Weak Markets Overshadow Sunshine Insurance IPO Plan

Key Takeaways:

• Sunshine Insurance could become China’s 10th listed insurer with its new Hong Kong IPO application, but has warned its profit could drop this year on falling investment returns
• Life and health insurance premiums contributed 66.8% of the company’s premium revenue in the first half of the year, accounting for 80% of its total embedded value

By Ken Lo

Investors looking for new Chinese insurance listings have faced a drought these past four years, with no new offerings since The People’s Insurance Co. (1339.HK; 601319.SH) made a Shanghai A-share IPO in November 2018. But a new ray of sunshine could soon brighten that corner of the financial sector with an application filed last week that would become the country’s 10th publicly listed insurer.

That application was actually a second listing attempt from Sunshine Insurance Group Co. Ltd., whose initial filing expired the previous week. The company is China’s 12th biggest life and seventh biggest property insurer, in a broader market seen to have huge potential due to a relatively low penetration rate. The deal is being underwritten by Huatai International, China International Capital Corp. (3908.HK), UBS Group and CCB International.

Market sources say the company plans to start selling shares as soon as it receives the nod from the Hong Kong Stock Exchange, aiming to raise up to $1 billion and list by the end of the month. 

The securities regulator on the Chinese mainland previously approved the insurer’s plan to issue up to 3.97 billion H-shares in Hong Kong.

Sunshine Property and Casualty Insurance was founded in 2005. After specializing in property insurance for two years, it added Sunshine Insurance Holdings and Sunshine Life Insurance to its list of corporate entities. With approval from the country’s former insurance regulator in early 2008, Sunshine Insurance Holdings was renamed as Sunshine Insurance Group and holds all the company’s operating units that span property, life, health and credit guarantee insurance as well as asset management services.

By the end of June, Sunshine’s life, property and casualty insurance units had 2,855 branches across China, covering most major cities and many smaller ones. Its sales network included 2,083 exclusive agents. The company had 31.5 million individual and 800,000 institutional clients by the end of June, with 416.27 billion yuan ($57 billion) in assets.

Outperforming five giants

Sunshine’s preliminary prospectus shows the company’s premium income rose steadily from 87.91 billion yuan in 2019 to 101.76 billion yuan last year, and was up another 14.3% in the first half of 2022 year-on-year to 62.95 billion yuan. But its investment income in the first half of this year fell 12.3% to 7.37 billion yuan due to weak markets. As a result, its net profit fell 2% to 1.79 billion yuan during the period, and it warned its profit could decline for the full year.

Chinese insurers raked in 2.8 trillion yuan in premium revenue in the first half of this year, up 5.1% from the year-ago period, according to the latest government data. But profits for the five biggest insurers fell 15% to 122 billion yuan. Thus, Sunshine’s growth of 14% in premium revenue and only a slight decline in profit showed it is outperforming the leaders.

Data published by China’s banking and insurance regulator in 2020 showed that Sunshine controlled 2.7% of the property market based on premium income in 2020, ranking it seventh among 87 companies in that segment. Its share of the life insurance market was a smaller 1.7%, ranking it 12th among 91 peers. 

Sunshine’s life insurance premium income has always been the major revenue source for the company, and grew by 14.5% and 10.4% in the past two years, respectively, accounting for nearly 60% of total premium income. That was better than the company’s property insurance business, whose revenue fell 5.8% in 2020, but rose 9% last year. Despite a slowing economy, Sunshine’s life insurance unit logged 1.95 billion yuan in new business value and 42.06 billion yuan in premium income in the first half of this year, taking its share of total revenue to 66.8%.

Sunshine’s life insurance is even more valuable to the company in terms of embedded value, worth 74.62 billion yuan, or 80% of the company’s total embedded value, by the end of June.

But Sunshine’s relatively small market share shows how the Chinese insurance market is highly concentrated in a small number of the largest players, making it difficult for smaller and medium-sized companies to gain a foothold. Sunshine’s status in that group of second-tier players, and how it can break through to the big leagues, will be one of the biggest concerns for potential investors.

Tall fundraising target

Sunshine says it will use funds from the listing to strengthen its digital technology capabilities, accelerate its digital transition, continue to build itself into a top-notch domestic insurance and asset management brand, and to cultivate synergies between its strategic investment and insurance business.

Its goals are similar to those of Zhongan Online P&C Insurance (6060.HK), a private online insurer backed by corporate giants Alibaba, Tencent and Ping An. Yet despite its high degree of digitalization, Zhongan saw its premium income grow by just 6.8% in the first half of the year and posted a loss of 622 million yuan, reflecting the difficulties facing such smaller insurers.

In terms of valuation, The People’s Insurance Co., China Life Insurance (2628.HK; 601628.SH) and Ping An (2318.HK; 601318.SH) have projected price-to-earnings (P/E) ratios ranging from 3.2 times to 4.8 times, averaging 4.2 times. Extrapolating Sunshine’s first-half profit to the whole year, it might expect an IPO valuation of around HK$16.2 billion ($2.07 billion).

While such a valuation isn’t peanuts, it makes the reported $1 billion IPO fundraising target look like a tall order. Accordingly, the company may have to set its sights lower, especially in light of weakness that has sent the Hong Kong stock market into a tailspin in recent weeks.