China Insurance Int’l Holdings - Fundamentals continue to improve across all units

Strong agency premium growth will lead to higher VNB growth. The recovery in premium growth in May was not only a reflection of increasing premium volume but of increasing quality as well. Like many insurers this year, TPL has been restructuring its premium composition to incorporate mostly agency-driven regular premium products. This will then result in higher APE (annual premium equivalent) growth, and ultimately on track to reach our VNB (value of new business) growth estimate of 18% yoy for 2009.

Strong auto sales will boost premiums of TPI, but we still expect an underwriting loss for the year. While increasing auto sales certainly bodes well for TPI in terms of written premiums, we continue to expect TPI to experience expense overruns due to its aggressive expansion. Hence, TPI should report an underwriting loss for the year. We estimate the loss ratio to be just under 60% for 2009 and the expense ratio to be just over 50%.

Strengthening reinsurance pricing will boost premium growth for CIRe.Following a turbulent 2008, CIRe is expected to stage a strong rebound in 2009 on both lower disaster claims and improving reinsurance pricing. According to a report by Aon Benfield, the financial crisis has damaged the capital of direct insurers more so than for reinsurers. Therefore, as direct insurers seek to boost their solvency margins, they have adopted to increasing the use of reinsurance.

The lack of major disasters thus far in 2009 also bodes well for CIRe in terms of claim payouts. We estimate the combined ratio for CIRe at 88% for the year, with the loss ratio of 58% and expense ratio of 30%.

We roll forward our target price to 2010 and raise our target price using the SOTP methodology to HK$20.00. We value TPL based on 1.8x 2010F P/EV and 17x NBV to arrive at an appraisal value of HK$15.30. We value TPI using P/B of 1.5x to arrive at HK$1.03, and value CIRe using P/B of 1.5x to arrive at HK$2.77. Finally, we use P/B of 1.0x to value CIIH’s other businesses to arrive at a SOTP price of HK$20.00. Maintain BUY.

Synergies with Ming An to improve profitability of TPI in the long-run. With the acquisition of Ming An Holdings (MAH), CIIH will be looking to overhaul the structure of TPI. In particular, CIIH will reorganise TPI so that underwriting is controlled at the central level rather than at the regional branches level. In the long run, this will enhance the risk selection process and ensure that TPI does not take on excessive risk just to run up premium volume at the branch level.

The acquisition of MAH will also allow the two to integrate their back-office operations and service networks. This will also lead to lower capital required for further expansion in China.

CIIH and MAH will also seek to achieve cost savings via reinsurance activities across its various insurance units. In spreading insurance risk across different units, it ensures that premium ceded to reinsurers stays within the group and at the same time, allows each unit to take advantage of the capital of other units.

Finally, the full acquisition of MAH will also increase the market capitalisation and free float of CIIH, which may lift the stock’s liquidity and attract more investors.

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