With relatively low insurance penetration and spending, as compared to the other more developed countries, there is little doubt that the insurance market in China is set to boom.
Further fueled by an ageing population and rising middle class, the Chinese insurance market seems like a sure bet every investor should make.
If you believe in the above thesis, then Ping An Insurance Group Co of China Ltd (SEHK: 2318) is the stock you should hold now as a long-term investor. And here are the reasons why I think this.
Leading life insurance business that outperforms
Its life insurance business contributed around 60% of group revenue and 70% to the group’s net profit in 2019.
It operates one of the largest life insurance businesses in China. Its value of new business (VNB) had consistent growth of 6% per annum from 2017 to 2019, which is one of the strongest among Chinese insurers.
The company recently reported its first-quarter 2020 results with VNB declining by 24% year-on-year. But that’s mainly due to the impact of Covid-19, since less insurance sales can be made with people staying indoors.
With more cities now removing lockdowns and relaxing social distancing restrictions in China, we can expect its VNB growth to recover and outperform in the second half of the year.
Best-in-class P&C business
The group’s P&C insurance business contributed around 20% to revenue and 15% to net profit in 2019.
Similar to its life insurance business, the group also operates one of the largest P&C businesses in China.
In addition to achieving strong topline growth, its underwriting profitability (as measured by the combined ratio) is best-in-class and dwarfs that of peers, even the market leader PICC Property & Casualty Co Ltd (SEHK: 2328).
Amid the pricing deregulation of the auto insurance market in China, the market has become more and more competitive with intense price competition.
Yet, Ping An P&C continues to remain a leader, thanks largely to its adoption of technology (such as the Ping An Auto Owner app) that promotes online customer development and improves the system of claims services.
Synergies from tech investments
Businesses of Ping An are now more diversified than just financial services. Ping An has made significant investments into technology companies.
For example, it’s invested in financial technology service provider OneConnect Financial Technology Co Ltd (NYSE: OCFT) and online medical and healthcare platform Ping An Healthcare and Technology Co Ltd (SEHK: 1833), also known as Ping An Good Doctor.
Besides these two, it also has a stake in the first pure-play online insurer in China, ZhongAn Online P&C Insurance Co Ltd (SEHK: 6060). ZhongAn is also backed by Tencent Holdings Ltd (SEHK: 700) and Ant Financial.
Such proactive tech investments not only help cross-sell its insurance products, but also provide valuable customer data and insights which further strengthen its insurance pricing and underwriting.
As the company continues to spin-off and list its tech subsidiaries and investments, this provides further room for an uptick in its valuation.
Current low valuation
Since the end of last year, the share price of Ping An has dropped by around 15% and its price-to-book (PB) ratio has come down from 2.4x to 1.9x.
With Covid-19 being contained in China and business activity further picking up, it’s reasonable to expect the group’s business to rebound later this year and its valuation to reach the pre-virus level.
The current depressed valuation provides a good entry point for long-term investors, especially noting that it was trading as high as 3x PB in the past three years.
Ping An Insurance Group, instead of being called an insurance company, is often seen as THE fintech company that looks to disrupt the massive and growing Chinese insurance market (which is traditionally not very innovative).
As a long-term investor, you are not only buying into its market-leading and all-rounded insurance platforms, but also the growth potential from all its synergistic tech investments. And the best part? It is CHEAP now.