The start of an uneven recovery. We remain constructive about long-term fundamentals of the insurance sector, but anticipate an uneven recovery in 2021 following the severe disruption of sales by COVID-19. For most life insurers, the ‘open-year’ sales of 1Q21 are likely to surprise the market on the upside, driven by healthy demand of saving-type insurance post COIVD-19, falling attractiveness of competing products, early and proactive preparation by insurers and a low base. However, looking beyond 1Q21, patience is needed for a solid and sustainable recovery of high margin protection products, as some customers are still reluctant to commit to long-term insurance plans and/or to having facetoface interaction with agents, even after the relaxation of lockdown measures.

Bond yield healthy, A-share supportive. We see a healthy bond yield and supportive Ashare market. On bond yield, we estimate China’s 10Y government bond yield to sustain at a healthy level of over 3.1%, supported by robust outlook of economic recovery, but partially offset by reduced issuance of local government bonds. On A-share, CS strategists expect more upside as China, relative to other regions, is already on the right track of recovery, likely leading to a less volatile shift between styles and sectors.

P&C under pressure on auto reform. In P&C, we expect the headwinds of premium growth to continue, weighed by the challenging outlook of the auto business after CBIRC deepened auto insurance pricing reform. The premium of non-auto lines, however, should deliver robust growth, thanks to under-penetration and government subsidy/support in certain lines, as well as full clearance of credit insurance. On underwriting profitability, we expect combine ratio to deteriorate YoY, led by auto reform and intensified competition.

Stock calls. In 2021, with supportive macro conditions largely intact, we believe that 2021 VNB recovery (though likely in an uneven manner) should drive the sector’s valuation recovery. The recovery of protection product demand could present further upside beyond 1Q. We expect a general growth improvement for the life sector in 2021, but divergent and uneven recovery paths for different players. Our top picks are Ping An and CPIC with sector-leading VNB growth. We revise up 2021/22 VNB forecast for CPIC and Ping An by 3%; and TP of CPIC (H) to HK$42 (from HK$37) and Ping An (H) to HK$119 (from HK$110) to reflect 1Q NB turnaround and more sustainable growth outlook in the future.