Rating Date Company Hold China Repg.jrj.com.cn/acc/Res/HK_RES/STOCK/2015/12/4/fe7131f1-ea... ·...

Deutsche Bank Markets Research

Rating

Hold Asia

China

Banking / Finance

Insurance

Company

China Re

Date

4 December 2015

Initiation of Coverage

Uniquely positioned in China’s insurance markets; initiate with Hold

Reuters Bloomberg Exchange Ticker 1508.HK 1508 HK HSI 1508

Strong potential but fairly valued

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Price at 3 Dec 2015 (HKD) 2.50

Price target - 12mth (HKD) 2.56

52-week range (HKD) 2.75 - 2.46

HANG SENG INDEX 22,480

HANG SENG INDEX 22,480

Esther Chwei

Research Analyst

(+852) 2203 6200

[email protected]

Lexie Zhou

Research Associate

(+852) 2203 6180

[email protected]

Price/price relative

2.4

2.5

2.6

2.7

2.8

10/15

China Re

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -5.3 – –

HANG SENG INDEX -0.4 7.4 -4.1

Source: Deutsche Bank

Stock data

Market Cap (HKDm) 106,200

Market Cap (USDm) 13,702

Shares outstanding (m) 42,479.8

Major shareholders Central Huijin (71.56%)

Free Float (%) 7

Avg daily value traded (USDm)

0.0

Source: Deutsche Bank

We initiate on China Re with a Hold rating and target price of HK$2.56 per share. With its strong network and local relationships, we believe China Re is well-positioned to benefit from the future development of China’s reinsurance market. The market is underpenetrated, with a relatively low cession rate of 13.3% for P&C reinsurance (vs. 19.6-48.1% in mature markets), and 2.8% for life reinsurance (vs. 3.4-19.6%). We believe increased product innovation should drive demand for reinsurance coverage. China Re, as the market leader, should stand to benefit. That said, we believe it is fairly priced at current levels of 1.3x 2016E P/B. We initiate with Hold.

The largest reinsurance group in China, with diversified insurance businesses China Re is the largest domestic reinsurance group in China, with the longest operating history in the market. Established in 1996, it now operates a diversified suite of businesses, including 1) the largest domestic P&C reinsurer in China (33.1% premium market share in 2013), 2) the second-largest domestic life reinsurer (37.7% in 2013), and 3) the sixth-largest domestic direct P&C insurer (3.0% in 2014). It has also expanded into overseas markets through Lloyd’s and other representative offices. China Re has achieved significant growth in recent years, with a net profit CAGR of 54.6% over 2012-14, and recorded 2014 ROAE and ROAA of 10.9% and 3.2%, respectively.

Earnings forecasts We forecast 52.8% growth in China Re’s earnings in 2015 to Rmb8,256m as a result of strong investment income, which more than offsets underwriting pressure due to the explosion in Tianjin. For 2016, however, we expect earnings to decline by 28.1% to Rmb5,936m, primarily due to lower assumed investment gains after the high base in 2015. We forecast 2015/16 ROAE and ROAA at 13.5%/8.4% and 4.0%/2.6% respectively. We expect P&C Re to record a combined ratio of 100.7% in 2015E given the significant increase in claims for the Tianjin Explosion, improving to 97.8% in 2016 on our estimates.

Valuation and risks We value China Re at Rmb93.9bn, or HK$2.56/share, based on our sum-of-the-parts valuation, which implies a 2016E P/B of 1.3x and P/E of 15.8x. 29% of our valuation comes from P&C Re, based on a 2016E target P/B of 1.5x, factoring in ROAE of 13.9% (2015-17E avg), a risk discount rate of 11.0% and LT growth of 5.0%. 27% comes from Life Re, which is valued at Rmb25.2bn, implying a 2016E P/EV of 1.4x. 13% comes from primary P&C business, based on a target P/B of 1.1x, derived from ROAE of 11.5% (2015-17E avg), a risk discount rate of 11.0% and LT growth of 5.0%. Downside risks include investment market volatility, China’s political and economic risks, the potentially high frequency of catastrophic events, intensified competition in the reinsurance and insurance industries and a significant change in China Re’s profitability. Upside risks include better-than-expected underwriting margins in reinsurance and primary P&C business, stronger-than-expected premium growth in (re)insurance and favourable changes in the regulatory environment.

4 December 2015

Insurance

China Re

Page 2 Deutsche Bank AG/Hong Kong

Model updated:03 December 2015

Running the numbers

Asia

China

Insurance

China Re Reuters: 1508.HK Bloomberg: 1508 HK

Hold Price (3 Dec 15) HKD 2.50

Target Price HKD 2.56

52 Week range HKD 2.46 - 2.75

Market Cap (m) HKDm 106,200

USDm 13,702

Company Profile

Established in 1996, China Re is the largest domestic reinsurance group in China, with the longest operating history in the market. Its business includes P&C reinsurance, Life reinsurance and primary P&C business.

Esther Chwei

+852 2203 6200 [email protected]

Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E

Data Per Share

EPS (DB adjusted) (CNY) 0.06 0.09 0.15 0.19 0.14 0.16

Growth rate - EPS (DB adjusted) (%) 0.00 49.09 60.21 30.93 -28.10 12.39

EPS (stated) (CNY) 0.06 0.09 0.15 0.19 0.14 0.16

Growth rate - EPS (Stated) (%) 0.00 49.09 60.21 30.93 -28.10 12.39

BVPS (DB adjusted) (CNY) 1.20 1.24 1.48 1.61 1.73 1.85

BVPS (stated) (CNY) 1.20 1.24 1.48 1.61 1.73 1.85

DPS (CNY) 0.00 0.00 0.01 0.11 0.03 0.04

Embedded Value/Share (CNY) 0.00 0.00 1.55 1.72 1.83 1.96

Issued shares (m) 36,407.61 36,407.61 36,407.61 42,479.81 42,479.81 42,479.81

Average market cap (CNYm) na na na 87,676.66 87,676.66 87,676.66

Valuation Ratios & Key Profitability Measures

P/E (DB adjusted) na na na 10.6 14.8 13.1

P/E (Stated) na na na 10.6 14.8 13.1

P/B (DB Adjusted) na na na 1.3 1.2 1.1

P/B (Stated) na na na 1.3 1.2 1.1

Dividend yield na na na 5.4 1.6 1.8

Payout ratio 0.0 0.0 0.1 0.0 0.2 0.2

P/EV na na na 1.2 1.1 1.1

ROE (DB Adjusted) (%) 5.2 7.6 9.9 13.1 7.3 7.8

ROE (Stated) (%) 5.2 7.6 10.9 13.5 8.4 8.8

ROA (Stated) (%) na na na na na na

Income Statement (CNYm)

Gross written premiums 59,299 67,375 73,753 87,961 99,974 110,739

Net earned premiums 55,293 61,112 68,852 79,354 89,994 100,010

Net incurred losses 31,399 37,826 45,441 43,372 59,754 66,389

Net operating expenses 19,156 21,725 20,392 22,386 23,351 25,234

Underwriting income 0 0 0 0 0 0

Net investment income 3,874 5,782 7,503 11,920 7,337 7,968

Underlying operating income 3,874 5,782 7,503 11,920 7,337 7,968

Other income/expenses 667 618 620 651 684 718

Associates/affiliates 0 0 894 1,251 1,343 1,437

Exceptionals/extraordinaries 16 39 -93 0 0 0

Profit before tax 2,933 4,291 7,007 10,772 7,592 8,553

Income tax expense 616 895 1,531 2,380 1,562 1,779

Minorities/preference dividends 55 22 71 136 94 103

Net profit 2,262 3,373 5,404 8,256 5,936 6,672

DB adjustments 16 39 -93 0 0 0

DB net profit 2,262 3,373 5,404 8,256 5,936 6,672

Balance Sheet (CNYm)

Investments 111,782 106,178 111,955 130,747 140,988 153,225

Fixed assets 2,360 2,419 2,565 2,693 2,827 2,969

Goodwill 1,485 1,503 1,502 1,502 1,502 1,502

Other assets 26,063 29,384 52,135 65,090 71,324 77,690

Total assets 148,029 154,829 189,675 225,816 244,445 265,602

Net outstanding claims 0 0 0 0 0 0

LT insurance premium reserves 79,288 92,980 119,388 138,514 150,933 165,314

Unearned premium reserves 0 0 0 0 0 0

Other reserves 0 0 0 0 0 0

Other liabilities 24,471 15,960 15,652 17,874 19,241 20,577

Total liabilities 103,759 108,941 135,040 156,387 170,174 185,890

Total shareholders equity 44,269 45,888 54,635 69,429 74,272 79,711

Growth & Key ratios (%)

GWP growth na 13.6 9.5 19.3 13.7 10.8

NEP growth na 10.5 12.7 15.3 13.4 11.1

Loss ratio (%) 68.3 68.0 73.2 75.6 76.0 76.3

Expense ratio (%) 34.6 35.5 29.6 28.2 25.9 25.2

Combined ratio (%) 102.9 103.5 102.8 103.8 102.0 101.6

Average investment yield (%) 5.0 4.5 4.6 4.7 4.6 4.6

Pre-tax underlying operating margin na na na na na na

Solvency ratio (%) 381.2 323.8 248.2 260.7 262.1 262.9

Investment asset mix Cash & bank deposits 2.3 6.0 5.9 5.7 5.7 5.7

Fixed income 76.4 71.2 66.3 66.9 66.9 66.9

Equities 18.2 15.9 16.8 16.1 16.1 16.1

Property 0.4 0.4 0.3 0.3 0.3 0.3

Loans 2.6 6.2 9.9 10.5 10.5 10.5

Source: Company data, Deutsche Bank estimates

4 December 2015

Insurance

China Re

Deutsche Bank AG/Hong Kong Page 3

Investment thesis

A dominant domestic reinsurance group at fair value

We initiate on China Re with a Hold rating and target price of HK$2.56 per

share. We believe China Re is well-positioned to benefit from the future

development of China’s reinsurance market, but the market has fairly priced in

its potential growth at 1.3x 2016E P/B.

China Re is the largest domestic reinsurance group in China. Established in

1996, it now operates a diversified suite of businesses, including 1) the largest

domestic P&C reinsurer in China (33.1% 2013 premium market share), 2) the

second-largest domestic life reinsurer (37.7%), and 3) the sixth-largest

domestic direct P&C insurer (3.0%). It has also expanded into overseas

markets through Lloyd’s and other representative offices. China Re has

achieved significant growth in recent years, with a net profit CAGR of 54.6%

over 2012-14, and recorded 2014 ROAE and ROAA of 10.9% and 3.2%

respectively.

Valuation

We value China Re at Rmb93.9bn, or HK$2.56/share, based on a sum-of-parts

valuation, which implies a 2016E P/B of 1.3x and P/E of 15.8x. 29% of our

valuation comes from P&C Re, based on a 2016E target P/B of 1.5x, factoring

in ROAE of 13.9% (2015-17E avg), a risk discount rate of 11.0% and LT growth

of 5.0%. 27% comes from Life Re, which is valued at Rmb25.2bn, implying a

2016E P/EV of 1.4x. 13% comes from primary P&C business, based on a target

P/B of 1.1x, derived from ROAE of 11.5% (2015-17E avg), a risk discount rate

of 11.0% and LT growth of 5.0%. With limited potential upside of 2.3%, we see

the stock as fairly valued.

Risks

Downside risks include investment market volatility, China’s political and

economic risks, the potentially high frequency of catastrophic events,

intensified competition in the reinsurance and insurance industries and a

significant change in China Re’s profitability.

Upside risks include better-than-expected underwriting margins in reinsurance

and primary P&C business, stronger-than-expected premium growth in

(re)insurance and favourable changes in the regulatory environment.

4 December 2015

Insurance

China Re


Table Of Contents

Investment summary ........................................................... 5 A dominant domestic reinsurance group in China .............................................. 5 Business snapshot ................................................................................................ 9 Competitive strengths ........................................................................................ 10 Well-positioned to tap into the potential of China’s reinsurance market .......... 12 Multiple drivers of future growth ....................................................................... 14 Strong capital position ....................................................................................... 16 Earnings forecasts .............................................................................................. 17 Valuation summary ............................................................................................. 19 Risks ................................................................................................................... 20

Comparison with listed Chinese insurers .......................... 21 Business mix ....................................................................................................... 21 Returns and profitability ..................................................................................... 22 Investment and market exposure ....................................................................... 23 Strong capital position ....................................................................................... 25

China reinsurance and primary insurance industry ........... 27 China reinsurance industry ................................................................................. 27 China primary insurance industry ...................................................................... 29 Key regulations for China’s insurance/reinsurance industry ............................. 30 Key growth drivers for insurance and reinsurance industry .............................. 32

China Re business at a glance ........................................... 38 Company structure ............................................................................................. 38 Business by segment .......................................................................................... 39 P&C Reinsurance ................................................................................................ 43 Life reinsurance .................................................................................................. 48 China Continent P&C insurance ......................................................................... 51

Market exposure ............................................................... 54 Investment assets and key composition ............................................................ 54

Capital position .................................................................. 57 Strong group and segment solvency margin ratio ............................................ 57

Valuation ........................................................................... 58 Valuation at HK$2.56/share for 2016E ............................................................... 58 Valuation comps ................................................................................................. 60

Financial forecasts ............................................................. 61 Group P&L and balance sheet forecasts ............................................................ 61 Segment P&L forecasts ...................................................................................... 63

EV and VNB ....................................................................... 67 Assumptions on EV and VNB ............................................................................. 67 EV and VNB sensitivities .................................................................................... 69

Risks .................................................................................. 72 China reinsurance risks ...................................................................................... 72

Appendix A ........................................................................ 74 Management ...................................................................................................... 74

4 December 2015

Insurance

China Re


Investment summary

A dominant domestic reinsurance group in China

The largest domestic reinsurance group, with a long history

Established in 1996, China Re is the largest domestic reinsurance group in

China and has the longest history in the operating reinsurance business in

China. It expanded overseas with the incorporation of China Re UK in 2011.

Figure 1: Brief history of China Reinsurance Group

Originated from PICC Insurance established in Oct 19491949

Established China Re Co. Ltd

1996

Renamed as China Re (Group) Co

China Re P&C, China Re Life and China Continent P&C was established

2003

China Re Asset Mmgt was established

2005

China Re (Group) Co. was restructured as China Re (Group)

Corporations, with MoF and Central Huijin holding 14.5% and 85.5%, respectively of the registered capital

2007

China Re UK became a member of Lloyd’s and established a

special purpose syndicate as China Re Syndicate 2088

2011

Registered capital was increased with MoF and

Central Huijin holding 15.09% and 84.91%

2012

China Re AMC established China

Re AMC HK

2015

Listed on HKEX at HK$2.7/share

Source: Company data, Deutsche Bank

Shareholding structure

China Re’s main business segments are P&C reinsurance, life and health (L&H)

reinsurance (referred to as life reinsurance later in this report), P&C and asset

management. Central Huijin and the Ministry of Finance (MoF) currently hold

71.56% and 12.72% of its total shares respectively.

4 December 2015

Insurance

China Re


Figure 2: China Re – current company structure (immediately after the over-allotment)

China Reinsurance (Group) Corporation

China Re P&C China Re LifeChina Continent

Insurance

Huatai Ins

AgencyChina Re UK

China Re

Underwriting

China Re AMCHuatai Surveyors

&Adjusters Co

China Re AMC

HK

100% 100% 93.18%

70%

100%

52.5% 100% 100%

10% 10% 10%

100%

Central Huijin MoF

71.56% 12.72%

NSSFCornerstone

Investors

Other public

investors

1.43% 7.57% 6.72%


Ranked 8th globally in terms of reinsurance premiums

According to A.M. Best, the gross written reinsurance premiums of the top 50

global reinsurers amounted to US$222.6bn in 2014, a 1% yoy decline, of which

~72% was contributed by the top 10 reinsurers. Munich Re was the largest

reinsurer globally in 2014 with GWP of US$39.0bn (52% coming from non-life

reinsurance and 48% from life). Lloyd’s and Everest Re are the only pure non-

life reinsurers while RGA is the only pure life reinsurer among the top 10

players. China Re ranked eighth globally and first in Asia.

Figure 3: Global top 10 reinsurers by GWP (2014)

52% 61%

55% 66%44%

100%

60% 79% 100%

48%39%

45%56%

100%40% 21%

0

5

10

15

20

25

30

35

40

Mu

nic

h R

e

Swis

s R

e

Han

no

ver

Re

BR

K

Hat

haw

ay

SCO

R S

E

Llo

yd's

RG

A

Ch

ina

Re

Par

tne

rRe

Eve

rest

Re

Non-life Life

US$ bn39.0

9.113.213.8

14.9

33.3

5.9 5.7

US$ bn39.0

34%

17.5

8.5

Source: A.M.Best, Deutsche Bank

4 December 2015

Insurance

China Re


Superior growth in 2012-14 in a global comparison

China Re is still in a growth stage (compared with global leading reinsurers),

with a 2012-14 reinsurance GWP CAGR of 11.1%, making it the third-fastest

growing company among the top 10 global reinsurers, according to A.M. Best.

Figure 4: Global top 10 reinsurance group average GWP growth (2012-2014)

16.5%

12.1% 11.1%

8.5%

5.1%

2.7% 2.4% 2.1%

-2.5%-5.1%

-10%

-5%

0%

5%

10%

15%

20%

Eve

rest

Re

Par

nte

rRe

Ch

ina

Re

SCO

R S

E

RG

A

BR

K

Swis

s R

e

Han

no

ver

Re

Mu

nic

h R

e

Llo

yd's

Source: A.M.Best, Company data, Deutsche Bank

Market leader in reinsurance business in China – No. 1 in P&C, No. 2 in L&H China Re P&C – the largest P&C reinsurer in China

China Re’s P&C domestic business recorded premium income of Rmb28.4bn in

2013, taking a 33.1% market share in China, and was ranked No.1 in the P&C

reinsurance market. Swiss Re, Munich Re, SCOR Re and Taiping Re followed,

with market shares of 18%, 10%, 3% and 2% respectively. The top five

reinsurers took 66% of China’s P&C reinsurance market in 2013. For 2012-14,

China Re P&C recorded average net profit growth of 36.8%, reaching

Rmb2,143m in 2014, due to: 1) an improvement in the combined ratio from

99.0% in 2012 to 98.0% in 2014; and 2) steady growth in investment income of

an average of 25.4% in 2012-14.

4 December 2015

Insurance

China Re


Figure 5: China P&C reinsurance market share (2013) Figure 6: China Re P&C – net profit growth

28.4

15.6

8.9

2.41.3 1.0 0.3 0.0

0

5

10

15

20

25

30

China Re Swiss Re Munich Re

SCOR Re Taiping Re

Hannover Re

Lloyd's General Re AG

Rmb bn 33% 0%0%1%2%3%10%18%

1,145

1,723

2,143

1,163

2,245

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 1H14 1H15

Rmb mn

Source: China Insurance Yearbook, Deutsche Bank


China Re Life – The second-largest life and health reinsurer in China

China Re Life had a 37.7% market share in China and was ranked No.2 in the

life and health reinsurance market in 2013, second only to Hannover Re. It

would have ranked first if financial reinsurance were excluded. China Re Life

recorded average net profit growth of 126.0% in 2012-14, reaching

Rmb1,415m in 2014, as a result of: 1) strong growth in investment income,

which averaged 43.7% over 2012-14; and 2) an increase in associate income to

Rmb474m in 2014.

