My Corona Portfolio (1): China Life Insurance

The coronavirus outbreak is making the headlines each and every day.  For the most part, the market, especially that of HK/China, has responded negatively to news of the Corona virus that originated from Wuhan.

Since the beginning of this viral outbreak, I’ve been thinking of accumulating a few “injured” HK/China stocks.  Some HK/China stocks have been hammered quite severely during this crisis. 

So I thought to myself, “why not start a special portfolio related to stocks affected by this health crisis?  Why not invest in some fundamentally strong stocks whose prices have been negatively impacted by the viral outbreak?  Why not buy on the dip and wait for capital gain?”  

Well, why not indeed!

The first two stocks that I was interested in for my “Corona Portfolio” were PingAn Insurance and China Life Insurance.  Of the two, I bought China Life Insurance first.  I am currently waiting for a right price to enter a position for PingAn Insurance.

Introduction

China Life Insurance is the largest insurance company headquartered in Beijing.  It hasn’t always been known as China Life Insurance.  China Life Insurance traces its beginning to People’s Insurance Company of China (PICC) when it was founded in 1949.  In 1996, life insurance division was separated from PICC and renamed as China Life Insurance Company in 1999. In 2003, approved by the State Council and China Insurance Regulatory Commission, the former China Life Insurance Company was restructured into China Life Insurance (Group) Company.  China Life Insurance is listed in New York, Hong Kong and Shanghai. 

Highlights

China Life’s market capitalization at 887.161 billion (HKD) is among one of the highest among listed life insurance companies globally. 

China Life commits itself to becoming a top international financial services and insurance group.  It has business in many fields, covering life insurance, property insurance, pension plans (enterprise annuity), banking, funds, asset management, wealth management, industrial investment, overseas business, etc.  Furthermore, it holds large shares in securities, trusts, futures, real estate, and other fields through strategic investments.

China Life dominates the China market with almost 20.5% of the total market share (compared to 17% market share of Ping An insurance).

The Chinese government holds a 68% stake in the China Life.  

This state-run insurance company enjoys a high degree of credit-worthiness and broad name recognition. 

The company touts its vast nationwide sales network comprising 1,439,000 people selling individual insurance products.  

The Chinese insurance market has been expanding rapidly on the back of the growth of a middle class and an increase in personal income, and the size of the market is expected to become even larger, reflecting the country’s graying society.

Results and Ratios

As at the end of June 2019, China Life reported the following:

1. Total assets reached RMB3,479,860 million, an increase of 6.9% from the end of 2018.

2. Total revenues was RMB448,221 million, an increase of 11.6% year-on-year.

3. Gross written premiums were RMB377,976 million, an increase of 4.9% year-on-year

4. Investment assets reached RMB3,304,129 million, an increase of 6.4% from the end of 2018.

5. Gross investment yield was 5.78%; net investment yield was 4.66%.

6. Net profit attributable to equity holders of the Company was RMB37,599 million, an increase of 128.9% year-on-year.

7. China Life has approximately 297 million long-term individual and group life insurance policies, annuity contracts, and long-term health insurance policies in force.

8. China Life’s ROE is 13% (well above 10%, which suggests China Life is covering its cost of capital and generating an ample return for shareholders).

9. China Life’s core solvency stands at 258.62% (vs 250.55% in 2018) and its comprehensive solvency stands at 269.09% (vs 250.56% in 2018).  Solvency margin refers to the surplus capital that an insurance company is required to hold at any point of time to pay any claims, dividends or other liabilities.  Under C-ROSS (China Risk Oriented Solvency System), the regulation requires that life insurers’ core solvency and comprehensive solvency ratios must be no less than 100% and 150%, respectively. As can be seen, China Life’s current solvency is strong. 

10. China Life has well-controlled credit risks, with over 95% of the its credit bonds having AAA ratings. The total amount of its non-standard fixed-income assets exceeded RMB 430 billion, with over 98% having AAA external ratings.

Why did I buy China Life?

