC’s agent numbers in 1Q25 have stabilised at 2006-2007 levels

(Chart data showing agent numbers from 2006 to 1Q25, highlighting 175,903 in 2006, 203,609 in 2007, peaking near 900k in 2017, and stabilizing at 188,000 in 2024 and 1Q25)

However, future agent growth may face hurdles. New regulations regarding agent commissions, announced in April 2025 by the National Financial Reporting Authority (NFRA), stipulate minimum payment periods tied to policy payment durations:

• Policy payment duration 5-10 years: Commission payment period cannot be less than 3 years.
• Policy payment duration 10 years and above: Commission payment period cannot be less than 5 years.

These regulations could make agent recruitment and retention more challenging after the third quarter of 2025 (3Q25F). This period is also expected to see intensified sales campaigns ahead of an anticipated cut in insurance policy guaranteed rates in 3Q25. This expectation stems from the April change in the guaranteed rate ‘research value’ disclosed by the Insurance Association of China, which fell to 2.13% (from 2.34% in January 2025). According to the association’s mechanism, if this ‘research value’ stays more than 25 basis points below the current guaranteed rate (2.5% since Sep 2024) for two consecutive quarters, insurers should lower their maximum guaranteed rates. The agent channel remains crucial, contributing 72% of CPIC’s NBV in FY24.

Premium Growth Drivers in 1Q25

CPIC’s total written premiums for life insurance grew 11.8% yoy in 1Q25. Key channel performance was mixed:

• Agency Channel: Premiums down 2.3% yoy. New policies fell 15.2%, while renewal policies saw a slight 0.7% increase.
• Bancassurance Channel: Showed explosive growth of 107.8% yoy, driven by a 130.7% surge in new policies and an 86.1% rise in new regular premiums.
• Group Channel: Grew 8.9% yoy.
• Other Channels: Increased significantly by 568.9% yoy, albeit from a small base.

Overall, total new premiums surged 30.2% yoy, while total renewal premiums grew 3.5% yoy.

Figure 5: CPIC’s premium growth in 1Q25

Property & Casualty (P&C): Underperformance Relative to Peers

CPIC’s P&C insurance segment reported a combined ratio of 97.4% for 1Q25. While this marked a 0.6 percentage point improvement compared to 1Q24, it represented a weaker performance relative to its major peers during the same period. For comparison:

• Ping An’s 1Q25 combined ratio was 96.6%, improving significantly by 3.0 percentage points year-over-year.
• PICC’s 1Q25 combined ratio was 94.5%, showing an even stronger improvement of 3.6 percentage points year-over-year.

This relative underperformance in combined ratio improvement is a key factor influencing the revised valuation outlook for CPIC’s P&C business.

Investment Outlook and Updated Financial Forecasts

Earnings Per Share (EPS) Forecasts Raised

CGS International Securities has increased its EPS forecasts for CPIC for FY25F and FY26F by 9.6% and 10.8%, respectively. This upward revision is primarily attributed to higher assumptions for investment income, driven by the rapid growth of investment assets, which in turn boosts overall revenue assumptions. Estimates for FY27F have also been introduced.

Key forecast metrics include:

• NBV Growth: 10.6% (FY25F), 6.6% (FY26F), 16.0% (FY27F)
• EPS (Rmb): 4.35 (FY25F), 4.94 (FY26F), 5.48 (FY27F)
• Dividend Yield: 5.59% (FY25F), 5.79% (FY26F), 6.03% (FY27F)
• ROE: 13.6% (FY25F), 13.9% (FY26F), 13.8% (FY27F)

Figure 12: Key financial data summary

Valuation and Investment Thesis: Add Rating Reaffirmed Despite TP Cut

Target Price Adjusted to HK\$34

The Sum-of-the-Parts (SOP) based target price for CPIC has been reduced from HK\$37 to HK\$34. This adjustment is primarily driven by a lower sustainable ROE assumption for the P&C segment, now projected at 13.6% compared to the previous estimate of 18.5%. This leads to a lower target P/BV multiple for the P&C business (0.8x vs. 1.1x previously), significantly impacting its valuation contribution (HK\$5.89 vs. HK\$9.32 previously).