Figure 7: China life and health reinsurance market (2013) Figure 8: China Re Life – net profit growth

13.2

11.3

3.2

2.01.4

0.3

0

2

4

6

8

10

12

14

Hannover Re China Re Munich Re Swiss Re SCOR Re General Re AG

Rmb bn

277

948

1,415

859

2,254

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 1H14 1H15

Rmb mn



China Continent P&C – a growing primary P&C insurer in China

China Re operates its P&C insurance business through China Continent

Insurance, a 93.18%-owned subsidiary. It is the sixth-largest player in China’s

P&C space, with a market share of 3.0% in 2014. China Continent has realised

a net-profit CAGR of 11.0% in the past three years and 162.8% growth to

Rmb1,469m in 1H15.

4 December 2015

Insurance

China Re


Figure 9: China P&C market (2014) Figure 10: China Continent– net profit growth

252

143

93

40 3522 21 18

0

50

100

150

200

250

300

PIC

C

Pin

g A

n

CP

IC

Ch

ina

Life

P&

C

Ch

ina

Ins

Ch

Co

nti

ne

nt

Sun

shin

e P

&C

Ch

Ex

po

rt&

Cre

dit

Rmb bn 33% 2%3%3%5%5%12%19%

708

238

873

559

1,469

0

200

400

600

800

1,000

1,200

1,400

1,600

2012 2013 2014 1H14 1H15

Rmb,mn



Business snapshot

Business mix

Among China Re’s key businesses, P&C reinsurance has accounted for the

biggest proportion in terms of premium income and net profit (42% and 39% in

2014 respectively). Life reinsurance and primary P&C accounted for 26% and

16% of net profit respectively, with 28% and 30% of total premium income.

Figure 11:China Re – 2014 business mix

42% 39%28%

28%26% 46%

30%

16%

16%

19%10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GWP Net profit Total assets

P&C Re Life Re P&C Corp&others


Profitability

China Re has seen ROAE and ROAA improving between 2012 and 2014 for the

Group, P&C reinsurance and the life reinsurance segments. Historically, P&C

reinsurance has had the highest ROAE of all the business segments, with 2014

ROAE of 15.6% vs. 14.9% for life reinsurance, 10.6% for P&C and 10.9% for

the group overall. We note that 2014 earnings include Rmb894m of income

from associates due to the reclassification of the stake in China Everbright

Bank (we discuss this later in this report).

4 December 2015

Insurance

China Re


Figure 12: ROAE by business segment Figure 13: ROAA by business segment

10.6%

4.2%

10.4%

5.2%

15.0%

12.9%

3.5%

7.6%

15.6%14.9%

10.6% 10.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

P&C Re Life Re P&C Group

2012 2013 2014

2.7%

0.6%

3.0%

1.7%

3.7%

1.6%

1.0%

2.2%

4.3%

1.9%

3.1% 3.2%

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

P&C Re Life Re P&C Group

2012 2013 2014



Competitive strengths

Strong network and local relationships

Due to its long history, China Re has established one of the most

comprehensive reinsurance business networks in China; it has business

relationships with 66 P&C companies (94% of total market players) and 70

domestic life and health insurers (93%). By developing the cross-border

renminbi reinsurance business, it has managed to initiate cooperative

relationships with all life and health insurers in Hong Kong offering renminbi-

denominated insurance business.

Figure 14: China Re – network and client base (1H15)

China P&C Re

China Life Re

Continent P&C

Branch and sub-branches 1,890

In-house sales force 23,500

Individual insurance agents 24,600

Insurance agencies/brokersBusiness relationship with 7,900 agencies and

240 brokers

Clients66 P&C insurance companies, 94% of all P&C

insurers in China

Clients

Mainland: 70 domestic life and health insurance

companies, 93% of all L+H insurers in China

Hong Kong: All L+H insurers offering Rmb-

denominated insurance business in Hong Kong


Comprehensive database to provide underwriting/pricing advantages

Through its years of operations, China Re has built a strong platform of data

resources and data-analysis capabilities, giving it, we believe, a distinct

competitive advantage in underwriting and pricing.

4 December 2015

Insurance

China Re


Figure 15: China Re – advantages in data resources and analysis

China Re P&C

• The largest actuarial database in China P&C reinsurance market

• 1st to establish a P&C insurance data analysis centre in May-13

• Published China’s 1st P&C insurance exposure curves in Sep-13

as a risk reference standard

•Catastrophe risk-related research with China Meteorological

Administration

China Re Life

• Led the preparation of China Life Insurance Experienced Critical

Illness Table (2006-2010) designated by CIRC

• Participated in the construction of China Life Insurance Mortality

Table (2000-2003) and the third mortality table

• Participated in the formulation of C-ROSS regime


A key player in the development of new business segments

China Re has also played a key role in the establishment and management of

China’s risk diversification mechanisms for nuclear, agricultural and

catastrophic risks through its participation in mechanism design, the issuance

of the catastrophe bond, risk analysis and pricing, and product design. We

believe such involvement has helped the company accumulate experience in

underwriting and pricing.

Figure 16: China Re – involvement in China’s specific P&C insurance pools

CNIP(China Nuclear Insurance

Pool )

• Founded in May-1999 to pool nuclear insurance underwriting

capacity to serve the PRC nuclear power industry

•Primarily covers nuclear property risks and nuclear third-party liability

risks

• 25 members including PICC P&C, Ping An and CPIC

•China Re is the key provider of underwriting capacity

CARP(China Agricultural

Reinsurance Pool )

• Founded by China Re and 23 primary insurance companies in Nov-14

•China Re perform administrative role for the entity, responsible for underwriting, risk analysis, actuarial pricing and reinsurance plan

design

• Started operation in Jan-15 and has become the principal channel for

agricultural reinsurance arrangements in China

•China Re forecast reinsurance premium from CARP to hit Rmb3.3bn in 2015, representing >50% of expected total agricultural reinsurance

market

CECIP(China Urban Rural

Residential Building

Earthquakes Catastrophe

Insurance Pool)

• Established in Apr-15

•China Re is the only reinsurance company invited to be involved

•China Re played constructive role in product design and other core

aspects of its operation


4 December 2015

Insurance

China Re


Well-positioned to tap into the potential of China’s reinsurance market

China’s reinsurance market is a key focus in China’s New Ten Guidelines

In August 2014, the State Council released the New Ten Guidelines for the

insurance sector. The reinsurance market is a key focus of the guidelines in

terms of: 1) product development; 2) the strengthened role of reinsurance; and

3) the opening up of the market.

We believe that the enhanced role of reinsurance is likely to lead to more

detailed and supportive government policies to reinforce the sector’s

development, while the encouragement of product innovation in reinsurance

bodes well for potential business growth in the future. Although the opening

up of the reinsurance market will attract more competitors and intensify

competition, it should promote the healthy development of the sector in the

long run.

Figure 17: Key notes on reinsurance in New Ten

Theme Details Comments

Product development

Strengthen product and technological innovation

Liberalisation and innovation in reinsurance should stimulate more demand and bode well for future business development

Increase the depth of protection of agriculture, transportation, energy, chemical, water resources, subway, aerospace, nuclear and other major national projects

Catastrophe reinsurance mechanism; establish multi-level catastrophe protection; set out regulations, reserves and database of catastrophe insurance.

Strengthened role of reinsurance

Strengthen reinsurance's role in diversifying natural disaster risks

The emphasis on the key role of reinsurance implies more government support for the sector's development

Strengthen reinsurance's role in the protection and support of China’s corporations overseas, increase China's bargaining power in global reinsurance markets

Opening up of reinsurance market

Increase the number of reinsurance market participants The opening up of the reinsurance market will attract more competitors and intensify competition but should promote the healthy development of the sector in the long run Develop regional reinsurance centres

Source: The State Council news website, Deutsche Bank

China’s relatively low cession rate

China’s reinsurance market is in a relatively early stage of development, with a

P&C cession ratio of 13.3% in 2013, ~33% below that of Germany (at 20.1%)

and the UK (at 19.6%), and 72% below that of the US (at 48.1%). The life

cession ratio of 2.8% (in 2013) was also low compared with other Asian

countries, 18% below Singapore (at 3.4%), 53% below Japan (5.9%) and 86%

below the US (19.6%) in 2012.

4 December 2015

Insurance

China Re


Figure 18: P&C cession ratio – 2013 Figure 19: L&H cession ratio – 2012

48.1%

20.1% 19.6%

13.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

US Germany UK China

19.6%

5.9%

3.4%2.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

US Japan Singapore China*

Source: Axco, Deutsche Bank

Note:* China L&H cession ratio is 2013 number Source: Axco, Deutsche Bank

Figure 20: Cession ratio – P&C reinsurance in China Figure 21: Cession ratio – life reinsurance in China

76.2

72.3

85.915.9%

13.1% 13.3%

10%

11%

12%

13%

14%

15%

16%

17%

65

70

75

80

85

90

2011 2012 2013

Total premium ceded (LHS) Cession ratio (RHS)

Rmb bn

11.414.1

30.0

1.2%

1.4%

2.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2011 2012 2013

Total premium ceded (LHS) Cession ratio (RHS)

Rmb bn

Source: CIRC, Deutsche Bank


Robust growth outlook

China’s reinsurance market is growing at a faster rate than its direct insurance

market, with a 2011-13 CAGR of 15.0% compared with 9.6% in direct

insurance. Benefiting from the robust growth of primary insurance industry,

we forecast China Re to record 19.0% and 15.2% yoy growth in reinsurance

premiums in 2015 and 2016, respectively.

4 December 2015

Insurance

China Re


Figure 22: China reinsurance market size Figure 23: China insurance market size

87% 84%

74%

13%16%

26%

40

50

60

70

80

90

100

110

120

2011 2012 2013

P&C reinsurance Life reinsurance

Rmb bn

87.6 86.4

115.9

33% 36% 38%

67%64%

62%

100

300

500

700

900

1,100

1,300

1,500

1,700

1,900

2011 2012 2013

P&C Life

Rmb bn

1,434

1,549

1,722



Multiple drivers of future growth

Life reinsurance to benefit from growing demand for financial reinsurance

The strong growth in the life reinsurance market is attributable mainly to the

rapid growth in financial reinsurance, which is used to meet clients’ financial

management needs. The potential implementation of a new solvency regime

could prompt further demand for financial reinsurance from smaller life

insurers. Note that life reinsurance GWP saw a significant increase in 1H15 of

77.1% yoy, helped by financial reinsurance demand.

Figure 24: China Re Life – historical GWP Figure 25: China Re Life – GWP mix

16,057

18,394

21,081

8,775

15,543

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

21,000

23,000

2012 2013 2014 1H14 1H15

Rmb mnRmb mn

16%10%

33%37%

4%11%

2%

74%

12%

1%0%

10%

20%

30%

40%

50%

60%

70%

80%

Domestic protection

Domestic savings

Financial Cross-border Rmb

Other

2012 2013 2014 1H15



Expecting rising need for reinsurance among smaller insurers

According to China Re, the company has quite a concentrated contribution

from its top clients. Among its reinsurance clients (66 P&C insurers and 70

L&H insurers), the top five clients accounted for 85.8% and 60.2% of its

domestic P&C reinsurance and life reinsurance premium income in 2014

respectively.

Over the last ten years, we have seen the number of players in the life and P&C

insurance markets rise from 43 and 35 in 2005 to 75 and 70 in 1H15

respectively. The presence of more market players has led to more

competition, and the market share of the top five players has been declining

4 December 2015

Insurance

China Re


over the past decade. The market share of smaller players (outside the top five

and their subsidiaries) has increased in the life and P&C markets, from 9.6% in

2005 to 32.5% in 1H15 for life, and from 14.3% to 24.6% for P&C over the

same period.

We believe the strong growth of smaller insurers will become a key driver of

future growth in China Re Life and China Re P&C. As the market leader, we

believe China Re is well equipped to meet the reinsurance demand of those

smaller players.

Figure 26: Smaller P&C players – number of players and

historical market share

Figure 27: Smaller life players – number of players and

historical market share

14%

19%

22%24%

26% 25% 26% 26% 26% 25% 25%

30 31

37 4247 48

5457 59 60

65

0

10

20

30

40

50

60

70

14%

16%

18%

20%

22%

24%

26%

28%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15

Mkt shr of smaller insurers (LHS) No. of smaller P&C insurers (RHS)

9.6%8.0%

13.1%

16.3%17.9%

22.2% 21.4%22.6% 23.0%

29.3%

32.5%

31 33

4144

47 49 48

55 57 5862

0

10

20

30

40

50

60

70

8%

13%

18%

23%

28%

33%

38%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15

Mkt shr of smaller insurers (LHS) No. of smaller Life insurers (RHS)

Note: Small players include companies outside the top five Source: CIRC, Deutsche Bank

Note: Small players include companies outside the top five and their subsidiaries Source: CIRC, Deutsche Bank

Strategically developing into new business areas

Aside from its dominant position in the traditional reinsurance market, China

Re is also taking opportunities arising from industry development through its

strategic efforts in innovative business areas:

P&C reinsurance: P&C CARP (China Agriculture Reinsurance Pool), CECIP

(China Urban and Rural Residential Building Earthquakes Catastrophe

Insurance Pool), catastrophe bonds and Lloyd’s business

Life reinsurance: Cancer insurance, mid- and high-end medical insurance,

tax-preferred health insurance and cross-border renminbi business.

4 December 2015

Insurance

China Re


Figure 28: Development into new business areas

Domestic P&C Reinsurance

•CARP: Co-founder and core member

•CECIP: sole reinsurer to participate in the establishment of CECIP

• Innovative products: China’s 1st earthquake index insurance

• Cat bond: sponsored the 1st issuance of

catastrophe bond linked to China earthquake risk in the overseas markets

Domestic Life Reinsurance

•Cancer insurance products: Worked with

20+ primary insurers in product development, providing pricing basis and

technical support•1st rescue insurance policy in China;

•1st financial reinsurance solution

•Mid- and high-end medical insurance• Tax-preferred health insurance

International P&C Reinsurance

• Lloyd’s: 1st Chinese company to obtain

Lloyd’s membership and underwrites through China Re Syndicate 2088

•Global risk diversification

International Life Reinsurance

•Cross-border Rmb business: 1st to launch

the business in Hong Kong and expanded to Macau, Singapore and Taiwan, etc as the

leading reinsurer


Strong capital position

1H15 solvency margin ratio of 253%

China Re has a strong capital position with a 1H15 solvency margin ratio of

253% and solvency margin ratios of more than 200% for all of its businesses.

We note that this has been achieved without any issuance of sub-debt and

hence leaves the company with ample financing flexibility. We believe the

ample capital flexibility should enable the company to take advantage of

growth opportunities in China as well as in overseas markets.

Figure 29: China Re – solvency margin ratio by business

217%

271%

228%

248%

290%

243% 240%

253%

200%

210%

220%

230%

240%

250%

260%

270%

280%

290%

300%

China Re P&C China Re Life Ch Continent Group

2014 1H15


4 December 2015

Insurance

China Re


Earnings forecasts

We forecast 2015 earnings growth of 52.8%

Helped by strong investment gains, we forecast China Re’s 2015 earnings to

grow by 52.8% to Rmb8,256m but to decline by 28.1% to Rmb5,936m in 2016,

primarily due to the high base in investment gains.

Figure 30: China Re – attributable net profit and ROAE forecast by segment

Rmb m Growth

Attributable net profit 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E

P&C Re 2,143 2,632 2,229 2,494 24.3% 22.8% -15.3% 11.9%

Life Re 1,415 3,088 2,412 2,768 49.3% 118.2% -21.9% 14.8%

P&C 814 1,540 960 1,081 266.4% 89.2% -37.7% 12.6%

Others 1,033 997 336 328 115.2% -3.4% -66.3% -2.4%

Total 5,404 8,256 5,936 6,672 60.2% 52.8% -28.1% 12.4%

ROAE

P&C Re 15.6% 16.1% 12.5% 13.1%

Life Re 14.9% 25.4% 17.4% 18.3%

P&C 10.6% 15.7% 9.0% 9.7%

Group 10.9% 13.5% 8.4% 8.8% Source: Company data, Deutsche Bank estimates

Simplified segment P&Ls

Below we have illustrated the simplified P&Ls for China Re’s three business

segments.

P&C reinsurance: We forecast 2015 net profit to grow 22.8% yoy to Rmb2,632m, helped mostly by the strong performance in 1H15. We have factored in the Tianjin explosions, estimating the 2H15 loss ratio to increase 3.2ppt yoy and the combined ratio to increase 3.6ppt yoy. However, we forecast 2016 earnings to decline by 15.3% to Rmb2,229m due to lower investment gains, which will more than offset underwriting improvements.

Figure 31: Simplified P&L – P&C reinsurance

Rmb m 2012 2013 2014 2015E 2016E 2017E 1H15 2H15E

Gross written premiums 26,210 30,086 31,135 30,512 32,037 34,600 14,813 15,698

Net premiums earned 24,652 27,803 30,986 29,071 30,631 33,495 14,528 14,543

Underwriting profits 82 363 607 -203 674 837 150 -354

Investment income 1,353 1,794 2,186 3,524 2,136 2,309 2,818 706

Net profit 1,145 1,723 2,143 2,632 2,229 2,494 2,245 387

Growth (YoY) 50.6% 24.3% 22.8% -15.3% 11.9% 93.1% -60.6%

Combined ratio 99.7% 98.7% 98.0% 100.7% 97.8% 97.5% 99.0% 102.4%

Loss ratio 58.1% 60.2% 64.0% 64.5% 64.5% 64.0% 61.6% 67.4%

Expense ratio 41.5% 38.5% 34.1% 36.2% 33.3% 33.5% 37.3% 35.1% Source: Company data, Deutsche Bank estimates

Life reinsurance: We forecast a strong net profit of Rmb3,088m (+118.2%

yoy) in 2015 as a result of substantial investment gains in 1H15. We estimate 2016 net profit to decline 21.9% to Rmb2,412m due to lower investment gains.

4 December 2015

Insurance

China Re


Figure 32: Simplified P&L – life reinsurance

Rmb m 2012 2013 2014 2015E 2016E 2017E 1H15 2H15E



Underwriting profits -1,426 -1,352 -1,777 -1,942 -1,732 -1,792 -1,178 -764

Investment income 1,403 2,243 2,898 4,894 3,702 4,156 3,681 1,213

Net profit 277 948 1,415 3,088 2,412 2,768 2,254 833

Growth (YoY) 242.5% 49.3% 118.2% -21.9% 14.8% 162.3% 49.9%

Combined ratio 109.4% 108.3% 109.6% 107.0% 105.0% 104.5% 109.5% 105.0%

Loss ratio 93.1% 84.6% 103.5% 100.0% 98.0% 98.0% 99.2% 100.6%


P&C insurance (China Continent): We estimate 2015 net profit to

increase 89.2% yoy to Rmb1,652m as a result of the strong

investment performance in 1H15 (net profit +367.7% yoy to

Rmb1,469m). We estimate the 2H15 net profit to decline by 87.5%

factoring in the claims from the Tianjin explosion, resulting in a

combined ratio of 103.0% in 2H15 and 101.0% in 2015. We expect an

improvement in the combined ratio to 100.0% in 2016, but this should

be more than offset by weaker investment gains, resulting in a 37.7%

yoy decline in 2016 net profit.

