Growth headwinds remain, value takes time to unlock
Post a challenging 2021 on new business growth, agency retention and real estate risks, we think regulatory changes and the pandemic are key uncertainties on new business outlook for 2022. We expect 10-15% sector Net Book Value (NBV) decline in 2022E, where yoy decline should narrow post Q122 (jump start and updated illness definitions causing high base last year). We think the sector will more proactively explore product diversification towards saving type policies, before meaningful pick up in demand for critical illness protection, thus some margin pressure. Our discussion with investors suggests the market is already expecting a double digit decline of new business value in 2022 off 2021 lows. With sector valuation de-rated to 0.5x 2022E P/EV (close to historical trough), our reverse engineering suggests risks on new business and investment are more than priced in. Unlock of value, however, would require positive catalysts on signs of new business turnaround, which will unlikely appear in the near term, in our view.
New regulatory initiatives on distribution: additional burden in near term?
Post implementation of China Risk Oriented Solvency System (C-ROSS) phase 2, we believe regulatory focus in 2022 will be on distribution. We see potential for national-wide adoption of 鈥渄ual recording鈥�, revising of commission structure into more backend loaded and discouraging of agents buying their own policies. These may be additional burdens to new business sales and agency retention. On the flip side, these regulations should help the sector to restore healthier distribution practices in the long term and favour insurers with higher quality agents and competitive product offerings.
Healthcare integration the silver lining on growth in long term
As discussed in our Q Series Redux, we believe there is significant room for insurers to be involved in the healthcare services business, which could potentially help generate client interaction, support cross-selling and improve underwriting results.
