Asian Insurance - How fast is EV growing? ::Macquarie Research

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Asian Insurance
How fast is EV growing?
Event
 In our recent insurance initiations, we established return on embedded value
(RoEV) as an important measure of life insurance performance. In this report,
we have decomposed our EV forecasts into key drivers to better illustrate our
stock preferences and identify stock mispricings.
Impact
 How fast is EV growing? We think the best measure of EV growth is
operating RoEV, as it strips out market volatility and other non-recurring
impacts. The first chart opposite shows that Ping An has a materially higher
RoEV outlook than peers, and AIA has a materially lower outlook.
 What EV multiple is fair? We prefer new business multiples to assess life
insurance valuation. We consider P/EV a valuation output rather than an
explicit input. However the market tends to quote and compare EV multiples;
we believe this comparison is only relevant if the RoEV outlook is also
considered. With this in mind, we believe AIA is overvalued (1.7x FY11e EV)
and Ping An is undervalued (2.2x).
 Ping An growing fastest, AIA weakest: We forecast the Chinese insurers
have a materially higher outlook for RoEV than AIA. This is due to the
composition of value between inforce and future business, which in turn is a
function of scale, growth and excess capital. Even if we were to double our
VNB forecasts for AIA in all future years, its RoEV would still be less than
Chinese peers. We believe this justifies a materially lower P/EV multiple.
 How much does VNB contribute? VNB is an important metric in assessing
new business execution. For the less mature Chinese insurers, future new
business is a more meaningful contributor to valuation. VNB contributes 7-
16%pts of our FY11 RoEV forecasts for the Chinese life names; versus only
3.1%pts for AIA.
 How sensitive are stock prices to VNB? Since VNB is a more material
contributor to EV growth for the Chinese names, our valuations of the Chinese
are therefore more sensitive to VNB expectations. For a 10% rise in VNB, our
Chinese life valuations rise by 5-7% versus only 3.3% for AIA (as shown in
the second chart opposite). So whilst VNB is an important metric to assess
AIA’s new business execution, it does not alter valuation as much as for
Chinese peers.
Outlook
 We think higher RoEV justifies higher P/EV, and that this supports the high
EV multiples that Chinese insurers enjoy relative to global peers. We think
Chinese RoEVs are sustainably higher than peers due to greater VNB
contribution.
 In conclusion, this analysis is strongly supportive of our existing views. In
particular, we believe that Ping An can deliver a medium term RoEV almost
twice that of AIA, suggesting a substantial P/EV premium.
 There are no changes to our forecasts, price targets or recommendations in
this report.