Figure 33: Simplified P&L – P&C insurance

Rmb m 2012 2013 2014 2015E 2016E 2017E 1H15 2H15E



Underwriting profits 161 -660 -103 -225 0 133 122 -347

Investment income 691 856 1,118 2,288 1,227 1,259 1,774 514

Net profit 708 238 873 1,652 1,030 1,160 1,469 183

Growth (YoY) -66.3% 266.4% 89.2% -37.7% 12.6% 367.7% -87.5%

Attributable net profit 653 220 814 1,540 960 1,081 1,369 171

Growth (YoY) -66.3% 270.0% 89.2% -37.7% 12.6% 367.7% -87.5%

Combined ratio 99.0% 103.9% 100.5% 101.0% 100.0% 99.5% 98.9% 103.0%

Loss ratio 60.2% 64.6% 59.0% 60.0% 59.5% 59.5% 55.4% 64.3%


4 December 2015

Insurance

China Re


Valuation summary

Sum-of-parts (SOTP) valuation

We value China Re at Rmb93.9bn, or HK$2.56 per share on 2016E, based on a

sum-of-parts valuation, which implies a 2016E P/B of 1.3x and P/E of 15.8x.

P&C Re is valued at Rmb27.4bn on a target P/B of 1.5x, and the Life Re

business is valued at Rmb25.2bn, implying a 2016E life P/EV of 1.4x and

primary P&C business is valued at Rmb11.8bn on a target P/B of 1.1x. Group

and other business is priced at Rmb29.6bn on a 1.0x target P/B.

Figure 34: China Re – valuation summary

2016E Rmb m HK$

Total Per share Note

P&C Re 27,353 0.74 1.5x P/B

Life Re 25,190 0.69 1.4x P/EV (Life)

P&C 11,765 0.32 1.1x P/B

Grp & others 29,622 0.81 1.0x P/B

Total 93,929 2.56 Implied 2016E P/B of 1.3x

and P/E of 15.8x Source: Deutsche Bank estimates

P&C Re: 29% of our valuation came from P&C Re, which is based on a 2016E target P/B of 1.5x, factoring in ROAE of 13.9% (2015-17E average), a risk discount rate of 11.0% and LT growth of 5.0%. The valuation implies a 2016E P/E of 12.3x.

Life Re: 27% of the valuation came from Life Re, which is valued at Rmb25.2bn, implying a 2016E P/EV of 1.4x and P/E of 10.4x.

Primary P&C: 13% came from primary P&C business, based on a target P/B of 1.1x, derived from ROAE of 11.5% (2015-17E average), a risk discount rate of 11.0% and LT growth of 5.0%. The valuation implies a 2016E P/E of 12.3x.

Figure 35: 2016E valuation, net profit and BV by segment

29%38%

25%

27%

41%

20%

13%

16%

15%

32%

6%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2016E valuation 2016E net profit 2016E BV

P&C Re Life Re P&C Others

Source: Deutsche Bank estimates

4 December 2015

Insurance

China Re


Risks

We believe that the key risks include: 1) volatility in China’s equity and bond

markets, which could have a material impact on the group’s book value, EV

and solvency margin ratio; 2) adverse impact relating to catastrophic events, to

which the company’s P&C reinsurance, life and health reinsurance and primary

P&C insurance business have relatively high exposure; 3) intensified

competition in the reinsurance and P&C industries, possibly leading to a

decline in China Re’s competitive position and weakened underwriting margin;

4) potentially adverse effects resulting from the implementation of the C-ROSS

regime; 5) economic and political risk pertaining to China; and 6) weaker-than-

expected premium growth. Please refer to the Risk Factors section later in this

report for a more complete list and details.

Upside risks include better-than-expected underwriting margins for the

reinsurance and primary P&C business, stronger-than-expected premium

growth of (re)insurance and favourable changes in the regulatory environment.

4 December 2015

Insurance

China Re


Comparison with listed Chinese insurers

Business mix

GWP

China Re recorded relatively modest average premium growth of 11.5%

between 2012 and 2014, compared with the 14.1% average for listed players.

Compared with listed groups, China Re has a relatively large contribution from

P&C and P&C reinsurance, accounting for 72% of GWP in 2014. This is similar

to that of PICC Group, whose P&C contribution was 71% in 2014.

Figure 36: 2012-14 average GWP growth Figure 37: 2014 GWP mix

35.9%

18.1%

14.7% 14.4%11.5%

8.4%5.9%

1.3%

14.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Ch Taiping

Ping An PICC Grp PICC P&C

China Re CPIC NCI China Life

Avg*

56% 51%

76%

29%29%

30%

44% 49%

18%

71%

42%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China Re Ping An CPIC Ch Taiping PICC Grp

Life Life Re P&C P&C Re

Note: Average is that of listed players, excluding China Re Source: Company data, Deutsche Bank


Net profit

Despite its modest GWP growth, China Re has recorded rapid earnings growth

in the past three years at an average of 54.6%, following the 75.3% for Ch

Taiping and 70.6% for China Life. Compared with the listed group peers, China

Re had a relatively balanced net profit mix in 2014, with 26% contributed by

Life Re, 16% by P&C, 39% by P&C Re and 19% by other businesses. In

comparison, the majority of net profit for CPIC and Ch Taiping (81% and 70%,

respectively) came from the life business, while most of PICC Group’s net

profit (91%) was from the P&C business.

4 December 2015

Insurance

China Re


Figure 38: 2012-14 average net profit growth Figure 39: 2014 net profit mix

75.3%70.6%

54.6%

47.8% 47.5%

40.0% 38.5%

20.5%

48.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ch Taiping

China Life

China Re

NCI CPIC Ping An PICC Grp

PICC P&C

Average

33%

81%70%

8%

26%

16%

18%

9%20%

91%

39%

8%2%

19%

49%

10%2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Life Life Re P&C P&C Re AM Other



Shareholder equity

China Re saw relatively slow book-value growth from 2012 to 2014 compared

with its listed peers, which was likely to be due to a lack of capital-raising. In

2014, its total equity mix was quite balanced, with 20% coming from Life Re,

18% from P&C, 28% from P&C Re, 1% from asset management and 33% from

others. Its listed peers usually have a dominant business, e.g. life for CPIC

(49%) and Ch Taiping (44%), and P&C for PICC Group (68%).

Figure 40: 2012-14 average BVPS growth Figure 41: 2014 total equity mix

28.0%27.1%

19.0%17.2%

16.1%

13.4%

11.1% 10.4%

18.7%

0%

5%

10%

15%

20%

25%

30%

PICC P&C

Ping An PICC Grp

Ch Taiping

NCI China Life

China Re

CPIC Avarage

22%

49% 44%

27%20%

18% 12%

23%22%

68%

28%

9%1%

5%

33%

66%

27% 25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Life Life Re P&C P&C Re AM Other



Returns and profitability

ROAE, ROAA and leverage ratio

China Re had a relatively low ROAE compared with its listed peers in 2014. The

2014 ROAE of 10.9% was lower than the listed average of 14.9%. However, its

2014 ROAA of 3.2% was among the best, second only to PICC P&C’s 4.4%.

We believe the low leverage ratio (asset-to-equity ratio) is the key reason for a

lower-than-average ROAE given that China Re has the lowest leverage of 3.5x,

compared with a listed average of 8.7x in 2014.

4 December 2015

Insurance

China Re


Figure 42: 2014 ROAE comparison vs. listed players Figure 43: 2014 ROAA comparison vs. listed players

21.1%

16.6% 16.0%14.6%

13.0% 12.8%

10.9% 10.2%

14.9%

0%

5%

10%

15%

20%

25%

PICC P&C

Ping An PICC Grp

NCI Taiping China Life

China Re

CPIC Average

4.4%

3.2%

2.4%

1.5% 1.4% 1.3%1.1% 1.1%

1.9%

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

5%

PICC P&C

China Re PICC Grp China Life

CPIC Ping An Taiping NCI Average



Figure 44: 2014 asset to equity ratio comparison Figure 45: 2014 debt to equity ratio comparison

3.54.3

7.07.9

8.4

10.9

13.313.8

8.7

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

China Re PICC P&C

CPIC China Life

PICC Grp Taiping NCI Ping An Average

0.0%

16.8%

24.9% 26.2% 27.2%30.4%

39.3%

51.8%

0%

10%

20%

30%

40%

50%

60%

China Re CPIC China Life

PICC P&C Taiping Ping An NCI PICC Grp


Note: Debt refers to interest bearing borrowings, mostly sub-debts Source: Company data, Deutsche Bank

Investment and market exposure

China Re led the industry, together with PICC Group, with an above-industry-

average net investment yield of 5.6% in 1H15 (annualised). We consider this a

good investment performance, especially given its relatively low exposure to

high-yielding, non-standard investments of 8.8% in 1H15. (Note non-standard

investments, referred to hereon in this report as NSI, include debt schemes,

trust plans, wealth management products and asset backed plans).

4 December 2015

Insurance

China Re


Figure 46: 1H15 net inv. yield vs. listed players Figure 47: Net inv. yield 2012-14 vs. listed players

5.6% 5.6%

5.1%

4.9%4.8% 4.8%

4.7%

4.4%

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

5.6%

5.8%

PICC Grp China Re Ping An Ins

CPIC NCI PICC Ch Taiping

China Life

5.0%

4.4%

4.7%

4.9%

4.7%

4.9%

4.6%

4.1%

5.2%

4.7%

5.3% 5.3%5.2%

4.6%

5.8%

4.5%

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

China Re China Life Ping An Ins

CPIC NCI Ch Taiping

PICC Grp PICC

2012 2013 2014



Figure 48: 1H15 NSI exposure Figure 49: Historical NSI exposure

18.7%17.4%

15.9%14.7%

11.0%

8.8%7.5%

4.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

NCI Ch Taiping

Ping An PICC Grp CPIC China Re PICC China Life

8.8%

4.7%

15.9%

11.0%

18.7%17.4%

14.7%

7.5%

0%

5%

10%

15%

20%

25%

China Re China Life Ping An CPIC NCI Ch Taiping

PICC Grp PICC

2012 2013 2014 1H15



China Re reported the highest annualised total investment yield of 9.7% in

1H15 (annualised total investment yield = un-annualised net investment

yield*2 + (un-annualised total investment yield – un-annualised net investment

yield) vs. an average of 6.9% for the listed players. Historically, China Re has

reported an industry-leading total investment yield. Besides having the second-

highest exposure to the equity market (18.3% of total investments in 1H15

while stock+funds as a percentage of total investment was 17.9%), we believe

the sustained outperformance also indicates China Re’s strong investment

techniques.

4 December 2015

Insurance

China Re


Figure 50: 1H15 total investment yield vs. listed players

Figure 51: Total investment yield 2012-14 vs. listed

players

9.7%

7.7%7.4%

6.9% 6.8% 6.7% 6.6%6.4%

6.9%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

China Re Ping An NCI China Life

Ch Taiping

PICC P&C

PICC Grp CPIC Avg

4.0%

2.8% 2.9%

3.3% 3.2%

3.6%

4.2%

3.7%

6.5%

5.4%5.1%

6.1%5.8% 5.8%

6.0%

5.2%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

China Re China Life Ping An Ins

CPIC NCI Ch Taiping

PICC Grp PICC

2012 2013 2014

Note: 1H15 total investment yield is annualised based on reported net and total yields Source: Company data, Deutsche Bank


Figure 52: 1H15 investment asset mix vs. listed players

|

Figure 53: 1H15 equity* investment as a percentage of

total

6% 4% 4% 2% 3% 3% 7% 8%

23% 29%15% 21% 22%

11%

23%30%

33%

42%

44%

50%36%

40%

31%

32%

18%

12%

15%

11%

15%

10%

16%

19%9%

5%16%

11%19%

17%

15%

7%11% 9% 7% 5% 5%18%

9% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China Re China Life Ping An CPIC NCI Taiping PICC Grp PICC P&C

Cash Term deposits Bonds Equities NSI Other

18.6%

17.9%

16.0%15.3%

14.8%

11.6%

10.6%10.0%

8%

10%

12%

14%

16%

18%

20%

PICC P&C China Re PICC Grp NCI Ping An China Life CPIC Taiping

Note: Equity refers to stock and investments funds only. Source: Company data, Deutsche Bank

Note: *Equity refers to stock and investments funds only for all insurers except for PICC P&C Source: Company data, Deutsche Bank

Strong capital position

China Re has a strong capital position on a group level, standing at 253% in

1H15. If the maximum sub-debt were issued, China Re’s solvency would be

among the strongest (at 404%) of its peer group.

Breaking down China Re’s solvency by its business lines, we view all major

business lines at healthy levels and on improving trends. Among the listed P&C

insurers, China Continent and PICC P&C are the only two players to maintain

their solvency above 200%. We believe that this robust capital position should

help China Re weather market volatility.

4 December 2015

Insurance

China Re


Figure 54: Group solvency margin ratio (1H15) Figure 55: P&C solvency (1H15)

293% 309% 295%253%

226% 246%197%

443%414% 413% 404%

320%

286%257%

100%

150%

200%

250%

300%

350%

400%

450%

Ch Taiping China Life CPIC China Re PICC P&C NCI Ping An Grp

1H15 solvency At max sub-debt

240%

226%

201%

171%

154%

198%

100%

120%

140%

160%

180%

200%

220%

240%

260%

Ch Continent

PICC P&C CPIC Ch Taiping Ping An Average



Figure 56: China Re- solvency margin by business

180%202% 192%

381%

159%174%

160%

324%

217%

271%

228%248%

290%

243% 240%253%

100%

150%

200%

250%

300%

350%

400%


2012 2013 2014 1H15


4 December 2015

Insurance

China Re


China reinsurance and primary insurance industry

China reinsurance industry

A brief history

Although it has a long history beginning with the establishment of PICC in

1949, the reinsurance industry operated under a compulsory regime for 18

years and was not commercialised until 2006. In 2006, the compulsory

reinsurance regime was abolished and China’s reinsurance industry entered a

partially-commercialised era with protection for domestic players. In 2010, the

protection for domestic reinsurers was removed in revised regulations, leading

to the dawn of a fully-commercialised era.

Figure 57: Milestones in the development of China’s reinsurance industry

year Milestones in industry development

1949 PICC was established and gradually started underwriting reinsurance business

1988 PICC’s Reinsurance Department started to underwrite domestic compulsory reinsurance business

The compulsory reinsurance regime required insurers to cede 30% of their business to PICC

1995 The compulsory cession ratio was reduced to 20% (from 30%)

1996 PICC’s Reinsurance Department was spun off to establish PICC Reinsurance Co.

1999 PICC Reinsurance Co. was renamed China Reinsurance Co., the predecessor of China Re

2003 The compulsory reinsurance ratio was reduced by 5% each year

Foreign companies began to enter China’s reinsurance market

2006 The compulsory reinsurance regime was abolished

2010 Revised regulation removed the article on giving priority to domestic reinsurance players

Source: CIRC, Company data, Deutsche Bank

Figure 58: China reinsurance market Figure 59: China reinsurance market mix

76.2

11.4

87.685.9

30.0

115.9

0

20

40

60

80

100

120

140

P&C reinsurance Life reinsurance Total

2011 2013

Rmb bn

87%74%

13%26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2013

P&C reinsurance Life reinsurance

Source :CIRC, Deutsche Bank


Eight major market participants

As of 2014, China had one domestic reinsurance group, eight foreign

reinsurance companies with branches established in the country, and 200+

foreign reinsurance companies participating in China’s reinsurance market on

an offshore basis. Besides professional reinsurance companies, some primary

insurers also participate in the reinsurance business (although it is relatively

small).

4 December 2015

Insurance

China Re


In term of gross written reinsurance in 2013, China Re led the market with

premium income of Rmb39.7bn (a 34% market share), with Swiss Re following

at Rmb17.7bn (15%), Hannover at Rmb14.2bn (12%), Munich Re at Rmb12.1bn

(10%) and SCOR Re at Rmb3.8bn (3%).

Figure 60: China reinsurance industry market share

(2013)

Figure 61: China reinsurance major players GWP (2013)

China Re, 34%

Swiss Re, 15%Hannover Re,

12%

Munich Re, 10%

SCOR Re, 3%

Taiping Re, 1%

General Re, 0%Lloyd's , 0%

Others, 23%

39.7

17.714.2

12.1

3.81.3 0.4 0.3

0

5

10

15

20

25

30

35

40

45

Ch

ina

Re

Swis

s R

e

Han

no

ver

Re

Mu

nic

h R

e

SCO

R R

e

Taip

ing

Re

Ge

ne

ral R

e

Llo

yd's

Rmb bn 34% 0%0%1%3%10%12%15%

Source :CIRC, Deutsche Bank


Relatively low cession ratio

The cession ratio of China’s P&C reinsurance and life reinsurance industries is

considered to be relatively low compared with those in developed markets.

China recorded a cession ratio of 13.3% for its P&C reinsurance market in 2013,

compared with that of the US being 48.1%, Germany’s 20.1% and the UK’s

19.6%, according to Axco data. China’s life reinsurance business also had a

low cession ratio of 2.8% (in 2013), compared with the US’s 19.6%, Japan’s at

5.9% and Singapore’s at 3.4% in 2012.

Figure 62: P&C cession ratio – China vs. other markets

(2013)

Figure 63: L+H cession ratio – China vs. other markets

(2012)

48.1%

20.1% 19.6%

13.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

US Germany UK China

19.6%

5.9%

3.4%2.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

US Japan Singapore China*

Source :Axco, Company data, Deutsche Bank

Note: *China is based on 2013 numbers Source: Axco, Company data, Deutsche Bank

4 December 2015

Insurance

China Re


China primary insurance industry

China’s position in the global market

China’s insurance market has been growing rapidly over the past five years,

with a 2009-14 CAGR of 13.0%, according to the Sigma reports by Swiss Re.

In 2014, China’s insurance market recorded premium income of US$328bn,

making it the fourth-largest market in the world and the second largest in Asia.

Figure 64: 2014 premium volume Figure 65: 2009-14 GWP CAGR

1,280

480

351 328271 255

195 160

0

200

400

600

800

1,000

1,200

1,400

US Japan UK China France Germany Italy Korea

US$ bn

13%

8%

4%

2% 2% 2%2%

0%0%

2%

4%

6%

8%

10%

12%

14%

China Korea Italy US Germany Japan UK France

Source: Swiss Re’s Sigma reports, Deutsche Bank


Still in the development stage

Despite the rapid growth over the past decade, China’s insurance market

remains at the development stage, evidenced by a relatively low insurance

penetration rate (total life insurance premiums as a percentage of gross

domestic product) and density rate (total life insurance premiums per capita)

compared with those of the developed insurance markets.

Figure 66: Asia – insurance penetration 2014 Figure 67: Asia – insurance density 2014

19%

14%

11% 11%

7%6%

5%3% 3%

2% 2% 1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Taiw

an HK

Ko

rea

Jap

an

Sin

gap

ore

Thai

lan

d

Mal

aysi

a

Ind

ia

Ch

ina

Ph

ilip

ine

s

Ind

on

esi

a

Vie

tnam

5,646

4,0723,778 3,759

3,163

524 323 236 60 58 55 280

1,000

2,000

3,000

4,000

5,000

6,000

HK

Taiw

an

Jap

an

Sin

gap

ore

Ko

rea

Mal

aysi

a

Thai

lan

d

Ch

ina

Ind

on

esi

a

Ph

ilip

ine

s

Ind

ia

Vie

tnam

US$

Note: Insurance penetration is defined as the ratio of premium income to GDP Source: Swiss Re’s Sigma reports, Deutsche Bank

Note: Insurance density is defined as premium income per capita Source: Swiss Re’s Sigma reports, Deutsche Bank

4 December 2015

Insurance

China Re


Key regulations for China’s insurance/reinsurance industry

The China Insurance Regulatory Commission (CIRC) was established in

November 1998 as a regulatory body directly under the State Council to act as

the authority regulating the commercial insurance industry in China. Over the

years, China’s insurance industry has been guided by the legal framework of

the PRC Insurance Law and regulated by the CIRC. In Figure 68 we list the

major regulations for the insurance and reinsurance industry.