The valuation breakdown is as follows:

• CPIC Life (75% of TP): Valued using a blend of P/EV (33% weight) and P/BV Gordon Growth Model (GGM) (67% weight). The valuation for the life segment remains largely unchanged at HK\$31.60. Key assumptions include a sustainable life ROEV of 14.6% and a cost of equity (COE) of 16.5% (based on Beta 1.50, Risk-Free Rate 3.0%, Equity Risk Premium 9.0%).
• CPIC P&C (14% of TP): Valued using P/BV GGM. The target P/BV of 0.8x applied to FY25F BVPS results in a valuation of HK\$5.89.
• Other Businesses (11% of TP): Valued at half of their FY25F Book Value (HK\$4.40), reflecting potential difficulty accessing excess capital.

The new HK\$34 target price implies a significant 61% potential upside from the share price as of April 29, 2025.

Investment Rationale: Dividend Appeal and Growth Potential

The ‘Add’ rating is reiterated despite the TP cut. Key supporting factors include:

• Attractive Dividend Yield: A forecast FY25F dividend yield of 5.7% is appealing to income-focused investors.
• Stable Payout Policy: The company maintains a stable dividend payout ratio policy based on operating profits.
• Southbound Investor Interest: CPIC remains one of the most attractive China insurers for Southbound investors via the Stock Connect program, second only to Ping An in terms of shareholding growth since March 2017.
• Savings Demand Beneficiary: The life segment is well-positioned to benefit from strong demand for savings-oriented insurance products amid current economic uncertainty and elevated precautionary savings.

Catalysts and Risks

• Potential Re-rating Catalysts: Stronger-than-expected NBV growth, favourable product mix shifts, continued strong premium growth, and a potential rebound in the A-share market (boosting investment income).
• Downside Risks: A decline in investor confidence in EV/NBV valuation metrics (potentially leading to lower P/BV GGM-based valuations), weakness in the A-share market impacting equity investments, lower bond yields pressuring fixed-income returns, faster-than-expected agent turnover hindering sales, and general investment asset risks.

Peer Comparison: CPIC’s Position in the Market

Compared to its peers listed in Hong Kong, CPIC offers a compelling dividend yield and trades at lower valuation multiples on some metrics.

Selected Peer Comparison Data (FY25F Estimates):

CPIC trades at a lower P/EV and P/E multiple compared to the HK-listed average (excluding international players), while offering a slightly above-average dividend yield and a competitive ROE.

ESG Considerations: Progress and Areas for Improvement

CPIC received a B- combined ESG score from LSEG in 2023, a slight downgrade from B in 2022. However, the company highlighted in its 2024 sustainability report that its MSCI ESG rating improved to AA, noted as the highest for a mainland Chinese insurance institution.

Key ESG points include:

• Strategic Focus: ESG is embedded across operations, with enhanced sustainability capabilities prioritized in the 2023-2025 development plan.
• Green Initiatives: Significant activity in green insurance (over Rmb 147 trillion coverage in 2024), innovation in new energy, carbon finance/sinks (e.g., Shipping Decarbonization Insurance, Carbon Quota Pledge Insurance). Support for climate change adaptation, clean energy, and pollution reduction.
• Climate Change Risk Management: Development of catastrophe and agricultural index insurance products to address climate-related risks.
• Pillar Score Trends:
  • Environmental: Stable at A- (2016-2023).
  • Governance: Strong improvement to A+ (2020-2023).
  • Social: Declined steadily from B- (2016) to D+ (2023).
  • ESG Controversies: Stable at A+ (2016-2023).
• Implications: While the LSEG score is average domestically, the stated MSCI progress and commitment to ESG could support future re-ratings. The declining Social pillar score is identified as a key area requiring management focus.

Conclusion: Attractive Value Proposition Despite P&C Concerns

China Pacific Insurance presents a compelling case based on the continued strength and growth trajectory of its life insurance business, highlighted by robust NBV performance and agent force stabilization. While the relative underperformance of the P&C segment’s combined ratio improvement has led to a downward revision in the target price, the overall investment thesis remains positive. The ‘Add’ rating is maintained, underpinned by an attractive dividend yield, a consistent payout strategy, strong appeal to Southbound investors, and the potential to capture demand for savings products. Key factors to monitor include the impact of upcoming regulatory changes on agent dynamics, P&C profitability trends, and broader market conditions affecting investment returns.