Wednesday, January 17, 2018

Life insurance still driving valuation growth

The embedded value (EV) of Asian insurers continued to grow during the first half of 2017, driven by growth in life insurance premiums, according to Milliman’s latest report on embedded value.

Hong Kong and mainland China insurers continued to report significant increases in the value of new business, with more than 50% increases for several companies, primarily driven by strong new business sales. Meanwhile, nearly all companies reported an increase in their new business margins.

“Positive performances by Asian equity markets and improving yields have led to an increase in the EV of life insurers within the region,” said Milliman principal and consulting actuary Paul Sinnott. “These favourable economic conditions, combined with refined product strategies and improved distribution channel productivity, continue to drive growth in life insurance premiums, margins and the overall business in Asia.”

Rising Asian equity markets tend to have a positive effect on the life insurance industry, typically improving insurers’ investment results and the performance of unit-linked and participating lines of business, while the effect of changing bond yields results depends on the EV methodology adopted, the assumptions used and the type of business written by the company, according to Milliman.

The biggest embedded value increases were posted by Ping An (16% at group level and 24% for its life and health insurance business), China Taiping (12% at group level and 14% for its life insurance business) and AIA Hong Kong (12%).

AIA’s healthy growth in EV in several operations is partly attributable to favourable capital market conditions, as Hong Kong led equity market gains across Asia, touching its highest growth rate in close to a decade.

It also reported strong 40% growth in the value of new business, driven by an exceptional performance from its agency and partnership distribution business, particularly in Hong Kong, where its strategic bancassurance deal with Citi contributed to 56% growth.

Ping An’s growth in EV was largely driven by strong new business sales, with a first-year premium increase of 33.6%, helped by 19% growth in its agency force (which now exceeds 1.3 million) and improved agency productivity. China Taiping’s EV growth was driven by increased new business sales and a greater focus on selling long-term health insurance products. The agency force of China Taiping increased by 50% during the first half year of 2017.

In India, insurers are increasingly starting to use embedded value as a valuation metric, with all of the companies that have listed or are in the process of listing using a market-consistent approach. ICICI Prudential became the first life insurer to be listed in September 2016, followed by SBI Life in early October this year. HDFC Life is expected to be listed soon and PNB MetLife is expected to become the fourth life insurer to be publicly listed.

However, these first IPOs have set a precedent for very high valuations. ICICI Prudential’s EV multiple as at March 31, 2017 was 3.4 and the implied new business multiple was approximately 58, while SBI Life listed with an EV multiple of 4.2 and an implied new business multiple of approximately 52. It remains to be seen if these high valuations will be sustained with subsequent insurance listings or whether the growth in supply will suppress the premium that investors are willing to pay.

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