4 December 2015

Insurance

China Re


Figure 68: Key regulations for the insurance/reinsurance industry

Business aspects Regulation Time of issuance Key points Changes/impacts

Legal framework on China Insurance Industry

PRC Insurance Law Oct-95 ● General principles; ● Insurance contracts; ● Operational rules; ● Supervision and regulation; ● Insurance agencies and brokerage companies; ● Liabilities and supplementary provisions

Amended four times - in 2002, 2009, 2014 and 2015

Insurance Group The Administration of Insurance Group Companies (Pilot)

Mar-10

● Investors jointly control 50+% of the ins co;

● Min registered capital of Rmb2bn;

● At least one ins co has 6+ years of insurance operating experience and profitable for past three years with net assets of Rmb1bn+ and total assets of Rmb10bn+

Insurance Fund

The Circular on Strengthening and Improving the Oversight of the % for the Application of Insurance Proceeds

Jan-14

● Equity: <30% ( of total assets);

● Real Estate: <30%;

● Other invested financial assets: <25%;

● Overseas inv: <15%;

● Inv in single fixed-income/equity/real estate/other assets: <5%

Interim Mgmt Measures on the Deployment of Insurance Fund

Apr-14

● General requirements on inv in bank deposits, bonds, equities of listed companies, sec inv funds, equities of unlisted companies and equity inv funds, real estate, infrastructure, preferred shares, VC fund, securitised financial products, derivatives and overseas inv;

● Prohibits depositing ins funds in non-banking FIs, inv in ST stocks, directly engaging in the development/construction of real estate; use of ins funds to provide guarantee/grant loans/engaging in VC inv

Solvency

Administrative Provisions on the Solvency of Ins Companies

Sep-08

● Inadequate solvency: <100%;

● Adequate solvency I: 100-150%;

● Adequate solvency II: >150%

Regulatory Standards, on Solvency of Ins Company (1-17)

Feb-15

● Risk-based capital requirements;

● Has entered the trial period for transition of C-ROSS;

● Insurers obliged to formulate two solvency reports

Internet insurance Internet insurance business rules

Jul-15

● Four product types (accident, term life, traditional whole life and certain P&C products) allowed nation-wide;

● Third-party online platforms required to obtain licence to sell insurance products

Reinsurance

Administration of Reinsurance Business

Jul-10

● For proportional reinsurance, % of each risk ceded to the same reinsurer may not exceed 80% of sum insured or liability limit of primary insurance contract;

● For facultative, the sum insured ceded to an affiliate of the policyholder may not exceed 20%

Notice of the CIRC on Issues concerning Safety and Soundness in Reinsurance Operations

Jan-12

● Leading reinsurer in treaty reinsurance business must be a wholly state-owned/controlled insurer or with financial strength ratings at either A- or above (from S&P, A.M.Best or Fitch) or A3 or above (from Moody's);

● Paid-in capital requirements: Rmb200m for professional entity and Rmb1bn for non-professional

Life insurance

The Notices of CIRC on traditional life product's pricing liberalisation

Aug-13

● Guarantee rates for traditional (non-par) products lifted, reserve pricing rates capped at 3.5% for traditional and 4.025% for retirement annuity;

● Lower capital requirements on risk-related business in order to encourage development of protection policies;

● Insurers are free to determine commission rates

The Notices of CIRC on universal life product's pricing liberalisation

Feb-15

● Guarantee rate cap for UL policies lifted from 2.5% to 3.5%;

● Increase in protection coverage and cap for regular premium to 20% of account value and Rmb10K respectively;

● Strengthening of risk management;

● Lower cap on expense loading and surrender charges

P&C insurance

Opinions on Commercial Auto Insurance Rate Reform

Feb-15

● Being rolled out in six regions (Heilongjiang, Shandong, Guangxi, Chongqing, Shaanxi and Qingdao) since June;

● Auto premium = basic premium / (1-additional expense loading) x no-claim discount x underwriting discount x channel discount;

● More pricing variance based on channel and claim history, etc


4 December 2015

Insurance

China Re


Key growth drivers for insurance and reinsurance industry

Macroeconomic growth

China’s insurance market has been growing rapidly over the past five years,

which is derived from a strong underlying economic development. China

recorded a GDP CAGR of 16% from 2009 to 2014, providing ample support for

the development of the insurance industry. Furthermore, growth in private

motor vehicles, fixed-asset investments and foreign trade also drives the

development in a variety of P&C segments.

Figure 69: 2014 GDP ranking by country Figure 70: 2009-14 GDP growth

17.4

10.1

4.4 3.92.9 2.8

2.2 2.1

0

2

4

6

8

10

12

14

16

18

20

US China Japan Germany UK France Brazil Italy

US$ trn

16%

7% 6%

4%3%

1%0%

-3%-5%

0%

5%

10%

15%

20%

China Brazil UK US Germany France Italy Japan



Auto insurance: Over the past five years, the total number of private motor

vehicles increased at a CAGR of 22.0% to 123m in 2014, which drove strong average growth of 20.7% in auto insurance in 2009-14.

Figure 71: Number of private motor vehicles Figure 72: Auto insurance premium growth

45.7

59.4

73.3

88.4

105.0

123.4

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2009 2010 2011 2012 2013 2014

mn

216

300

350

401

472

552

0

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014

Rmb bn

Source: National Bureau of Statistics, Deutsche Bank


Liability, commercial property and engineering insurance: Total fixed-asset investment expanded at a CAGR of 18.0% in 2009-14 to Rmb51,276bn in 2014, which drove relatively rapid growth in commercial-property, engineering and liability insurance. During the same period, liability insurance recorded a five-year CAGR of 22.4% and of 11.8% for commercial property.

4 December 2015

Insurance

China Re


Figure 73: Fixed asset investment

Figure 74: Liability and commercial prop. premium

growth

22.525.2

31.1

37.5

44.6

51.3

0

10

20

30

40

50

60

2009 2010 2011 2012 2013 2014

Rmb trn

9.211.6

14.818.4

21.7

25.322.1

27.2

33.036.0

37.9 38.7

0

5

10

15

20

25

30

35

40

45

2009 2010 2011 2012 2013 2014

Liability Commercial Property

Rmb bn



Cargo, marine hull and credit insurance: Foreign trade also grew steadily in

2009-14, with a CAGR of 11.9% in China’s total imports and exports to Rmb26.4tr. This boosted growth in cargo and credit insurance, with CAGRs of 9.9% and 23.4% respectively during that period.

Figure 75: Trade volume Figure 76: Cargo and credit insurance premium growth

15.1

20.2

23.624.4

25.826.4

10

12

14

16

18

20

22

24

26

28

30

2009 2010 2011 2012 2013 2014

Rmb trn

6.17.9

9.8 10.2 10.3 9.8

7.0

9.6

11.5

16.1 15.5

20.1

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

Cargo Credit

Rmb bn



Agricultural insurance: Agricultural insurance grew rapidly over the

past five years with a premium CAGR of 19.5%, which is driven by the

increasing demand for protection for agriculture and support from the

government.

4 December 2015

Insurance

China Re


Figure 77: Agricultural insurance premium growth

13.4 13.6

17.4

24.1

30.732.6

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014

Rmb bn


Wealth accumulation to drive demand for WMP and protection

As a result of the rapid economic development, social wealth has been

increasing. Personal deposits with financial institutions grew at an average rate

of 12.8% over the past three years, while disposable income for rural and

urban residents recorded CAGRs of 10.9% and 15.3% from 2009 to 2014,

respectively. Increased wealth has changed the consumption patterns of

Chinese citizens, who are making more purchases of retirement protection and

healthcare. Insurance products are more in demand, since urban families want

to protect their quality and standard of living. Meanwhile, rural residents have

also seen an accumulation of wealth, providing further support to the life and

health insurance market in China.

Figure 78: Disposable income of urban/rural residents Figure 79: Personal deposits in financial institutions

17.219.1

21.824.6

26.528.8

5.2 5.9 7.0 7.99.4 10.5

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014

Urban Rural

Rmb thousand

35.4

41.1

46.7

50.8

30

35

40

45

50

55

2011 2012 2013 2014

Rmb trn



Transformation in social structure to increase awareness of health insurance

The urbanisation of rural areas and new construction has led to larger

populations in small towns and hence stronger purchasing power, providing

opportunities for insurers in county areas. At the same time, there has been a

change in demographics and family structure, creating demand for social

security. As a percentage of the total population, the elderly (>65 years old)

4 December 2015

Insurance

China Re


have increased from 6% in 1995 to 10% in 2014, indicating an ageing

population. In other words, there are fewer income earners to support the

elderly population and demand for protection-insurance products, pension

funds and retirement plans should increase if this trend persists.

Figure 80: China urbanisation Figure 81: China population age structure

352

459

562

670 691 712 731 749

29.0%

36.2%

43.0%

49.9%51.3%

52.6% 53.7% 54.8%

20%

25%

30%

35%

40%

45%

50%

55%

60%

300

350

400

450

500

550

600

650

700

750

800

1995 2000 2005 2010 2011 2012 2013 2014

Urban population (LHS) A % of total (RHS)

mn

27% 23% 20% 17% 16% 17% 16% 16%

67% 70% 72% 75% 74% 74% 74% 73%

6% 7% 8% 9% 9% 9% 10% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2000 2005 2010 2011 2012 2013 2014

0-14 15-64 65+



Primary insurance market growth to drive reinsurance growth

The P&C and life insurance industries have recorded rapid growth in recent

years, with five-year CAGRs of 20.3% and 9.3% respectively, as a result of fast

economic growth, wealth accumulation, social-structure optimisation and

favourable government policy.

The fast development of primary insurance business has resulted in

tremendous demand for capital capacity expansion, risk transfer and solvency

improvement. Reinsurance is one of the major options for primary insurers

with regard to risk management and capital relief.

Figure 82: P&C premiums in China Figure 83: Life premiums in China

299

403

478

553

648

754

427

0

100

200

300

400

500

600

700

800

2009 2010 2011 2012 2013 2014 1H15

Rmb bn

814

1,050

956996

1,074

1,269

943

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

2009 2010 2011 2012 2013 2014 1H15

Rmb bn

Source: CIRC, China Insurance Yearbook, Deutsche Bank

Source: CIRC, China Insurance Yearbook, Deutsche Bank

Favourable government policy to support industry development

The Chinese government has released a series of policies to support the

development of the insurance industry in China. Key policies in recent years

are summarised in Figure 84.

4 December 2015

Insurance

China Re


Figure 84: Key government policies to promote PRC insurance industry

Timeline Key Doc. Details

Nov-13 Third Plenary Session of the Eighteenth CPC Central Committee Set out target to modernise the financial industry, including the insurance industry

Aug-14 The New Ten Guidelines Set up general direction for development of insurance industry in China

Oct-14 Opinions of State Council on accelerating development of commercial health insurance

Officially confirmed the importance of health insurance in the development of modern health service and health mgmt industries

May-15 The Notice on the Commencement of Individual Income Tax Policy Pilot Program for Commercial Health Insurance

Individuals in the pilot zone entitled to preferential tax treatment in respect of purchases of certain commercial health-insurance products


In the Guidelines on accelerating the development of modern insurance industry

(the New Ten Guidelines), the government made commercial insurance an

important pillar of the social-security system and the financial system and set

out targets to achieve insurance penetration (premium/GDP) of 5% (up from

3% in 2013) and insurance density of Rmb3,500 (up from ~Rmb1,200) by 2020.

The implied premium CAGR would be 15-16% in 2015-20, based on average

annual GDP growth of 6.5-7.5% during the period.

Also, the guidelines encourage the development of insurance products,

including retirement/pension, health and critical-illness insurance for life and

catastrophe, accident, agricultural, credit and guarantee and export-credit

insurance for P&C. We note that the development of new products should

spark the need for reinsurance either in terms of risk diversification or in

technical support for actuary and risk evaluation.

Figure 85: China insurance penetration Figure 86: China insurance density

3.8%

3.0% 3.0% 3.0%3.2%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2010 2011 2012 2013 2014 … 2020

158 163 179201

236

565*

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 … 2020

USD/person

*National Ten target insurance penetration at 5% Source: Swiss Re’s Sigma reports, New Ten Guideline, Deutsche Bank

*National Ten target insurance density at Rmb3500/person Source: Swiss Re’s Sigma reports, New Ten Guideline, Deutsche Bank

4 December 2015

Insurance

China Re


Figure 87: New Ten Guidelines on key areas to develop

Segment Area of development Details

Life Retirement Encourage the launch of innovative pension products and services

Health Development of diversified health insurance services

Life and P&C Critical-illness insurance Continue the rollout of critical-illness insurance

P&C

Catastrophe insurance Commercial insurance to be used as a platform to establish a catastrophe insurance system, to explore effective protection against disasters such as typhoons, earthquakes, landslides, mudslides, food and forest fires.

Liability insurance Focus on areas such as environmental pollution, food safety, medical liability insurance

Agricultural insurance Proposal to expand coverage of agricultural insurance, begin pilot programme for agricultural-revenue insurance and explore new products and services, such as weather-index insurance.

Credit and guarantee insurance

1. Develop bond-credit insurance

2. Accelerate the development of SME credit insurance and loan-guarantee insurance to increase the financing capacity of SMEs

3. Actively develop personal consumer loan-guarantee insurance

Export-credit insurance

1. Emphasise export-credit insurance's role in supporting steady growth and transformation in exports

2. Increase export credit insurance's support of individual brands, intellectual property and strategic emerging industries

3. Steadily open up ST export-credit insurance market

Reinsurance

Product development

1. Strengthen innovation in products and technology

2. Increase the depth of protection of agriculture, transportation, energy, chemical, water resources, subway, aerospace, nuclear and other major national projects

3. Catastrophe reinsurance mechanism; establish multi-level catastrophe protection; set out regulations, reserves and database on catastrophe insurance.

Strengthened role of reinsurance

1. Role in diversifying natural disaster risks

2. Role in protection and support of Chinese corporations overseas; increase China's bargaining power in global reinsurance markets

Reinsurance market open-up Increase the number of reinsurance market participants

Develop regional reinsurance centres

Source: New Ten Guidelines, Deutsche Bank

New solvency regime – C-ROSS to promote sustainable development

The CIRC recently promulgated a risk-oriented solvency regulatory framework

(C-ROSS), which is likely to: 1) impose higher risk-management requirements

on primary insurers; 2) require more capital for certain insurance products such

as credit and surety, commercial property, engineering, agricultural and marine

hull insurance; and 3) impose rigorous requirements on reinsurers by placing

more importance on counterparty credit risk in reinsurance transactions and

reinsurers’ local underwriting capacity.

These factors are expected to increase the demand for reinsurance and risk

transfer as well as promote the healthy development of the reinsurance

business.

4 December 2015

Insurance

China Re


China Re business at a glance

Company structure

With its origins in PICC, China Re was the first and is currently the largest

domestic reinsurance group in China. It became a joint-stock limited company

after the 2007 restructuring, when Central Huijin and the MoF became its

shareholders with stakes of 84.9% and 15.1% respectively. As the largest

domestic reinsurance group in China, China Re enjoyed a leading market share

of 33.1% of premiums ceded in the China P&C reinsurance market and 37.7%

in China life and health reinsurance in 2013. It operates in the following

segments:

P&C reinsurance, domestically and abroad, through wholly-owned

subsidiary China Re P&C

Life and health reinsurance, domestically and abroad, through wholly-

owned China Re Life

Primary P&C insurance through China Continent Insurance, a 93.18%-

owned subsidiary

Asset management of insurance funds through China Re AMC

Figure 88: China Reinsurance – Current company structure (immediately after the over-allotment)

China Reinsurance (Group) Corporation

China Re P&C China Re LifeChina Continent

Insurance

Huatai Ins

AgencyChina Re UK

China Re

Underwriting

China Re AMCHuatai Surveyors

&Adjusters Co

China Re AMC

HK

100% 100% 93.18%

70%

100%

52.5% 100% 100%

10% 10% 10%

100%

Central Huijin MoF

71.56% 12.72%

NSSFCornerstone

Investors

Other public

investors

1.43% 7.57% 6.72%


4 December 2015

Insurance

China Re


Business by segment

GWP

China Re recorded a GWP CAGR of 11.5% from 2012 to 2014, while 1H15 saw

yoy growth of 23.1%. P&C reinsurance is the biggest GWP contributor

historically, with a 42% contribution in 2014, while life reinsurance and primary

P&C business accounted for 29% and 30% respectively. 1H15 saw life

reinsurance premiums outrun P&C reinsurance to become the biggest

contributor (36%), with yoy growth of 77%, due to the rapid growth of financial

reinsurance.

