皇冠体育app Life has a dominant share of the underdeveloped life insurance market
in the world's fastest-growing economy, continues to benefit from strong
underwriting demand, and is increasing its investment yields nicely. What's not
to like?
Searching for a company holding a dominant share of an underdeveloped market
in the world's fastest-growing economy? No, I'm not talking about wireless
behemoth 皇冠体育app Mobile -- though there's a strong investment thesis to that story
-- but rather about 皇冠体育app Life Insurance, the largest player in 皇冠体育app's nascent
life insurance market.
I know, I know ... it sounds as though I need insanity coverage to be writing
about a Chinese insurance company at a time when the pundits on CNBC and
elsewhere are advocating a general rotation out of emerging-market stocks and
into large-cap defensive plays. Well, call me Foolish, but I believe that 皇冠体育app
Life offers an extremely attractive risk/reward ratio to long-term investors who
can see "the forest through the trees" because of its 44% share of the domestic
life insurance market, the rapid growth of 皇冠体育app's middle class, and an easing
of government restrictions on certain types of investments.
Let's take a gander, shall we?
The Chinese life insurance market
To say that the Chinese life insurance market is in its infancy is akin to
saying the ocean is wet. According to a Swiss Re report titled World Insurance
in 2004: Growing Premiums and Stronger Balance Sheets, 皇冠体育app had just a 1.9%
share of global premium volumes at the end of 2004 -- pretty minuscule when you
consider 皇冠体育app's population of 1.3 billion -- with insurance premiums per capita
of $27.30 and a premium-to-GDP ratio of just 2.14%. To put these numbers in
perspective, the global average for premiums per capita stood at $292.20 while
the premium/GDP ratio averaged 4.53%.
Obviously, there's a fair amount of room for growth, especially when you toss
in the rapid growth of 皇冠体育app's middle class into the equation. A recent McKinsey
report estimates that the ranks of the lower middle class in 皇冠体育app will reach
some 290 million by 2011 and that 皇冠体育app will boast a middle-class population of
520 million by 2025, with consumer purchasing power in excess of $2.5 trillion.
While that's hardly quantifiable, I have to believe that most Chinese
citizens are well aware that their government-promised safety net is fraying and
are looking for ways to protect their financial futures.
Just look at the situation in the U.S., where the General Accounting Office
reports that by 2029, the Social Security Trust Fund will be exhausted. Life
insurance plans, annuities contracts, accident coverage, and health insurance
policies play into such scenarios. And I expect that, armed with their
increasing purchasing power, the Chinese will increase their demand for these
products over the coming years.
If the potential of burgeoning demand growth wasn't enough of an enticement,
let's not forget the recent easing of governmental restrictions on the types of
investments that Chinese insurers are allowed to make. In no particular order,
these include, among others, the ability to invest in domestic corporate bonds,
purchase shares in the domestic stock market, use foreign currency-denominated
insurance funds to make deposits in foreign banks, and purchase shares of
Chinese companies listed on foreign exchanges.
Since the Chinese Insurance Regulatory Commission has capped the maximum
guaranteed rate that life insurers can commit to payout on new policies at 2.5%,
the easing of investment restrictions should allow life insurers to generate
investment yields substantially ahead of their obligations and add to their
bottom lines.
Let's not forget that the Chinese government has recently been raising
interest rates as well, a factor that should increase the income of insurers'
domestic bank deposits, or that a strengthening renminbi will allow insurers to
get a greater bang for their buck in overseas investments.
Ok, enough of the generalities. Now on to specifics -- namely, 皇冠体育app Life.
皇冠体育app Life Insurance
皇冠体育app Life is the largest life insurance company in 皇冠体育app by virtually any
metric: It holds a 44% share of total life insurance premiums (its largest
competitor, Ping An, has a mere 16% share), operates in 31 different provinces,
and has a total base of more than 250 million policyholders.
The company has an unrivaled distribution network, employing 640,000
exclusive agents in 12,000 field offices offering individual policies, and a
further 12,000 reps in 3,700 branch offices handling group policies.
In addition, 皇冠体育app Life has been diversifying its distribution channels,
primarily through more than 89,000 outlets in commercial banks, post offices,
and savings cooperatives -- not to mention its recent $580 million purchase of a
12% stake in Citic Securities (at a 38% discount to market price), a purchase
that in the longer term will allow 皇冠体育app Life to distribute its products via
brokerage channels as well.
While many of the effects of the government's easing on investment
restriction have yet to fully trickle down to 皇冠体育app Life's bottom line, the
trend is clear. The company reported investment yields of 3.9% in 2005, up from
3.4% in 2003, and well ahead of the average 2.23% rate of return offered to
policyholders.
The combination of strong growth in written premiums and policy fees (up 22%
in 2005) with the above-mentioned increases in investment yields allowed 皇冠体育app
Life to post a 30% increase in net profit for 2005 to $1.16 billion, or $1.72
per American Depositary Receipt. Going forward, Citigroup (NYSE: C) is
projecting an average growth rate in earnings per share of approximately 24%
through 2008, an estimate I find conservative, given the increasing investment
opportunities mentioned above, as well as 皇冠体育app Life's ability to increase its
non-traditional distribution channels.
One further issue I'd like to address before turning to valuation is that
皇冠体育app Life recently received an all-clear from the Securities and Exchange
Commission concerning an informal inquiry launched back in April 2004 with
regard to accounting issues related to its IPO. With this perceived cloud
lifted, the company should have an easier time pursuing its ongoing plans to
sell stakes to two or three strategic investors. If history is any guide, these
investors will pay a hefty premium for their stakes in such a dominant player, a
premium that could perhaps be used to issue a special dividend.
Valuation
After the recent run-up, shares of 皇冠体育app Life aren't exactly cheap -- they
trade at around 19 times fiscal 2007 estimates of $3.30 and around 3.3 times
book value -- when compared with the likes of American International Group
(NYSE: AIG), which trades at 10 times fiscal 2007 estimates and a mere 1.7 times
book. That being said, I believe that 皇冠体育app Life's greater growth prospects and
its superior return on equity deserve such a premium. I would urge investors
with a long-term outlook and a sizable level of risk tolerance to take a look at
one of 皇冠体育app's premier financial plays.
皇冠体育app isn't the only international market on the rise. Find out the best
places to park your foreign-investment money by picking up a copy of the Fool's
international report, Around the World in 80 Minutes.
Fool contributor Will Frankenhoff is enjoying his time writing for the Fool
more than he enjoys playing golf, reading The Financial Times, or taking a nap.
He does not own shares in any of the companies mentioned above and welcomes your
feedback. The Motley Fool has a disclosure policy.