Based on China Life’s business model, strong balance-sheet, and its ability to grow its earnings as well as its revenues, I consider the shares of China Life a worthy purchase.

China Life trades for a price-to-book (PB) ratio of 1.39.  Looking at the PB ratio, China Life is not very expensive, so I scooped up some China Life at HKD19.64. 

Given that China Life’s share is fairly volatile, this could mean the price can sink lower, giving me another chance to buy in the future. This is based on its beta (1.18 vs sector median of 0.46), which is a good indicator for share price volatility.

I’m not an exclusively dividend investor.  I like to possess some growth stocks as well.  China Life’s dividend yield is not even 1% (current yield = 0.92), so it is definitely a growth stock to me.  In other words, I hope to find capital gain when the stock price rises.  

I see many reasons why the stock price will rise because of the increase in the need for insurance:

1. It is common knowledge that the population of China is ageing.  And as the population begins to grow more advanced in age, the need for insurance increases in tandem.  About 20% of China’s population (close to 170 million people) is above the age of 65, and this proportion of elderly will only increase in the next few decades to come.

2. Given China’s one child policy, the only child in most families cannot adequately provide for his ageing parents, and meet their medical expenses and long-term care in the future.  Any doting Chinese parents will explore their insurance options now before they hit retirement so as not to burden their only child (or children, if they are lucky to have more than one) to meet their medical needs when they are eventually in retirement.  This is becoming increasingly necessary considering the increase of average life expectancy from 67 (1986) to 76 years (2016, latest data available from the World Bank).

3. China’s middle class has expanded rapidly, surging from around 29 million in 1999 (2% of the population) to approximately 541 million in 2015 (39% of the population; data taken from the World bank).  China’s middle class is amongst the fastest such growth rates in the world.  China’s middle class, with higher disposable income, will spur demand for more insurance products that secure their medical needs and meet their property expenses and wealth needs.

4. China leads the under-insured in the world.  The insurance penetration rate of China is just 4.6%, compared to the global average rate estimated at 6.1%.  Suffice it to say that China’s insurance market, though the world’s second largest (after the USA), is still in its nascent stage.  As at 2018, China’s insurance gap reached USD76.4 billion.  China’s low insurance penetration rate, coupled with a rising awareness of longevity risks, will continue to support China’s insurance market for many, many years to come.

5. The current Covid-19 situation has awakened in many Chinese citizens a need for medical insurance.  Mr Xia Changsheng, a Tianfeng Securities analyst, opined thus, “… the outbreak spurs people’s awareness for the need for insurance, such as life or health cover.”  I couldn’t agree more.  This awareness of human frailty and mortality bodes well for future insurance business.

For now, the insurance industry in China is in the doldrums in the wake of the Covid-19 crisis.  Agents cannot go out to meet potential clients to sell policies.  In fact, with the great number of people being hospitalised and an increasing number of deaths, Chinese insurance companies will have to deal with more claims (https://www.insurancebusinessmag.com/asia/news/breaking-news/coronavirus-outbreak-puts-insurers-under-the-microscope-212379.aspx).  However, with China Life’s strong balance sheets, it is definitely able to meet any massive spike in claim payouts (don’t forget China Life’s core solvency is 258.62%, which is significantly higher than the minimum requirement of 100%). 

China Life might face disruptions from e-commerce players (think Alibaba Group and Tencent Holdings).  China Life is speeding up technology application and incubation for the purpose of enhancing the digitalisation of the company.  It has no other choice but to go in that direction, and I’m glad to know, from going through its latest presentation, that it is taking the technological bull by the horns and meeting the challenge head-on.

Since my purchase (HKD19.64), China Life’s share price has gapped down to HKD18.80 (Feb 24).  It is okay for me, because the share price will take time to stablise given the Covid-19 crisis that is probably here to stay for a while (until maybe summer). 

For now, I’m happy with my position and will keep a close eye on China Life and the behaviour of Mr. Market. 

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.