Figure 89: China Re – historical GWP growth Figure 90: China Re – GWP mix

59.3

67.4

73.8

35.0

43.0

0

10

20

30

40

50

60

70

80

2012 2013 2014 1H14 1H15

Rmb bn

44% 44% 42% 44%34%

27% 27% 29% 25%36%

30% 29% 30% 31% 30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H14 1H15

P&C Re Life Re P&C



Figure 91: China Re – historical GWP growth

Rmb m YoY growth YoY growth

GWP 2012 2013 2014 2013 2014 1H14 1H15 1H15

P&C Re 26,210 30,086 31,135 14.8% 3.5% 15,587 14,813 -5.0%

Life Re 16,057 18,394 21,081 14.6% 14.6% 8,775 15,543 77.1%

P&C 17,940 19,909 22,459 11.0% 12.8% 11,094 13,291 19.8%

Inter-segment -908 -1,014 -922 11.7% -9.1% -492 -599 21.7%

Total 59,299 67,375 73,753 13.6% 9.5% 34,964 43,048 23.1% Source: Company data, Deutsche Bank

4 December 2015

Insurance

China Re


Figure 92: Detailed GWP breakdown of China Re businesses

GWP GWP mix GWP YoY growth

Rmb m 2012 2013 2014 1H15 2012 2013 2014 1H15 2013 2014

Group GWP* 60,168 68,326 74,573 43,582 100% 100% 100% 100% 14% 9%

P&C Re 26,210 30,086 31,135 14,813 44% 44% 42% 34% 15% 3%

Domestic 24,122 28,422 29,296 13,338 40% 42% 39% 31% 18% 3%

Motor 14,701 16,998 17,491 7,308 24% 25% 23% 17% 16% 3%

Comm'l prp and hhd 3,799 4,302 4,354 2,198 6% 6% 6% 5% 13% 1%

Agricultural 1,501 2,240 3,227 1,532 2% 3% 4% 4% 49% 44%

Liability 1,352 1,602 1,455 817 2% 2% 2% 2% 18% -9%

Engineering 806 1,134 983 554 1% 2% 1% 1% 41% -13%

Others 1,963 2,146 1,786 929 3% 3% 2% 2% 9% -17%

International 1,576 1,164 1,357 965 3% 2% 2% 2% -26% 17%

Europe 422 241 585 410 1% 0% 1% 1% -43% 143%

Asia 722 662 565 324 1% 1% 1% 1% -8% -15%

North America 334 185 156 183 1% 0% 0% 0% -45% -16%

Latin America 53 61 44 36 0% 0% 0% 0% 15% -28%

Africa 25 11 4 8 0% 0% 0% 0% -56% -64%

Oceania 20 4 3 4 0% 0% 0% 0% -80% -25%

Lloyd's 476 473 476 483 1% 1% 1% 1% -1% 1%

CNIP and others 36 27 6 27 0% 0% 0% 0% -24% -80%

Life Re 16,057 18,394 21,081 15,543 27% 27% 28% 36% 15% 15%

Domestic 9,366 11,309 15,003 13,528 16% 17% 20% 31% 21% 33%

Protection-type 2,494 2,698 2,877 1,664 4% 4% 4% 4% 8% 7%

Savings-type 1,586 748 671 305 3% 1% 1% 1% -53% -10%

Financial reinsurance 5,286 7,863 11,455 11,559 9% 12% 15% 27% 49% 46%

Overseas (cross-border Rmb) 6,537 6,952 5,954 1,951 11% 10% 8% 4% 6% -14%

HK, Macau and TW 5,921 6,401 5,309 1,919 10% 9% 7% 4% 8% -17%

Rest of Asia 148 112 66 49 0% 0% 0% 0% -24% -41%

Europe 467 439 521 -42 1% 1% 1% 0% -6% 19%

Americas 1 0 58 25 0% 0% 0% 0% -100% na

Others 154 133 124 64 0% 0% 0% 0% -13% -7%

Primary P&C 17,902 19,846 22,358 13,226 30% 29% 30% 30% 11% 13%

Motor 13,978 15,683 17,840 10,391 23% 23% 24% 24% 12% 14%

Accident and ST Health 1,367 1,604 1,717 1,017 2% 2% 2% 2% 17% 7%

Commercial property 795 815 882 568 1% 1% 1% 1% 3% 8%

Liability 684 614 685 452 1% 1% 1% 1% -10% 12%

Marine hull 341 280 283 193 1% 0% 0% 0% -18% 1%

Credit 100 176 267 69 0% 0% 0% 0% 76% 52%

Other 637 674 684 536 1% 1% 1% 1% 6% 1% Note: *Before inter-segment Source: Company data, Deutsche Bank

4 December 2015

Insurance

China Re


Net profit

China Re’s net profit comes mainly from its P&C reinsurance, life reinsurance,

primary P&C, asset management and other business, with a CAGR of 54.6%

from 2012 to 2014. P&C reinsurance is the biggest contributor historically,

contributing 39% of group 2014 net profit, life reinsurance followed at 26%,

others at 19%, P&C at 16% and asset management at 0.2%. Life reinsurance

recorded strong growth of 162% yoy to become one of the biggest profit

contributors in 1H15.

Figure 93: China Re – historical net profit growth Figure 94: China Re – net profit mix

2.3

3.4

5.4

3.4

6.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2012 2013 2014 1H14 1H15

Rmb bn

49% 51%39% 33% 34%

12%

28%

26%25%

34%

31%7%

16%16%

22%

8% 14% 19%26%

11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H14 1H15




Figure 95: China Re – historical net profit growth

Rmb m YoY growth YoY growth

Net profit 2012 2013 2014 2013 2014 1H14 1H15 1H15

P&C Re 1,145 1,723 2,143 50.6% 24.3% 1,163 2,245 93.1%

Life Re 277 948 1,415 242.5% 49.3% 859 2,254 162.3%

P&C 708 238 873 -66.3% 266.4% 559 1,469 162.7%

Others 188 486 1,044 158.3% 115.0% 900 714 -20.8%

Asset management 0 8 13 2689.9% 55.0% 0 8 2571.4%

Other 478 919 1,039 92.3% 13.1% 920 679 -26.2%

Elimination -290 -442 -7 52.2% -98.1% -20 27 -232.0%

Total 2,318 3,396 5,476 46.5% 61.3% 3,481 6,682 91.9%

Minority interest 55 22 71 -59.5% 219.0% 48 104 114.9%

Attributable net profit 2,262 3,373 5,404 49.1% 60.2% 3,433 6,578 91.6% Source: Company data, Deutsche Bank

Total assets

Life reinsurance accounts for the biggest proportion of China Re’s total assets,

at 46% in 2014. P&C Reinsurance and P&C accounted for 27% and 16%

respectively. Life reinsurance assets grew rapidly in 1H15 (+36.2% yoy) to

become half of China Re’s total assets, with P&C Re and P&C at 25% and 15%

respectively.

4 December 2015

Insurance

China Re


Figure 96: China Re – historical total assets growth Figure 97: China Re – total assets mix

148155

190

231

100

120

140

160

180

200

220

240

2012 2013 2014 1H15

Rmb bn

31% 31% 27% 31% 25%

38% 40% 46% 39% 51%

17% 16% 16% 18%15%

15% 13% 11% 12% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H14 1H15




Figure 98: China Re – historical total assets growth

Rmb m YoY growth HoH growth

Total assets 2012 2013 2014 2013 2014 1H14 1H15 1H15

P&C Re 45,806 48,362 52,035 5.6% 7.6% 50,545 58,554 12.5%

Life Re 55,529 61,428 87,119 10.6% 41.8% 63,366 118,665 36.2%

P&C 24,888 25,506 30,349 2.5% 19.0% 28,724 34,904 15.0%

Others 21,805 19,532 20,172 -10.4% 3.3% 20,121 18,671 -7.4%

Asset management 352 381 789 8.0% 107.3% 642 761 -3.6%

Other 42,493 41,670 44,324 -1.9% 6.4% 42,922 45,783 3.3%

Elimination -21,040 -22,519 -24,941 7.0% 10.8% -23,443 -27,872 11.8%

Total 148,029 154,829 189,675 4.6% 22.5% 162,755 230,794 21.7% Source: Company data, Deutsche Bank

Shareholder equity

China Re’s total equity is concentrated in its life reinsurance, P&C reinsurance

and P&C business segments and at the group level for management and

support. Others and elimination on the group level accounted for the biggest

proportion of total equity at 31% in 1H15, followed by P&C reinsurance at 29%,

Life reinsurance at 22% and P&C business at 19%.

Figure 99: China Re – historical shareholder equity Figure 100: China Re – shareholder equity mix

43.7

45.3

53.9

58.8

40

42

44

46

48

50

52

54

56

58

60

2012 2013 2014 1H15

Rmb bn

25% 27% 28% 29%

15%18% 20% 22%

15%14%

17% 18%

45% 42%34% 31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15




4 December 2015

Insurance

China Re


Figure 101: China Re – historical shareholder equity growth

Rmb m YoY growth HoH growth

Total equity 2012 2013 2014 2013 2014 1H14 1H15 1H15

P&C Re 10,812 12,189 15,251 12.7% 25.1% 13,174 17,150 12.4%

Life Re 6,663 8,003 11,021 20.1% 37.7% 9,166 12,855 16.6%

P&C 6,805 6,744 9,788 -0.9% 45.2% 7,433 11,108 13.5%

Others 19,989 18,952 18,575 -5.2% -2.0% 19,682 18,495 -0.4%

Asset management 241 246 568 1.8% 131.3% 550 580 2.1%

Other 38,713 39,694 41,483 2.5% 4.5% 40,578 41,480 0.0%

Elimination -18,965 -20,987 -23,476 10.7% 11.9% -21,446 -23,566 0.4%

Total 44,269 45,888 54,635 3.7% 19.1% 49,454 59,607 9.1%

Minority 595 593 741 na 834

Attributable equity 43,675 45,295 53,893 3.7% 19.0% na 58,773 9.1% Source: Company data, Deutsche Bank

P&C Reinsurance

Overview

China Re P&C’s reinsurance business mainly consists of: 1) domestic P&C

reinsurance, 2) international P&C reinsurance, 3) Lloyd’s business, 4) CNIP

business and 5) certain legacy P&C reinsurance business operated by China Re

P&C on behalf of the group. According to the China Insurance Yearbook, China

Re P&C ranked No.1 in the China P&C reinsurance market in 2013, with a

premium volume of Rmb28.4bn and a 33.1% market share.

Figure 102: China Re P&C business segments Figure 103: China Re P&C 2013 GWP and market share

P&C reinsurance business

Domestic

P&C

reinsurance

business

Int’l

P&C

reinsurance

business

Lloyd’s

business

China

Nuclear

Insurance

Pool

(CNIP)

Legacy

business

29,296 476 55 -1,357

94.1% 4.4% 1.5% 0.2% -

2014 GWP

(Rmbmn)

%

28.4

15.6

8.9

2.41.3 1.0 0.3 0.0

0

5

10

15

20

25

30

China Re Swiss Re Munich Re

SCOR Re Taiping Re

Hannover Re

Lloyd's General Re

33.1% 18.2% 1.1%1.6%2.8%10.3% 0.0%0.3%

Rmb bn


Note: GWP for China Re P&C is based on CIRC data Source: China Insurance Yearbook, Deutsche Bank

China Re P&C recorded average GWP growth of 9.0% in 2012-14. Domestic

P&C reinsurance business accounted for the majority of the premium income

in 2014, at 94%. In 1H15, GWP declined 5.0% yoy, mainly due to decreased

premiums ceded from motor insurance; this more than offset the growth in

international business, whose contribution increased from 4% in 2014 to 7% in

1H15 and premiums from domestic agricultural, engineering and liability

business.

4 December 2015

Insurance

China Re


Figure 104: China Re – P&C reinsurance GWP Figure 105: China Re – P&C reinsurance GWP mix

26,210

30,08631,135

15,587 14,813

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2012 2013 2014 1H14 1H15

Rmb mn

92% 94% 94%90%

6% 4% 4%7%

2% 2% 2% 3%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2012 2013 2014 1H15

Domestic International Lloyd's CNIP



Profitability and returns

P&C reinsurance business recorded average net profit growth of 36.8% in 2012-14

to Rmb2,143m, due to: 1) an improvement in the combined ratio from 99.0% in

2012 to 98.0% in 2014; and 2) steady growth in investment income of 25.4% in

2012-14. ROAE also steadily improved from 10.6% in 2012 to 15.6% in 2014.

Figure 106: China Re P&C – net profit Figure 107: China Re P&C – ROAE and ROAA

1,145

1,723

2,143

1,163

2,245

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 1H14 1H15

Rmb mn

10.6%

15.0% 15.6%

18.3%

27.7%

2.5%3.7% 4.3% 4.7%

8.1%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 1H14* 1H15*

ROAE ROAA


Note(*): Half-year number is annualised Source: Company data, Deutsche Bank

Figure 108: China Re P&C combined ratio Figure 109: China Re P&C – Total inv income

58.1% 60.2% 64.0% 61.6%

40.9% 38.3% 34.1% 36.4%

99.0% 98.6% 98.0% 98.0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15

Loss ratio Expense ratio

1,417

1,855

2,228

1,071

2,833

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 1H14 1H15

Rmb mn



4 December 2015

Insurance

China Re


Business lines

Below we provide details of each business line within China Re P&C.

Domestic P&C reinsurance

Domestic P&C reinsurance provides reinsurance coverage for a wide range of P&C business including motor, commercial property and household, engineering, agricultural and liability. It is the key business, which accounted for 94% of total P&C reinsurance GWP in 2014 and recorded a 2012-14 GWP CAGR of 10.2%. The underwriting margin for domestic P&C reinsurance is relatively low, with the 2014 combined ratio at 99.3%.

Figure 110: Domestic P&C reinsurance historical GWP Figure 111: Domestic P&C reinsurance combined ratio

24,122

28,42229,296

13,338

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2012 2013 2014 1H15

Rmb mn

55.2% 60.1% 64.0% 62.7%

42.0%39.5% 35.3% 36.3%

97.2% 99.6% 99.3% 99.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15




The largest business line (accounting for ~60% of GWP historically), motor

reinsurance GWP saw modest growth in 2013/14 at 15.6% and 2.9%

respectively. Its loss ratio has continued to climb over the past two years, from

59.1% in 2012 to 62.6% in 2014. Agriculture reinsurance was the fastest

growing business line in the past two years, at an average of 46.6% yoy, with

its proportion increasing from 6% in 2012 to 11% in 2014. At the same time, it

has the fastest growing loss ratio, which was recorded at 79.6% in 2014, the

highest among all business lines.

4 December 2015

Insurance

China Re


Figure 112: GWP and loss ratio by segment

YoY growth

Domestic P&C Re 2012 2013 2014 1H15 2013 2014

Motor 14,701 16,998 17,491 7,308 15.6% 2.9%

Comm'l prop and household 3,799 4,302 4,354 2,198 13.2% 1.2%

Agricultural 1,501 2,240 3,227 1,532 49.2% 44.1%

Liability 1,352 1,602 1,455 817 18.5% -9.2%

Engineering 806 1,134 983 554 40.7% -13.3%

Others 1,963 2,146 1,786 929 9.3% -16.8%

Total 24,122 28,422 29,296 13,338 17.8% 3.1%

Mix

Motor 60.9% 59.8% 59.7% 54.8%

Comm'l prop and household 15.7% 15.1% 14.9% 16.5%

Agricultural 6.2% 7.9% 11.0% 11.5%

Liability 5.6% 5.6% 5.0% 6.1%

Engineering 3.3% 4.0% 3.4% 4.2%

Others 8.3% 7.6% 6.0% 6.9%

Total 100.0% 100.0% 100.0% 100.0%

Loss ratio

Motor 59.1% 59.6% 62.6% 67.1%

Comm'l prop and household 46.5% 72.3% 73.0% 51.9%

Agricultural 56.9% 65.1% 79.6% 62.8%

Liability 44.7% 48.7% 54.7% 60.8%

Engineering 54.6% 44.1% 51.0% 57.0%

Others 47.2% 52.2% 49.2% 52.1%

Total 55.2% 60.1% 64.0% 62.7% Source: Company data, Deutsche Bank

International P&C reinsurance

International P&C reinsurance business refers to that written from ceding

companies outside mainland China, with primary coverage of non-marine,

specialty, liability and motor insurance. It accounted for 4.4% of total P&C

reinsurance GWP in 2014. China Re’s international P&C reinsurance business

was mainly developed in Asia before 2010, after which it expanded to

developed markets such as Europe and the US. Despite a decline in premium

growth (2012-14 CAGR of -7.2%), the combined ratio improved from 145.3% in

2012 to 92.6% in 2014.

4 December 2015

Insurance

China Re


Figure 113: Int’l P&C reinsurance GWP growth Figure 114: Int’l P&C reinsurance combined ratio

1,576

1,164

1,357

965

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013 2014 1H15

Rmb mn

126.4%

66.7%54.5% 48.7%

18.9%

20.9% 38.1%34.5%

145.3%

87.7%92.6%

83.3%

10%

30%

50%

70%

90%

110%

130%

150%

2012 2013 2014 1H15Loss ratio Expense ratio



Lloyd’s business

China Re P&C’s Lloyd’s business is conducted through China Re Syndicate

2088. It was originally established in December 2011 as a special-purpose

syndicate at Lloyd’s, and was converted to an independent syndicate in

November 2014 to begin underwriting business under the China Re brand.

Figure 115: Lloyd’s business historical GWP Figure 116: Lloyd’s business combined ratio

476

473

476

483

1.8%1.6%

1.5%

3.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

468

470

472

474

476

478

480

482

484

2012 2013 2014 1H15

GWP (LHS) As % of toal (RHS)

Rmb mn

86.3% 81.7%73.3%

57.6%

35.2%

19.9%21.9% 54.8%

121.5%

101.6%95.2%

112.4%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

2012 2013 2014 1H15




China Nuclear Insurance Pool (CNIP)

CNPI was founded in May 1999 by China Reinsurance Co., PICC, CPIC and

Ping An to support the development of nuclear power in China. Currently, CNIP

has 25 members, who provide nuclear insurance underwriting capacity in

proportion to their net assets and bear joint and several liabilities for the

business they participate in. China Re P&C’s CNPI business includes: 1)

nuclear material damage insurance, 2) nuclear third-party liability insurance, 3)

nuclear material transportation liability insurance and 4) business interruption

insurance in relation to civil nuclear facilities in and outside China. Currently,

China Re P&C domestic nuclear insurance covers 26 nuclear power units in all

11 nuclear power plants operated for commercial purposes in China, while its

overseas business covers ~70% of the global commercial civil nuclear facilities

located in 23 countries and regions. Premiums from this line of business are

quite marginal, accounting for ~0.2% of total P&C reinsurance premiums.

4 December 2015

Insurance

China Re


Legacy P&C reinsurance business

This segment relates to business historically underwritten by the group but

currently operated by China Re P&C on behalf of the group. It consists of: 1)

PICC’s international business before 1996, 2) certain domestic commercial

business and business from the international market during 1996 to 2002, 3)

certain compulsory reinsurance underwritten during 2002 to 2005 and 4)

certain commercial business underwritten during 2005 to 2009. The legacy

segment does not generate any new business currently.

Life reinsurance

Overview

China Re life and health reinsurance business mainly consists of: 1) domestic

protection-type reinsurance, 2) domestic savings-type reinsurance, 3) domestic

financial reinsurance, 4) international life and health reinsurance and 5) legacy

life and health reinsurance business retained at the group level.

Figure 117: China Re Life by business line Figure 118: China life reinsurance market (2013)

Protection-

type

reinsurance

Savings-

type

reinsurance

Financial

reinsurance

Cross-

border

RMB

reinsurance

Other

2,877 11,455 5,302 652671

13.6% 3.2% 54.3% 25.2% 3.1%

2014 GWP

(Rmbmn)

%

Life and health

reinsurance business

Domestic International

13.2

11.3

3.2

2.01.4

0.3

0

2

4

6

8

10

12

14

Hannover Re China Re Munich Re Swiss Re SCOR Re General Re AG

Rmb bn



Figure 119: China Re Life historical GWP Figure 120: China Re Life – GWP mix

16,057

18,394

21,081

8,774

15,543

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

21,000

23,000

2012 2013 2014 1H14 1H15

Rmb mnRmb mn

16%10%

33%37%

4%11%

2%

74%

12%

1%0%

10%

20%

30%

40%

50%

60%

70%

80%

Domestic protection

Domestic savings

Financial Cross-border Rmb

Other

2012 2013 2014 1H15



4 December 2015

Insurance

China Re



The life reinsurance business recorded average net profit growth of 126.0% in

2012-14 to Rmb1,415m as a result of: 1) strong growth in investment income,

which averaged 40.9% in 2012 to 2014, and 2) an increase in associate income

to Rmb474m in 2014. ROAE also steadily improved from 4.2% in 2012 to

14.9% in 2014.

Figure 121: China Re Life – net profit Figure 122: China Re Life – ROAE and ROAA

277

948

1,415

859

2,254

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 1H14 1H15

Rmb mn

4.2%

12.9%14.9%

20.0%

37.8%

0.5%1.6% 1.9% 2.8%

4.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2012 2013 2014 1H14* 1H15*

ROAE ROAA


Note: Half-year numbers are annualised Source: Company data, Deutsche Bank

Business lines

Domestic protection-type reinsurance

Domestic protection-type reinsurance can be divided into life, health and

accident, based on protection category, or long term and short term based on

duration. Protection-type reinsurance recorded average growth of 7.4% in

2012-14, mainly driven by health, which accounted for the majority (62% in

2014) of protection-type reinsurance.

