Saturday, March 15, 2014

The "China Worry" Effect

Fear and worry about China's economy and financial system appears to be taking its toll on China's leading insurers, and MoneyShow's Jim Jubak, thinks that's why it's important to look for a financial company in China that's firing on all cylinders.

Ping An Insurance Group ((PNGAY) in New York and (HK:2318) in Hong Kong) kicked off earnings reporting season for China's big insurance companies yesterday. Ping An, China's second largest insurer, reported a 40.3% gain in net income for 2013.

That 40% gain in net income is likely to be among the lower increases reported by China's insurance companies in the next few weeks. The average growth in net income among insurers expected by analysts is 92%. I think that makes it worthwhile holding the best of these insurers—such as Ping An and China Life (LFC), a member of my Jubak's Picks portfolio, for these earnings reports, even though the systemic stress—and thus risk—in China's financial system is rising.

I would, however, take a hard look at risk at specific companies after they've reported, to judge how exposed to these systemic risks each might be.

Ping An isn't your average Chinese insurance company. The big increase in new income in 2013 was a result of a 13% increase in net premiums and a 14% increase in profits at the company's banking arm. Ping An relies less on selling insurance through banks than the average Chinese insurer—a plus, since this business carries very slim margins—and the company has been at the forefront of innovations, such as online sales (in its auto insurance lines). On the downside, especially in the current state of the financial sector, Ping An has a big banking arm. In 2012, impairment losses at the bank doubled. In 2013, impairment losses fell from the 10 billion yuan of 2012 to 8.97 billion yuan. Bank income also rose, as long margins increased. But the bank isn't without its problems, according to analysts. For the year, analysts at Sanford C. Bernstein wrote, on March 7, the lender delayed recognition of some non-performing loans that could have, the analysts argued, cut net income by half. Ping An's bank is a key reason that the stock trades at a 10% discount to peers such as China Life.

That company isn't without its problems itself. At China Life, though, the issue is a lack of growth in new business—China Life is much more dependent on sales through banks than Ping An, and this channel simply hasn't been very effective. New business value, a measure of the profitability of new business, has lagged peers. Still, back in January, China Life guided investors to a 120% increase in net income in 2013 over 2012. The cause of that, the company said, was a big jump in investment income resulting from better performance among Chinese stocks in 2013 than in 2012.

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