A newly public Indian life insurance company could offer 17% upside for stock investors, argues JPMorgan in a report initiating coverage. But that’s eclipsed by the outlook for a pair of Chinese insurers. Their shares could nearly double in price in a year, the investment bank predicts.
The two markets are an insurance salesperson’s dream. China has 1.36 billion people, and India, 1.24 billion, making them the world’s two most populous nations. Yet they rank second and fifth within just Asia, respectively, in life insurance premiums last year. Worldwide, insurance spending averages 3.5% of gross domestic product. In Japan it is 8.3%; South Korea, 7.3%. But in China and India it is just 2% and 2.7%, respectively.
Which market is more promising? It’s difficult to say, conclude analysts M.W. Kim and Seshadri Sen in a joint report for JPMorgan published Tuesday. But both markets have quadrupled in size over the past 15 years, and considering their low penetration rates, should enjoy healthy growth for years.
There are key differences. Nearly half of India’s insurance market is controlled by the state-owned Life Insurance Corporation of India. The rest is dominated by joint ventures between Indian and outside financial firms. The largest of these is ICICI Prudential Life Insurance (ticker: 540133.IN), which had its initial public offering last month. Indians tend to buy insurance through individual agents, and generally like savings products whose values are linked to stock market performance. In China, local players dominate the business. Many customers buy through banks and prefer “participating policies,” which pay dividends from the profits of the insurance company. Tax breaks for insurance are more generous in India, although China’s financial regulators are beginning to dabble with them. The report initiates ICICI Prudential with an Overweight rating and a price target of 380 rupees, versus a recent share price of INR325. But that’s a modest increase compared with China Life Insurance (2628.HK) and Ping An Insurance (2318.HK), both traded in Hong Kong. China Life’s price target is 38 Hong Kong dollars, implying 89% upside. Ping An’s target of HKD80 suggests potential for a 98% gain. If the two markets have similarly bright outlooks, why do the Chinese shares have so much more upside potential? They have much lower valuations. ICICI Prudential trades at 31 times next year’s earnings, compared with 14 times for China Life and 10 times for Ping An. Earnings can be lumpy for insurance companies, so consider a comparison of share prices and “embedded value.” That’s the net value of an insurance company’s assets, plus the present value of its anticipated profits. ICICI Prudential trades at 3.5 times next year’s projected embedded value. China’s insurance sector traded at over four times back in 2007, just before the global financial crisis, but today China Life and Ping An both fetch 0.8 times.
Investors worry that China’s insurers will struggle to reproduce past profits in their investment portfolios as stock gains slow and interest rates fall. If so, they could be forced to increase their reserves, cutting into profits. JPMorgan views those concerns as excessive and predicts that strong product growth in coming quarters will restore investor confidence and drive a rebound in valuations.