Figure 123: Domestic protection type reinsurance GWP Figure 124: Domestic protection type reinsurance GWP

mix

2,494

2,698

2,877

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

2012 2013 2014

Rmb mnRmb mn

6.0% 4.8% 6.5% 5.7%

56.4% 56.6%62.5% 61.5%

37.6% 38.6%31.0% 32.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15

Life Health Accident



4 December 2015

Insurance

China Re


Domestic savings-type reinsurance

This line of business comprises solely long-term life insurance (mainly

endowment insurance) with a policy period of less than five years. GWP has

declined over the past two years at an average rate of 35.0% as a result of

significant cost increases due to a sustained high interest rate market

environment. The segment only accounted for 2.3% of total life reinsurance in

1H15.

Domestic financial reinsurance

Financial reinsurance is mainly used to cater to clients’ needs for financial management rather than insurance risk transfer. It has large but volatile volumes and relatively low profit margins. It is usually ceded on a temporary basis. The business enjoyed average growth of 47.2% in 2012-14 and reached Rmb11,559m in 1H15 (the volume for 2014 achieved already), pushed by two new contracts worth Rmb10,300m. It accounted for 74% of total life reinsurance in 1H15.

Figure 125: Domestic savings type reinsurance GWP Figure 126: Domestic financial reinsurance GWP

1,586

748671

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013 2014

Rmb mnRmb mn

5,286

7,863

11,455

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2012 2013 2014

Rmb mnRmb mn

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Overseas life and health reinsurance

Most of China Re’s overseas life and health reinsurance business is cross-border renminbi reinsurance, which was launched in 2010. It was the first reinsurance company to run such a business and has established itself as a leading reinsurer in this sector. Besides cross-border renminbi reinsurance, Chine Re Life also has a small amount of short-term protection-type reinsurance business in overseas markets, primarily in the form of reciprocal business. China Re Life reported 2014 overseas L+H reinsurance premiums of Rmb5,954m, accounting for 28% of total L+H reinsurance.

Cross-border Rmb reinsurance

Cross-border renminbi reinsurance is business reinsured by reinsurance/insurance companies in China from overseas cedants and settled in renminbi. China Re established the business in Hong Kong in 2010 and expanded into Macau, Singapore, Taiwan and other markets globally thereafter. China Re has developed business relationships with all life insurers that offer renminbi-denominated policies in Hong Kong, and reinsured ~42% (in terms of TWP) of new business premiums of renminbi-denominated individual policies in 2014.

4 December 2015

Insurance

China Re


Figure 127: Overseas L+H reinsurance GWP mix Figure 128: Cross-border Rmb reinsurance by region

91% 92%89%

98%

9% 8%11%

2%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2012 2013 2014 1H15

Cross-border Rmb reinsurance Other overseas L+H

91% 92% 89% 98%

2% 2% 1%3%7% 6% 9%

-2%

1%

-20%

0%

20%

40%

60%

80%

100%

2012 2013 2014 1H15

HK, Macau and TW Rest of Asia Europe Americas



China Continent P&C insurance

Overview

China Re operates its P&C insurance business through China Continent

Insurance, a 93.18%-owned subsidiary. It is the sixth-largest player in China’s

P&C space, with a market share of 3.1% in 1H15. The business saw stable

growth over the past five years, with a CAGR of 13.9% in 2009-14.

Figure 129: China Continent historical GWP Figure 130: Top players in P&C industry (1H15)

1.5

3.8

6.3

10.0 9.410.3

13.8

16.317.9

19.8

22.4

13.2

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15

Rmb bn

Mkt Shr 1% 3% 4% 5% 4% 3% 3% 3% 3% 3% 3% 3%

Ranking #7 #7 #6 #5 #5 #5 #5 #6 #6 #6 #6 #6

PICC P&C34%

Ping An19%

CPIC11%

CL P&C6%

China Ins5%

Ch Continent3%

Others22%

Source: Company data, CIRC, Deutsche Bank


China Continent has relatively high exposure to auto insurance, accounting for

80% of its 2014 GWP (vs. an average of 76% for the top three P&C players).

4 December 2015

Insurance

China Re


Figure 131: China Continent product mix (2014 GWP) Figure 132: Product mix comparison (2014)

Motor80%

A+H8%

Commercial prop4%

Liability3%

Marine hull1%

Credit1%

Other3%

80%73% 77% 79% 82%

20%27% 23% 21% 18%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ch Continent PICC Ping An CPIC Ch Taiping

Non-motor Motor




Drawing on its strengths in scalability, a strong distribution network and

effective management systems, China Continent realised a net profit CAGR of

11.0% in the past three years and 162.7% growth to Rmb1,469m in 1H15.

ROAA and ROAE stood at 3.1% and 11.6% respectively in 2014.

Figure 133: China Continent – net profit Figure 134: China Continent – ROAE and ROAA

708

238

873

559

1,469

0

200

400

600

800

1,000

1,200

1,400

1,600

2012 2013 2014 1H14 1H15

Rmb,mn

10.4%

3.5%

10.6%

15.8%

28.1%

2.8%

0.9%

3.1%4.1%

9.0%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 1H14* 1H15*

ROAE ROAA Source: Company data, Deutsche Bank

Note: Half-year data is annualised Source: Company data, Deutsche Bank

Combined ratio

China Continent’s combined ratio was relatively high at 99.8% in 2014,

compared with 95.3% for Ping An, 96.5% for PICC, 99.8% for Ch Taiping and

103.8% for CPIC. If we look at the combined ratio by segment, most of the

businesses have relatively low margins with combined ratios all >95%.

Commercial property and credit insurance had the highest combined ratios

(109.8% and 282.9% in 2014) in the past two years, due to high claims and

high expenses.

4 December 2015

Insurance

China Re


Figure 135: China Continent – historical combined ratio Figure 136: 2014 combined ratio of major P&C players

60.2% 64.6% 59.0% 55.5%

38.2%38.6%

40.8% 42.5%

98.3%103.2%

99.8% 97.9%

0%

20%

40%

60%

80%

100%

120%

2012 2013 2014 1H15

57.7% 64.4%54.4% 59.0%

68.0%

37.6%32.1% 45.4% 40.8%

35.8%

0%

20%

40%

60%

80%

100%

120%

Ping An PICC Ch Taiping Ch Continent CPIC

Expense ratio Loss ratio

95.3% 96.5% 99.8% 99.8% 103.8%



Figure 137: China Continent – combined ratio by segment

Combined ratio 2012 2013 2014 1H15

Motor 99.1% 103.5% 98.1% 97.8%

Accident and ST Health 93.8% 98.8% 99.6% 90.7%

Commercial property 56.7% 111.8% 109.8% 108.9%

Liability 93.8% 100.4% 99.9% 91.4%

Marine hull 123.0% 110.1% 97.2% 80.9%

Credit 103.7% 125.4% 282.9% -144.1%

Other 91.9% 95.6% 95.5% 117.2%

Total 98.3% 103.2% 99.8% 97.9%

Loss ratio

Motor 61.7% 65.7% 58.6% 55.5%



Liability 61.1% 59.6% 54.8% 50.5%

Marine hull 77.1% 62.2% 57.3% 52.3%

Credit 4.7% 94.1% 226.0% -149.9%

Other 45.8% 44.2% 43.7% 66.1%

Total 60.2% 64.6% 59.0% 55.5%

Expense ratio

Motor 37.4% 37.7% 39.6% 42.3%



Liability 32.7% 40.8% 45.1% 40.9%

Marine hull 45.9% 47.9% 39.9% 28.7%

Credit 99.0% 31.3% 56.9% 5.8%

Other 46.1% 51.4% 51.8% 51.1%

Total 38.2% 38.6% 40.8% 42.5%


4 December 2015

Insurance

China Re


Market exposure

Investment assets and key composition

Investment asset mix

China Re has a relatively conservative balance sheet, with fixed income assets

accounting for 75.1% of total investments in 1H15 (including term deposits of

22.9%, loans of 9.7% and bonds of 33.1%), equity at 18.3% and cash at 5.9%.

Over the past three years, equity has slightly declined (from 20.4% in 2012 to

18.3% in 1H15); term deposits have also declined (from 34.0% to 22.9%), but

loans have increased (from 2.8% to 9.7%).

Figure 138: 1H15 China Re investment mix Figure 139: China Re’s investment mix change

Cash , 5.9%

Term deposit, 22.9%

Bonds, 33.1%

Loans, 9.7%

Equity, 18.3%

Others, 10.1%

3%

34%

40%

3%

20%

0%

6%

23%

33%

10%

18%

10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Cash Term deposit Bonds Loans Equity Others

2012 2013 2014 1H15



Equity investments

China Re has maintained >15% equity investment exposure over the past three

years, with a high of 20.4% in 2012. 1H15 saw 18.3% equity investment and

92.5% was classified as available for sale (AFS), which means any investment

gains/losses should be booked through the balance sheet unless they are

realised. The remaining 7.5% was classified as trading (fair value through the

P&L), for which any gains/losses should be booked through the P&L.

4 December 2015

Insurance

China Re


Figure 140: China Re – equity as percentage of

investment assets

Figure 141: China Re – equity investment by type

20.4%

16.4% 16.1%

18.3%

0%

5%

10%

15%

20%

25%

2012 2013 2014 1H15

19.3%5.3% 8.3% 7.5%

80.7%94.7% 91.7% 92.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15

Trading AFS



Bond investments

Bond investments accounted for 33.1% of China Re’s total investments in

1H15, or 44.1% of total fixed-income investments. Over the past few years, the

proportion of corporate bonds has increased from 55.4% in 2012 to 65.1% in

1H15, and the proportion of subordinated bonds declined from 24.6% to

19.3%. Bond mix by classification remained largely stable with held-to-

maturity (HTM) accounting for 39.4% in 1H15, AFS for 59.3% and trading for

1.3% in 1H15.

Figure 142: China Re – bond investment by issuer Figure 143: China Re – bond investment by type

0.3% 0.4% 0.4% 0.4%

24.6% 25.4% 22.1% 19.3%

19.6% 17.3%15.7% 15.1%

55.4% 56.9% 61.8% 65.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15

Govt bond Sub bonds FI-issued bonds Corp bonds

2.4% 3.8% 1.5% 1.3%

57.6% 54.5% 57.4% 59.3%

40.0% 41.7% 41.1% 39.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15

Trading AFS HTM



Non-standard investments (NSI)

China Re’s NSI exposure has increased rapidly over the past three years, from

2.7% in 2012 to 8.6% in 2014 and 8.8% in 1H15. The majority of the NSIs are

debt schemes, accounting for 81.3% in 1H15, with trust at 17.9% and WMPs

at 0.7%.

4 December 2015

Insurance

China Re


Figure 144: China Re – NSI exposure Figure 145: China Re – NSI mix

2.8

7.1

12.0 12.8

2.7%

6.0%

8.6% 8.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

2

4

6

8

10

12

14

2012 2013 2014 1H15

NSI (LHS) As % of total inv (RHS)

Rmb bn

100.0%

70.8%77.3% 81.3%

8.0% 1.1%0.7%

21.1% 21.6% 17.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 1H15

Debt schemes WMPs Trust



Investment returns

China Re has outperformed the industry in the past three years in terms of net

and total investment yield. In 1H15, it achieved an annualised net investment

yield of 5.6% and an annualised total investment yield of 9.7% as a result of

gains from strong equity market performance.

Figure 146: China Re vs. listed average – net inv yield* Figure 147: China Re vs. industry – total inv yield*

5.0%

4.9%

5.2%

5.6%

4.6%

4.8%

5.1%

4.9%

4.5%

4.7%

4.9%

5.1%

5.3%

5.5%

5.7%

2012 2013 2014 1H15

China Re Listed average

4.0%

5.2%

6.5%

9.7%

3.4%

5.0%

5.6%

6.9%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

2012 2013 2014 1H15

China Re Listed average

Note: *Annualized net inv yield = 2* un-annualized net inv yield Source: Company data, Deutsche Bank

Note: *Annualised total inv yield = 2*un-annualised net investment yield + (un-annualised total investment yield – un-annualised net investment yield Source: Company data, Deutsche Bank

4 December 2015

Insurance

China Re


Capital position

Strong group and segment solvency margin ratio

China Re has a strong capital position with 2014/1H15 solvency >200% for all

segments and at a group level. On a comparative basis, its group solvency of

253% in 1H15 is at the average level for listed insurers (average of listed

insurers at 249%) The solvency of P&C reinsurance and the primary P&C

business is leading the industry at 290% and 240% respectively in 1H15. Life

reinsurance business solvency stood at 243% in 1H15, which is lower than the

industry average of 272%. Given that it has not yet issued any sub-debt, China

Re and its subsidiaries should have ample room to improve its capital position

if necessary.

Figure 148: China Re – solvency margin by business Figure 149: Group solvency margin ratio (1H15)

217%

271%

228%

248%

290%

243% 240%

253%

200%

210%

220%

230%

240%

250%

260%

270%

280%

290%

300%


2014 1H15

309%

295% 293%

253%246%

226%

197%

177%

249%

150%

170%

190%

210%

230%

250%

270%

290%

310%

330%

China Life

CPIC Ch Taiping

China Re NCI PICC P&C

Ping An PICC Grp Avg



Figure 150: P&C solvency margin ratio (1H15) Figure 151: Life solvency margin ratio (1H15)

290%

240%226%

201%

171%

154%

188%

100%

120%

140%

160%

180%

200%

220%

240%

260%

280%

300%

China Re P&C

Ch Continent

PICC P&C CPIC Ch Taiping Ping An Average

325%

309% 309%

246% 243%

225%215%

272%

150%

170%

190%

210%

230%

250%

270%

290%

310%

330%

350%

Ch Taiping

China Life

PICC Life NCI China Re Life

CPIC Ping An Avg



4 December 2015

Insurance

China Re


Valuation

Valuation at HK$2.56/share for 2016E

Sum-of-parts valuation

We value China Re at Rmb93.9bn, or HK$2.56 per share on 2016E, based on a

sum-of-parts valuation. P&C Re is valued at Rmb27.4bn on a target P/B of 1.5x,

Life Re business is valued at Rmb25.2bn, implying a 2016E life P/EV of 1.4x

and primary P&C business is valued at Rmb11.8bn on a target P/B of 1.1x.

Group and other business is priced at Rmb29.6bn on 1.0x target P/B. The

target price of HK$2.56/share implies a 2016E P/B of 1.3x and P/E of 15.8x.

Figure 152: China Re – valuation summary

2016E Rmb m HK$

Total Per share Note

P&C Re 27,353 0.74 1.5x P/B

Life Re 25,190 0.69 1.4x P/EV (Life)

P&C 11,765 0.32 1.1x P/B

Grp & others 29,622 0.81 1.0x P/B

Total 93,929 2.56 Implied 2016E target P/B of 1.3x and

P/E of 15.8x Source: Deutsche Bank estimates

P&C Re valuation

We value P&C Re at HK$0.74 per share, based on a 2016E target P/B of 1.5x.

The target P/B is based on a ROAE of 13.9%, which is the average of 2015-17E

forecasts, a risk discount rate of 11.0%, which is commonly used for insurance

companies, and a terminal growth of 5.0%. The valuation implies a 2016E P/E

of 12.3x.

Figure 153: China Re – valuation of P&C Re

2016E Target

ROAE 13.9%

Risk discount rate 11.0%

Growth 5.0%

Fair PBV 1.5x

Book value (Rmb m) 18,458

Book value per share (HK$) 0.50

Valuation (Rmb m) 27,353

Valuation per share (HK$) 0.74

- Implied 2016E P/E 12.3x Source: Deutsche Bank estimates

4 December 2015

Insurance

China Re


Life Re valuation

We value Life Re based on the 2016E appraisal value, which is the sum of:

Embedded value, which consists of adjusted net worth (ANW) of

Rmb14.2bn (HK$0.39 per share) and value of in-force (VIF) of

Rmb4.2bn (HK$0.11 per share)

Value of future new business, which we estimated by multiplying our

2016E VNB forecasts by a NB multiples of 7.6x, factoring in 8% VNB

growth for 10 years, 0% thereafter and a risk discount rate of 20%

We have a 2016E valuation of Life Re at Rmb25.2bn, or HK$0.69 per share,

implying a 2016E life P/EV of 1.4x and life P/E of 10.4x.

Figure 154: China Re – valuation of Life Re

HK$ 2014 2015E 2016E 2017E

EVPS 0.47 0.46 0.50 0.58

Value of future NB [(i) x (ii)] 0.17 0.17 0.18 0.21

- (i) NBV/shr 0.02 0.02 0.02 0.03

- (ii) NB multiple 7.6 7.6 7.6 7.6

Appraisal Value/shr 0.64 0.62 0.69 0.79

- Implied P/EV 1.4 1.4 1.4 1.4

- Implied P/E 13.2 7.1 10.4 10.5

Source: Deutsche Bank estimates

Primary P&C valuation

We value the P&C business at HK$0.32 per share, based on a target 2016E

target P/B of 1.1x, which factors in our estimation of ROAE at 11.5% (based on

the 2015-17E average), a risk discount rate of 11.0% and terminal growth of

5.0%. Note the attributable valuation took into account the 93.2% stake.

