[20081121]Insurance : Ping An "October Premium Income under PRC GAAP&q

Events:
Ping An announced October premium income under PRC GAAP.

Our Comments:
We maintain our SELL rating on China Ping An-H, to reflect the foreseeable premium income growth slowdown, consistent funding cost pressure, and potential for lower investment returns.
Ping An Life’s October premium income maintained steady growth
Ping An Life’s October premium income totaled Rmb7.109bn, up 28.5% YoY, slightly faster than the 24.9% growth rate in September. In the first ten months, Ping An Life’s premium income was Rmb84.52bn, up 29.6% YoY, basically flat with the growth rate of 29.8% seen over January~September (Chart1).
We expect Ping An Life’s premium income to increase steadily in the future, mainly because of slower premium income growth in 2008 and consistent intentional control over the bancassurance channels, as well as Ping An Life’s credit rates for universal policies, which have been higher than its peers’ since May 2008.
Higher credit rate for universal policies may cushion premium income slowdown, but also raise operating risk
Ping An Life has the highest credit rates for universal policies among the major life insurance companies, though it once again reduced credit rates modestly from 5.50% to 5.25% in October 2008 (Chart 2).
Higher credit rates may help Ping An Life sustain steady premium income growth, but may also hurt its profitability. Investment returns are unlikely to make a substantial turnaround in the near term, so Ping An will have to keep using its provisions, and credit rates will have to be reduced slightly going forward. The reduction of 3~5-yr time deposit rates and the lowering of credit rates for universal policies by other major insurance companies increase the downside pressure.
Ping An P&C might show underwriting loss in 2008 as premium income growth continued to slow
Ping An P&C’s premium income totaled Rmb1.859bn in October 2008, up 15.3% YoY, slower than the 19.1% growth rate in September. In the first ten months, Ping An P&C’s premium income surged 26.2% YoY to Rmb22.618bn, 1.1ppt slower than the growth rate over January~September (Chart 3).
Ping An P&C performed quite well in 2008, but its premium income growth has entered a downtrend in recent months due to the overall slowdown of premium income growth in the P&C insurance industry. The P&C arm is likely to see underwriting loss in 2008 because of this year’s frequent natural disasters and declined premium rates, and will probably make a very limited bottom line contribution to Ping An.