Figure 155: China Re – valuation of primary P&C

2016E Target

ROAE 11.5%

Risk discount rate 11.0%

Growth 5.0%

Fair PBV 1.1x

Book value (Rmb m) 11,715

Book value per share (HK$) 0.30

Valuation (HK$ m) 11,765

Value/share (HK$) 0.32

- Implied 2016E P/E 12.3x Source: Deutsche Bank estimates

4 December 2015

Insurance

China Re


Valuation comps

Figure 156: Current valuation (3 December 2015)

Price Mkt Cap P/EV (Group) (x) Implied P/EV (Life) (x) Implied NB multiple (x) VNB growth

LC US$ bn 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

China Re 2.50 13.7 1.4 1.3 1.3 13.5 10.6 15.5 10.9% 13.5% 8.4%

China Life - H 26.8 122.1 1.3 1.2 1.1 1.3 1.2 1.1 6.4 3.8 2.3 9.2% 32.5% 20.8%

Ping An - H 44.3 96.3 1.4 1.3 1.1 1.6 1.2 1.0 7.1 2.2 0.5 20.9% 35.8% 21.0%

CPIC - H 33.5 38.4 1.4 1.3 1.3 1.4 1.3 1.1 6.1 3.2 1.6 16.3% 32.9% 20.8%

NCI - H 34.7 21.5 1.0 0.9 0.9 1.0 0.9 0.9 0.5 -0.9 -2.0 16.0% 32.2% 17.9%

CTIH 24.0 9.6 1.0 1.0 0.9 1.0 0.9 0.8 -0.7 -0.8 -2.6 37.4% 31.4% 21.7%

PICC Group** 4.1 22.4 1.4 1.2 1.1 0.4 0.3 0.3 -10.7 -11.0 -10.5 -13.3% 13.8% 11.5%

H-listed CN Avg* 1.2 1.1 1.1 1.3 1.1 1.0 3.9 1.5 0.0 20.0% 33.0% 20.4%

AIA 48.4 75.2 2.0 2.0 1.8 2.0 2.0 1.8 20.6 17.1 12.5 23.8% 17.4% 19.4%

H-listed Avg 1.4 1.3 1.2 1.4 1.3 1.1 6.7 4.1 2.0 20.6% 30.4% 20.3%

PICC P&C 17.4 33.3 2.4 2.2 2.0 13.7 10.9 12.8 21.1% 21.5% 16.8%

China Life - A 29.6 1.8 1.6 1.4 1.8 1.6 1.5 14.8 10.3 8.1 9.2% 32.5% 20.8%

Ping An - A 36.0 1.4 1.2 1.1 1.6 1.2 1.0 6.8 2.2 0.2 20.9% 35.8% 21.0%

CPIC - A 29.0 1.5 1.4 1.3 1.5 1.3 1.2 7.0 3.9 2.2 16.3% 32.9% 20.8%

NCI - A 51.8 1.8 1.7 1.6 1.8 1.7 1.6 15.5 11.0 8.8 16.0% 32.2% 17.9%

A-listed Avg 1.6 1.5 1.3 1.7 1.5 1.3 11.0 6.9 4.8 15.6% 33.3% 20.1% Note: * H share average does not include PICC Group; **PICC Group figures for P/EV(Life), NB multiple and NBV growth refer to that of its life and health business; ***PICC Group, Ping An and China Taiping valuations are adjusted for 10% valuation discount ****For PICC P&C and China Re, P/EV is P/B and Implied NB multiples is PE Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates

Figure 157: Target valuation

Target Rating Upside P/EV (Group) (x) Implied P/EV (Life) (x) Implied NB multiple (x) VNB growth

price 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

China Re 2.56 Hold 2% 1.4 1.3 1.3 13.8 10.9 15.8 10.9% 13.5% 8.4%

China Life - H 37.7 Buy 41% 1.9 1.7 1.6 1.9 1.7 1.6 17.1 12.2 9.7 9.2% 32.5% 20.8%

Ping An - H 55.4 Buy 25% 1.8 1.6 1.4 2.2 1.9 1.6 14.7 9.0 6.0 20.9% 35.8% 21.0%

CPIC - H 47.1 Buy 41% 2.0 1.9 1.8 2.2 2.0 1.8 17.4 12.2 9.5 16.3% 32.9% 20.8%

NCI - H 56.0 Buy 61% 1.7 1.5 1.4 1.7 1.5 1.4 12.3 8.5 6.5 16.0% 32.2% 17.9%

CTIH 34.6 Buy 44% 1.4 1.4 1.2 1.6 1.6 1.4 9.4 8.1 4.7 37.4% 31.4% 21.7%

PICC Group** 4.9 Hold 20% 1.7 1.5 1.4 1.7 1.2 1.2 11.3 2.9 2.6 -13.3% 13.8% 11.5%

H-listed CN Avg* 1.8 1.6 1.5 2.0 1.8 1.6 14.8 10.2 7.4 20.0% 32.8% 19.7%

AIA 56.5 Buy 17% 2.3 2.1 1.9 2.3 2.1 1.9 26.1 20.2 15.1 23.8% 20.1% 19.7%

H-listed Avg 1.9 1.7 1.6 2.0 1.8 1.6 16.7 11.9 8.7 20.6% 30.7% 19.7%

PICC P&C 17.4 Hold 0% 2.4 2.2 2.0 13.7 10.9 12.9 21.1% 21.5% 16.8%

China Life - A 31.6 Buy 7% 1.9 1.7 1.6 1.9 1.7 1.6 17.1 12.2 9.7 9.2% 32.5% 20.8%

Ping An - A 46.4 Buy 29% 1.8 1.6 1.4 2.2 1.9 1.6 14.7 9.0 6.0 20.9% 35.8% 21.0%

CPIC - A 39.5 Buy 36% 2.0 1.9 1.8 2.2 2.0 1.8 17.4 12.2 9.5 16.3% 32.9% 20.8%

NCI - A 47.0 Buy -9% 1.7 1.5 1.4 1.7 1.5 1.4 12.3 8.5 6.5 16.0% 32.2% 17.9%

A-listed Avg 1.8 1.7 1.6 2.0 1.8 1.6 15.4 10.5 7.9 15.6% 33.3% 20.1% Note: * H share average does not include PICC Group; **PICC Group figures for P/EV(Life), NB multiple and NBV growth refer to that of its life and health business; ***PICC Group, Ping An and China Taiping valuations are adjusted for 10% valuation discount; ****For PICC P&C and China Re, P/EV is P/B and Implied NB multiples is PE Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates

4 December 2015

Insurance

China Re


Financial forecasts

Group P&L and balance sheet forecasts

We expect China Re’s attributable net profit to grow 52.8% to Rmb8,256m in

2015, mainly driven by decent investment performance (total investment

income +58.9% yoy) and strong profit from investments in associates of

Rmb1,251m (+40% yoy), but to fall 28.1% to Rmb5,936m in 2016 due to the

high base in 2015, which has been boosted by investments. We note that it is

common for insurers to record underwriting losses, as a significant portion of

their earnings come from investment income.

We note a significant increase in profits of associates in 2014 to Rmb894m,

mainly due to the reclassification of the investments in China Everbright Bank

(CEB) from AFS equities to investments in associates at end-1Q14. Despite a

small stake holding of 4.3% in CEB, it was treated as associates since China Re

could exert influence on the business of CEB through its board seat in CEB.

The reclassification in 2014 has also resulted in a one-off investment gain of

Rmb2,066m, which is based on the difference between the market value and

book value of CEB (the stock was trading at ~0.7x trailing P/B at end-1Q14).

4 December 2015

Insurance

China Re


Figure 158: China Re Group P&L

P&L (Rmb m) 2012 2013 2014 2015E 2016E 2017E


Net premiums written 56,870 63,817 69,561 81,352 92,166 101,974

Net premiums earned 55,293 61,112 68,852 79,354 89,994 100,010

Claims -31,399 -37,826 -45,441 -43,372 -59,754 -66,389

Increase in reserve -6,361 -3,709 -4,936 -16,646 -8,660 -9,956

Commissions expense -13,178 -15,257 -12,440 -12,949 -13,145 -14,415

General and adm expenses -5,978 -6,467 -7,952 -9,437 -10,205 -10,819

Underwriting profits -1,623 -2,148 -1,917 -3,050 -1,771 -1,570

Interest and dividend income 4,862 5,429 5,816 6,765 7,467 8,099

Investment gains/(losses) -745 562 1,817 5,285 0 0

Finance costs -243 -209 -130 -130 -130 -130

Total investment income 3,874 5,782 7,503 11,920 7,337 7,968

Other income/(expenses) 667 618 620 651 684 718

Total operating income 2,918 4,252 6,206 9,521 6,250 7,117

Other exceptional 16 39 -93 0 0 0

Pre-tax earnings 2,933 4,291 6,113 9,521 6,250 7,117

Associates 0 0 894 1,251 1,343 1,437

Taxation -616 -895 -1,531 -2,380 -1,562 -1,779

Net profit 2,318 3,396 5,476 8,392 6,030 6,774

Minority interests 55 22 71 136 94 103

Net profit attributable to shareholders 2,262 3,373 5,404 8,256 5,936 6,672

Growth (YoY) 49.1% 60.2% 52.8% -28.1% 12.4%

Underwriting margin (Group) -2.9% -3.5% -2.8% -3.8% -2.0% -1.6%

Claims ratio 68.3% 68.0% 73.2% 75.6% 76.0% 76.3%

Commissions ratio 23.8% 25.0% 18.1% 16.3% 14.6% 14.4%

Expense ratio 10.8% 10.6% 11.5% 11.9% 11.3% 10.8%

Total avg investment yields 4.2% 5.0% 6.0% 8.3% 4.6% 4.6%

Net investment yields 5.0% 4.5% 4.6% 4.7% 4.6% 4.6%

Investment gain/(loss) -0.8% 0.5% 1.4% 3.6% 0.0% 0.0%

Average investment assets 97,239 119,822 127,498 145,002 162,661 176,116

ROAE 5.2% 7.6% 10.9% 13.5% 8.4% 8.8%

ROAA 1.6% 2.2% 3.2% 4.0% 2.6% 2.7% Source: Company data, Deutsche Bank estimates

4 December 2015

Insurance

China Re


Figure 159: China Re Group balance sheet

Balance Sheet (Rmb m) 2012 2013 2014 2015E 2016E 2017E

Cash and cash equivalents 2,739 7,325 7,904 8,862 9,556 10,385

Term deposits 47,588 43,679 44,142 51,148 55,154 59,941

Bonds 42,599 42,891 44,301 53,543 57,737 62,748

Trading 1,003 1,622 672 779 840 913

AFS 24,557 23,378 25,442 31,293 33,745 36,673

HTM 17,039 17,891 18,186 21,471 23,153 25,162

Equity investments 21,444 19,372 22,358 25,202 27,176 29,535

Trading 4,140 1,019 1,866 1,723 1,858 2,019

AFS 17,304 18,353 20,492 23,480 25,319 27,516

Policy and other loans 3,113 7,560 13,180 16,423 17,709 19,246

REPO 150 236 1,155 854 921 1,001

Investment properties 487 460 433 499 538 585

Investment assets 118,121 121,523 133,473 156,530 168,791 183,440

Insurance receivables 440 471 589 635 720 800

Reinsurance assets 13,961 18,897 16,792 20,231 22,994 25,470

Investment in associates/JV 6 6 7,709 8,094 8,499 8,924

PP&E 2,360 2,419 2,565 2,693 2,827 2,969

Goodwill and intangibles 1,485 1,503 1,502 1,502 1,502 1,502

Other assets 11,655 10,010 27,045 36,131 39,111 42,496

Total assets 148,029 154,829 189,675 225,816 244,445 265,602

Insurance reserves 39,762 47,712 70,316 86,963 95,623 105,579

Policyholders' reserves 36,603 41,729 48,174 59,578 65,511 72,332

Inv contract liab & deposits 3,158 5,983 22,143 27,385 30,112 33,247

P&C contract liabilities 39,526 45,269 49,072 51,551 55,310 59,735

Deferred tax liabilities 470 321 1,404 1,544 1,698 1,868

Subordinated debt 0 0 0 0 0 0

Customers' deposits (advanced premiums) 0 0 0 794 900 1,000

Deferred income tax 0 0 0 50 50 50

REPO 12,742 3,481 2,309 2,424 2,545 2,673

Payables 7,926 8,871 5,358 6,348 7,200 8,001

Other liabilities 3,332 3,287 6,582 6,714 6,848 6,985

Total liabilities 103,759 108,941 135,040 156,387 170,174 185,890

Minority interests 595 593 741 877 971 1,074

Shareholders' equity 43,675 45,295 53,893 68,551 73,300 78,638 Source: Company data, Deutsche Bank estimates

Segment P&L forecasts

P&C reinsurance

We expect China Re P&C’s net profit to increase 22.8% yoy to Rmb2,632m,

mostly helped by the strong performance in 1H15. We have factored in the

Tianjin Explosions, resulting in the 2H15E loss ratio increasing 3.2ppt and the

combined ratio +3.6ppt. However, we forecast 2016E earnings to decline by

15.3% to Rmb2,229m due to lower investment gains, which more than offset

the underwriting improvements.

4 December 2015

Insurance

China Re


Figure 160: China Re P&C – P&L projections

P&L - P&C Re (Rmb m) 2012 2013 2014 2015E 2016E 2017E




Claims -14,332 -16,743 -19,819 -18,751 -19,757 -21,437


General and adm expenses -453 -227 -257 -349 -245 -335

Underwriting profits 82 363 607 -203 674 837


Investment gains/(losses) -145 162 392 1,597 0 0

Finance costs -63 -61 -43 -45 -47 -49

Investment income 1,353 1,794 2,186 3,524 2,136 2,309


Total operating income 1,438 2,163 2,796 3,324 2,814 3,150

Other exceptional 16 5 -101 0 0 0

Pre-tax earnings 1,454 2,168 2,695 3,324 2,814 3,150

Associates 0 0 6 6 6 6

Taxation -309 -444 -558 -698 -591 -662

Net profit 1,145 1,723 2,143 2,632 2,229 2,494

Growth (YoY) 50.6% 24.3% 22.8% -15.3% 11.9%

Underwriting margin - P&C Re 0.3% 1.3% 2.0% -0.7% 2.2% 2.5%

Claim ratio 58.1% 60.2% 64.0% 64.5% 64.5% 64.0%

Commission ratio 39.7% 37.7% 33.3% 35.0% 32.5% 32.5%

Expense ratio 1.8% 0.8% 0.8% 1.2% 0.8% 1.0%




ROAE 10.6% 15.0% 15.6% 16.1% 12.5% 13.1%

ROAA 2.5% 3.7% 4.3% 4.8% 3.8% 3.9%


Life reinsurance

We forecast a strong net profit of Rmb3,088m (+118.2% yoy) for 2015 as a

result of investment gains in 1H15. We estimate that 2016 net profit will

decline 21.9% to Rmb2,412m due to lower investment gains.

4 December 2015

Insurance

China Re


Figure 161: China Re Life – P&L projections

P&L - Life Re (Rmb m) 2012 2013 2014 2015E 2016E 2017E




Claims -7,753 -10,087 -14,151 -11,098 -25,287 -29,072

Increase in reserve -6,361 -3,709 -4,936 -16,646 -8,660 -9,956

Commissions expense -2,263 -3,464 -528 -971 -1,212 -1,394

General and adm expenses -214 -395 -599 -971 -1,212 -1,195

Underwriting profits -1,426 -1,352 -1,777 -1,942 -1,732 -1,792



Finance costs -70 -56 -23 -24 -26 -27

Investment income 1,403 2,243 2,898 4,894 3,702 4,156


Total operating income 339 1,182 1,331 3,173 2,203 2,607

Other exceptional 1 35 8 0 0 0

Pre-tax earnings 340 1,217 1,340 3,173 2,203 2,607

Associates 0 0 474 708 760 813

Taxation -63 -269 -399 -793 -551 -652

Net profit 277 948 1,415 3,088 2,412 2,768

Growth (YoY) 242.5% 49.3% 118.2% -21.9% 14.8%

Underwriting margin - P&C Re -9.4% -8.3% -9.6% -7.0% -5.0% -4.5%

Claims ratio 93.1% 84.6% 103.5% 100.0% 98.0% 98.0%


Expense ratio 1.4% 2.4% 3.2% 3.5% 3.5% 3.0%




ROAE 4.2% 12.9% 14.9% 25.4% 17.4% 18.3%

ROAA 0.5% 1.6% 1.9% 3.4% 2.4% 2.5%


P&C insurance

We estimate that 2015 net profit will increase 89.2% to Rmb1,652m as a result

of the strong investment performance in 1H15 (net profit +367.7% yoy to

Rmb1,469m). We estimate that 2H15E net profit will decline 87.5%, factoring

in the claims from Tianjin Explosion, resulting in a 2H15 combined ratio of

103.0% and 2015 at 101.0%. We expect an improvement in the combined ratio

in 2016 to 100.0%, but this could be more than offset by weaker investment

gains, resulting in a 37.7% yoy decline in 2016 net profit.

4 December 2015

Insurance

China Re


Figure 162: Primary P&C – P&L projections

P&L – Primary P&C (Rmb m) 2012 2013 2014 2015E 2016E 2017E




Claims -9,314 -10,992 -11,473 -13,523 -14,710 -15,881


General and adm expenses -4,871 -5,350 -6,450 -7,438 -8,035 -8,541

Underwriting profits 161 -660 -103 -225 0 133

Interest and dividend income 804 840 963 1,204 1,273 1,308


Finance costs -48 -41 -42 -44 -46 -49

Investment income 691 856 1,118 2,288 1,227 1,259


Total operating income 963 285 1,141 2,195 1,365 1,539

Other exceptionals -1 0 -2 0 0 0

Pre-tax earnings 962 285 1,140 2,195 1,365 1,539

Associates 0 0 6 6 6 6

Taxation -254 -47 -273 -549 -341 -385

Net profit 708 238 873 1,652 1,030 1,160

Growth (YoY) -66.3% 266.4% 89.2% -37.7% 12.6%

Underwriting margin - P&C 1.0% -3.9% -0.5% -1.0% 0.0% 0.5%

Claims ratio 60.2% 64.6% 59.0% 60.0% 59.5% 59.5%


Expense ratio 31.5% 31.5% 33.2% 33.0% 32.5% 32.0%




ROAE 10.4% 3.5% 10.6% 15.7% 9.0% 9.7%

ROAA 2.8% 0.9% 3.1% 4.9% 2.7% 2.8%


4 December 2015

Insurance

China Re


EV and VNB

Assumptions on EV and VNB

Reported EV and VNB

We forecasts Life Re’s Life EV to grow by 16.3% yoy in 2015E to Rmb16,035m

and by 15% yoy in 2016E to Rmb18,441m. We estimate the Life Re VNB to

grow by 20.0%/15.0% yoy to Rmb772mn and Rmb887mn in 2015-16E.

Figure 163: EV and VNB forecasts

Rmb m 2014 2015E 2016E 2017E 2H14 1H15 2H15E

Life ANW 10,380 12,545 14,233 16,171 10,380 12,333 12,545

VIF 3,404 3,489 4,208 5,024 3,404 3,899 3,489

Life EV 13,783 16,035 18,441 21,196 13,783 16,232 16,035

- YoY/HoH growth 16.3% 15.0% 14.9% 17.8% -1.2%

Group ANW 53,091 69,581 73,701 78,310 53,091 58,154 69,581

VIF 3,404 3,489 4,208 5,024 3,404 3,899 3,489

Group EV 56,495 73,070 77,909 83,335 56,495 62,053 73,071

- YoY/HoH growth 29.3% 6.6% 7.0% 9.8% 17.8%

12M VNB 643 772 887 1,020 643 811 772

- YoY growth 20.0% 15.0% 15.0% 20.0% Source: Company data, Deutsche Bank estimates

EV assumptions

China Re uses a risk discount rate of 11%, at the average level of listed peers.

It is relatively more optimistic on capturing opportunities with impressive

investment returns, and assumes a flat rate of investment returns at 5.5%.

Figure 164: RDR assumptions (2014) Figure 165: Long-term investment return assumptions

11.0% 11.0% 11.0% 11.0%

11.5%

11.0%

10.0%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

China Re Life

China Life Ping An CPIC NCI Taiping Life

PICC Life

5.50% 5.50% 5.50%

5.20%

5.50% 5.50%

5.75%

5.0%

5.1%

5.2%

5.3%

5.4%

5.5%

5.6%

5.7%

5.8%

China Re China Life Ping An CPIC NCI Ch Taiping PICC Life



EV assumptions compared with peers

China Re’s EV assumptions relative to its peers are listed in Figure 166. The

company’s investment return assumption is a flat 5.5%, which is relatively

aggressive compared with those of its peers.

4 December 2015

Insurance

China Re


Figure 166: Summary of EV assumptions (2014)

Base case China Re Life China Life Ping An CPIC NCI TPL PICC Life

Long term investment return assumptions

5.50% 5.50% 5.50% 5.20% 5.50% 5.50% 5.75%

RDR 11.0% 11.0% 11.0% 11.0% 11.5% 11.0% 10.0%

Tax 25% 25% 25% 25% 25% 25% 25%

Mortality Ultimate mortality assumptions: 50%-80% of "China Life Insurance Mortality Tables (2000-2003)" or the pricing mortality tables of the primary insurance products; the selection factors are used.

Group bases: China Life Insurance mortality table (2000-2003) Critical-illness products: analysis of historical experience and expectations of future developments

65% of the China Life Table for non-annuities. For annuitants, the experience mortality rates since the grant period has been based on 60% and 50% of China Life Annuity (2000-03) table for male and female, respectively

Life products: 70% of China Life Table (2000-03) for non-annuitants, with selection factors of 50% in policy year 1, 25% in policy year 2 and ultimate rates applicable thereafter; deferred annuity products: 80% of China Life Table (2000-03) for annuitants, together with an allowance for future mortality improvements

Based on China Life Table (2000-03), individual life and annuity products (accumulation phase): male: 65%, female: 60%; individual annuity products (payout phase):75% of individual life; group life and annuity products (accumulation phase): male: 75%. female: 70%; group annuity products (payout phase): 75% of group life

70% of the China Life Table for non-annuities, with three-year selection period; for annuitants, the experience mortality rates since the grant period has been based on 80% and 70% of China Life Annuity (2000-03) table for male and female, respectively

Set with due consideration of the prevailing experience of the industry, PICC Health’s own experience and the reinsurance rates obtained by PICC Health.

Expense Inflation of 2.0% p.a.

For individual life: Rmb37-45 per policy; for group life: Rmb14 per policy

Increase of 2% per annum

Inflation of 2.5% p.a. with respect to per-policy expenses

Inflation of 2.0% p.a. with respect to per-policy expenses

Based on benchmark assumption

Future inflation rate is assumed to be 2.5% p.a.

Morbidity 75% to 140% of the primary insurance products' pricing tables

Transferred long-term policies of China Life have all been issued on or after 10 June 1999; China Life has no morbidity experience on its policies beyond the fourth policy year

The loss ratios have been assumed to be in the range of 15-85% for short-term accident and health insurance business

Claim ratios for short-term accident and short-term health business are assumed to be in the range of 20-80%

Morbidity assumptions are expressed as a percentage of China Life Insurance Experienced Critical Illness Table (2006 to 2010)

70% of the filing rates with a three-year selection period

Set with due consideration of the prevailing experience of the industry, PICC Health’s own experience and the reinsurance rates obtained by PICC Health.

Policyholder div.

70% of interest surplus

Individual and group participating business: 70% of interest surplus

For individual life and bancassurance participating business: 75% of the interest and mortality surplus; for group life participating business, dividends have been based on 80% of interest surplus only

Individual and bancassurance participating business: 70% of interest and mortality surplus; group annuity business: 80% of interest surplus

70% of surplus arising from participating business

No disclosure No disclosure

Solvency margin

100% 100% 100% 100% 100% 100% 100%

Source: Company Data, Deutsche Bank

4 December 2015

Insurance

China Re


EV and VNB sensitivities

EV and VNB sensitivities to assumption changes (2014)

We estimate the EV and VNB of China Re Life based on a set of assumptions

and the company has provided sensitivities should these assumptions differ

from expectations. According to these sensitivities, China Re’s EV and VNB are

most sensitive to changes in investment returns, followed by a solvency

margin requirement of 150% (instead of 100%) and the risk-discount rate.

Figure 167: China Re – EV sensitivity (2014) Figure 168: China Re – VNB sensitivity (2014)

-0.3%

1.4%

-0.1% 0.0% -0.1% -0.1%

-0.7%

0.3%

-1.4%

0.1% 0.0% 0.1% 0.1%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

RDR: ±50bps

Inv return:±50bps

Mortality&morbidity:

±10%

Lapse:±10% Maintainance exp.: ±10%

CoR of S-T

reinsurance:

±1%

Solvency margin 150%

-4.9%

20.4%

-0.2%-1.7% -1.6%

-7.0%

-13.1%

5.4%

-20.4%

0.0%1.9% 1.6%

7.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

RDR: ±50bps

Inv return:±50bps

Mortality&morbidity:

±10%

Lapse:±10% Maintainance exp.: ±10%

CoR of S-T

reinsurance:

±1%

Solvency margin 150%


Source: Company Data, Deutsche Bank

EV and VNB sensitivities relative to other listed Chinese insurers

Figure 169 to Figure 180 compare China Re’s EV and VNB sensitivities to

changes in underlying assumptions based on 2014 data vs. other listed

Chinese life insurers. Compared with its peers, China Re’s VNB are noticeably

more sensitive to changes in investment return assumptions and a solvency

margin requirement of 150% (instead of 100%).

Figure 169: EV sensitivity – investment returns Figure 170: VNB sensitivity – investment returns

1.4%

9.1%

4.3%

7.0%8.4%

4.2%

6.9%

-1.4%

-9.0%

-4.4%

-7.0%-8.5%

-4.6%

-6.9%-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


Increase by 50bps Decrease by 50bps

20.4%

14.2%9.8% 11.2%

22.5% 21.2%

36.3%

-20.4%

-14.1%-9.8% -11.2%

-22.5% -21.2%

-36.3%-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%


Increase by 50bps Decrease by 50bps Source: Company data Deutsche Bank

Source: Company data Deutsche Bank

4 December 2015

Insurance

China Re


Figure 171: EV sensitivity – risk discount rate Figure 172: VNB sensitivity – risk discount rate

-0.3%

-2.7%

-1.6%-1.9%

-2.6%

-1.7%-1.3%

0.3%

2.9%

1.7%2.1%

2.8%

1.8%

1.2%

-3%

-2%

-1%

0%

1%

2%

3%

4%



-4.9% -5.6%-6.8% -6.2%

-7.9%-9.6%

-4.5%

5.4% 6.0%7.4% 6.6%

8.5%

11.2%

5.1%

-15%

-10%

-5%

0%

5%

10%

15%





Figure 173: EV sensitivity – 10% decrease in mortality

and morbidity rates

Figure 174: VNB sensitivity – 10% decrease in mortality

and morbidity rates

0.1%

1.0%

0.8%

0.4%

1.5%

0.6%

0.3%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%


0.0%

1.1%

3.3%

2.0%

3.1%

2.5%

1.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%




Figure 175: EV sensitivity – 10% decrease in

maintenance exp.

Figure 176: VNB sensitivity – 10% decrease in

maintenance exp.

0.1%

0.6%

0.4%

0.8%

1.5%

0.2%

0.5%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%


1.6%

7.8%

1.1%

9.5%

14.1%

1.5%

9.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

China Re China Life Ping An CPIC NCI Ch Taiping PICC Life Source: Company data Deutsche Bank


4 December 2015

Insurance

China Re


Figure 177: EV sensitivity – 10% decrease in lapse Figure 178: VNB sensitivity – 10% decrease in lapse

0.0%

0.2%

0.8%

-0.1%

0.7%

0.3%

1.0%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%


1.9%

1.3%

4.5%

0.9%

7.0%

3.8%

7.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%




Figure 179: EV sensitivity – solvency margin at 150% Figure 180: VNB sensitivity – solvency margin at 150%

-0.7%

-4.3%

-5.9%

-4.3%

-0.5%

-4.0%

-2.1%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%


-13.1%

-7.5% -7.3%-8.5%

-13.5%

-17.9%

-9.6%

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%




4 December 2015

Insurance

China Re


Risks

China reinsurance risks

Volatility in investment markets

As of 1H15, 18.3% of China Re’s investment assets, or Rmb26.6bn, was

invested in equity securities and 33.1% in bonds. A significant decline or

increase in the bond market or in the prices of the listed stocks that China Re

invested in, or in the portfolio investment funds that it invested in, could

materially reduce or increase the value of its investment portfolio and the

earnings during that period.

Potential adverse impact related to catastrophic events

The company’s P&C reinsurance, life and health reinsurance and primary P&C

insurance businesses have relatively high exposure to catastrophic events

domestic and abroad, which are unpredictable by nature. Due to a variety of

limitations, the assessment of catastrophe risk may be inadequate, and such

events could materially and adversely affect the company’s profitability. The

Tianjin Explosion incident in 2015 is likely to pose certain threats to China Re’s

profitability in 2H15.

Potential risks from high business concentration

In 2014, 85.8% of GWPs from the domestic P&C reinsurance business were

generated through the top five cedants. Changes in those top cedants’ ceding

strategies could materially affect the company’s premium volume, either

positively or negatively.

Intensified competition in the reinsurance and insurance industries

China Re is facing intense competition from domestic and foreign insurers in

the reinsurance and P&C industries. The competitive landscape is likely to

intensify with the entry of new players. For instance, PICC P&C and private

companies have already announced plans to establish their own reinsurance

companies. A decline in the company’s competitive position in reinsurance or

P&C could have a materially adverse effect on its business.

Credit and counterparty risk

In addition to the common counterparty risks due to bankruptcy, lack of

liquidity and operational failure etc. of counterparties; the company is subject

to credit risk arising from the premium receivables. We noted the company

recorded 95% HoH growth in reinsurance debtors in 1H15 as a result of the

new large-sum financial reinsurance contract entered in 1H15. As the business

continues to develop, it is possible that the company may fail to collect some

premium receivables from a particular counterparty at particular time.

Implementation of the C-ROSS regime

As the regulatory provisions of the C-ROSS regime have yet to be implemented,

the impact on China Re’s reinsurance and insurance business is unpredictable

and materially adverse effects cannot be ruled out.

Potential risks from innovative business

As one of the recent developed businesses for China Re Life, financial

reinsurance has grown rapidly in recent years and became the biggest

premium contributor in 2014 (accounting for 77.7% of life and health

4 December 2015

Insurance

China Re


reinsurance premium income). However, it is difficult to predict the demand for

such business from primary insurers, which may change from time to time due

to regulatory fluctuation. A substantial increase or drop in demand will

materially affect China Re Life’s underwriting performance.

Potential exchange rate and cross-border Rmb interest rate changes

Cross-border renminbi reinsurance business accounted for 89% and 98% of

total GWPs from the company’s overseas life and health reinsurance business

in 2014 and 1H15 respectively. Adverse changes in renminbi exchange rates

and the spread of renminbi interest rates between onshore and offshore

markets may lead to a decline in premiums from cross-border renminbi

reinsurance business.

Differences between actual experience and assumptions

China Re’s reinsurance and insurance business pricing and underwriting are

estimated based on a set of assumptions, which include risk-discount rates,

future investment returns, mortality and morbidity rates and other factors

beyond the company’s control. Should these assumptions fail to materialise,

China Re’s financial results could be materially different from expectations.

China’s political and economic risks

As most of China Re’s business is conducted in China, the company is

exposed to the country’s economic and political conditions. Any major

slowdown in China’s economy or unfavourable developments with regard to

the legal or socio-political environment could have an adverse impact on the

company’s business.

Potential significant influence from two largest shareholders

The two largest shareholders, Central Huijin and the MOF, currently hold

~71.56% and 12.72% of stakes in China Re. Both will likely have the ability to

exercise controlling influence over the company’s business relating to

management appointment, business strategies, dividends distribution and new

securities issuance, etc.

Cyclical nature of the reinsurance and insurance

Historically, reinsurance and primary insurance have been cyclical and

operating results have experienced fluctuations due to competition, levels of

underwriting capacity, and market demand for (re)insurance, among others.

The supply of available reinsurance capital has increased over the past several

years and may increase further due to: 1) additional capital provided by new

entrants or existing insurers or reinsurers; and 2) alternative products, such as

collateralised reinsurance contracts and other innovative insurance capital

market instruments.

Impact from changes in interest rates

China Re’s return on investment and business profitability are sensitive to

interest rate fluctuations. Since November 2014, the PBOC has reduced the

benchmark interest rate on 1Y deposits by 150ppt. A decline in interest rates

may result in reduced investment returns from the company’s newly added

fixed-income assets and thus materially reducing its profitability.

4 December 2015

Insurance

China Re


Appendix A

Management

Figure 181: Management profiles

Name Age Position Date of Joining Education Work experience

LI Peiyu 52 Executive Director and Chairman

Aug-10

Doctoral degree in management science and engineering from Tsinghua University

Mr. Li started to work on Jul-1987 in the research office of the development research department and Development Research Centre of the State Council.

From Aug-2000 to Feb-2003, he was a member of the Party Committee, deputy director, and deputy director of the Henan Province Development and Planning.

From Feb-2003 to Dec-2007, he was deputy secretary of the municipal Party committee and mayor of Hebi city, Henan province, and a member of the eighth CPC Henan Province Committee

From Dec-2007 to Nov-2008, he was chief officer of the alternative asset investment department, China Investment Corporation.

From Nov-2008 to Aug-2010, he was second-in-command of Research Office and inspector of the general department of the Research Office, the State Council.

WANG Pingsheng

58

Executive Director and Vice Chairman

Feb-08

Master’s degree in international finance from Liaoning University

Mr. Wang started to work in Sept-1996 and joined China Re in 2008.

Since May-2008, he has served as several key roles including vice-president, the compliance controller, vice-chairman, executive director and director of the labour union committee in China Reinsurance Group.

From Feb-2009 to Apr-2013, he acted as director, Huatai Insurance Agency.

From Sept-2010 to Mar-2014, he served as chairman of the supervisory committee, China Continent Insurance.

Since Nov-2012, he was chairman of the board of directors, China Life Reinsurance Corp.

From Nov-2012 to Oct-2014, he was the shareholder representative supervisor, China Everbright Bank

ZHANG Hong

50 President Jan-96

Bachelor of arts in English from University of International Relations

Mr. Zhang started to work in Sept-1987 and joined China Re in Jan-1996.

From Jan-1996, he served as several key roles including deputy general manager and vice-president successively, China Reinsurance Group.

From Jan-2006 to Jun-2009, he was chairman of the board of directors, China Life Reinsurance Corp.

From Dec-2009 to Nov-2012, he acted as director of China Re AMC.

From Sept-2009 to Dec-2009, he was general manager, China P&C Reinsurance Corporation.

From Nov-2009 to Apr-2012, he served as director, China Continent Insurance.

Since August 2012, he has been the executive director and president, China Reinsurance Group.

REN Xiaobing

48

Vice President, Compliance Controller

Jun-07

Post-graduate certificate in finance (insurance) from Nankai University

Mr. Ren started to work in Oct-1989 in the financial administration department, the non-banking department and the insurance department of the People’s Bank of China successively.

From Nov-1998 to Apr-2001, he served as deputy divisional director, the insurance intermediary supervision department, CIRC.

From Apr-2001 to Jun-2007, he was vice-president and chief underwriter, Sinosafe General Insurance Co., Ltd.

From Jun-2007 to Aug-2012, he acted as director (appointed by Central Huijin), China Re.

From Jul-2011 to Jul- 2012, he was the deputy director and director of the insurance institutions management department successively, Central Huijin.


4 December 2015

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China Re


Figure 182: Management profiles (Cont’d)

Name Age Position Date of Joining Education Work experience

KOU Riming 57

Vice President, Chief Financial Officer

Jan-09

Doctor of science degree in hydrogeology and engineering geomechanics from Geology of China Academy of Sciences

Mr. Kou started to work in Mar-1994 at China Development Bank and served in several key positions including deputy director of the fund department and general manager of the trading office.

From Nov-2001 to Sept-2005, he was director of the shareholding restructuring office, China Three Gorges Project Corporation.

From Sept-2002 to Sept-2005, he was deputy general manager and chief financial officer of China Yangtze Power Co., Ltd.

From Jun-2006 to Jan-2009, he was managing director of the fixed income department of UBS AG, Hong Kong Branch.

Mr. Kou joined the company in Jan-2009. He has served as vice-president since Mar-2009 and as the chief financial officer since Dec-2011.

YU Qing 51

Vice President, Board Secretary

Feb-09

Master’s degree in history of foreign economic philosophy from School of Economics of Peking University

Ms. Yu started to work on Feb-1989 in the Ministry of Finance and served in several key roles including divisional director of finance division, divisional director of the general division and cadre of the deputy-departmental level of the finance department.

Ms. Yu joined the company in Feb-2009. Since Mar-2009 she has been vice-president and board secretary, and since May-2010 she has also been the principal committee member of the asset-liability management committee.

LIU Tianyang

54 Audit Controller

Sep-09

Doctoral degree in management science and engineering from Huazhong University of Science and Technology

Ms. Liu served as deputy director and president of China Foreign Economy and Trade Trust Co., Ltd. (Hainan Branch) from Dec-1992 to Aug-1995.

From Aug-1995 to Sept-2009, she served several key roles in National Chemicals Import and Export Corporation, Chinese Commercial Enterprise Group, China Export & Credit Insurance Corporation, and Dagong Global Credit Rating Co., Ltd.

Ms. Liu joined the company in Sept-2009 and has since then served as the secretary of the commission for discipline inspection. She has been the audit controller since May-2013.

TIAN Meipan

40 Chief Actuary

Nov-12 Master’s degree in finance from Nankai University

Mr. Tian served as a lecturer at the insurance department of Nankai University from July-1999 to Dec-2001.

From Dec-2001 to Dec-2003, he served at the commercial business division of the company’s life insurance business department.

From Dec-2003 to Dec-2010, he served several key roles including divisional director of the actuarial division, controller of risk management department, deputy chief actuary as well as actuarial controller successively of China Life Reinsurance Corporation

Since Sept-2009, he has been the chief actuary, China Reinsurance Group. Source: Company data, Deutsche Bank

4 December 2015

Insurance

China Re


Figure 183: China Re – board of directors and management team

Name Position Education Experience

Executive Directors

Mr. LI Peiyu Chairman PhD in management science and engineering, Tsinghua University 28 years

Mr. WANG Pingsheng Vice-Chairman MA, Liaoning University 29 years

Mr. ZHANG Hong Executive Director BA, University of International Relations 28 years

Mr. REN Xiaobing Executive Director Post-graduate certificate in finance (insurance), Nankai University 26 years

Non-executive Directors

Ms. LU Xiuli Non-executive Directors MA, Renmin University 28 years

Mr. SHEN Shuhai Non-executive Directors PhD in applied economics in Jiaotong University 32 years

Independent Non-executive Directors

Ms. WANG Jun Independent non-executive Director PhD in quantitative economics, Peking University 17 years

Mr. HAO Yansu Independent non-executive Director BA, Dongbei University 32 years

Mr. LI Sanxi Independent non-executive Director BA, Accounting Department of Lanzhou Commercial College 27 years

Ms. MOK Kam Sheung Independent non-executive Director Common Professional Examination diploma in laws, University of the West of England

18 years

Mr. WEI Shiping Independent non-executive Director MA, Northern Jiaotong University 18 years

Mr. ZHU Yong Independent non-executive Director PhD in history of economics philosophy, Peking University 15 years

Mr. CAO Shunming Independent non-executive Director PhD in law, the Graduate School of Chinese Academy of Social Sciences 13 years

Mr. LIN Wei Independent non-executive Director BA, Beijing Institution of Finance and Trade 29 years

Management team

Mr. ZHANG Hong President BA, University of International Relations 28 years

Mr. REN Xiaobing Vice-President, Compliance Controller Post-graduate certificate in finance (insurance), Nankai University 26 years

Mr. KOU Riming Vice-President, Chief Financial Officer PhD in hydrogeology and engineering geo-mechanics, Geology of China Academy of Sciences

20 years

Mr. YU Qing Vice-President, Board Secretary MA, School of Economics of Peking University 26 years

Ms. LIU Tianyang Audit Controller PhD in management science and engineering, Huazhong University of Science and Technology

23 years

Mr. TIAN Meipan Chief Actuary MA, Nankai University 16 years


4 December 2015

Insurance

China Re


Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

China Re 1508.HK 2.50 (HKD) 3 Dec 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=1508.HK

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Esther Chwei

Historical recommendations and target price: China Re (1508.HK) (as of 12/3/2015)

2.30

2.35

2.40

2.45

2.50

2.55

2.60

2.65

2.70

2.75

2.80

Oct 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

4 December 2015

Insurance

China Re


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

52 %

37 %

11 %18 %11 % 14 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

4 December 2015

Insurance

China Re


Additional Information

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4 December 2015

Insurance

China Re


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4 December 2015

Insurance

China Re


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