Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

People's Insurance (PICC) / Equity Bottom-Up

*Improving Profitability: Peoples Insurance (1339.HK) [Peoples] reported 3Q20 net profit after tax of CNY 6.1 bn, an increase of CNY 593 mn (10.7%) linked quarter. The increase is primarily attributed to the Life unit, whose bottom-line improved CNY 1.5 bn (191.8%) over the period, and Other which improved CNY 784 mn (9.7x); and*PICC P&amp;C Continues An Uphill Battle: PICC P&amp;C (2328.HK) profits declined CNY 1.8 bn (37.7%).  Credit insurance remains the key drag on earnings due to underwriting weakness. PICC P&amp;C’s combined ratio increased 200 bp to 100.4% in 3Q20, due to the higher expense ratio (up 630 bp to 35.5%)  - only partially offset by a lower loss ratio (down 430 bp to 64.9%).

*Improving Profitability: Peoples Insurance (1339.HK) [Peoples] reported 3Q20 net profit after tax of CNY 6.1 bn, an increase of CNY 593 mn (10.7%) linked quarter. The increase is primarily attributed to the Life unit, whose bottom-line improved CNY 1.5 bn (191.8%) over the period, and Other which improved CNY 784 mn (9.7x); and*PICC P&amp;C Continues An Uphill Battle: PICC P&amp;C (2328.HK) profits declined CNY 1.8 bn (37.7%).  Credit insurance remains the key drag on earnings due to underwriting weakness. PICC P&amp;C’s combined ratio increased 200 bp to 100.4% in 3Q20, due to the higher expense ratio (up 630 bp to 35.5%)  - only partially offset by a lower loss ratio (down 430 bp to 64.9%). 

Peoples Insurance – Investment Led Profit Increase

*Way Too Early Provision Reduction: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase  - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk;  *Credit Is WEAKER: Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity; and *Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans.

 *Way Too Early Provision Reduction: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase  - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk;  *Credit Is WEAKER: Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity; and *Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans. 

Ping An Insurance – Bank Fundamentals Worsening

*Healthcare Ecosystem Discussed: Ping An Insurance (2318.HK) [Ping An] hosted a healthcare ecosystem investor day on September 22nd in Shenzhen. Ping An stressed that it has already built the largest online healthcare user portal; one of the largest off-line networks of medical providers; and the leading healthcare technology capabilities. Ping An reaffirmed its long-term strategic ambitions for healthcare and health technology with its announcement to invest another CNY 20-30 bn; *Investment Push Into Healthcare:For the next five years, we anticipate another CNY 100 bn to be invested in R&amp;D, but the healthcare ecosystem will be allocated an even larger percentage at 20%-30%; and*Fundamentally Challenged Still: Despite the cheerleading session,Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans.

*Healthcare Ecosystem Discussed: Ping An Insurance (2318.HK) [Ping An] hosted a healthcare ecosystem investor day on September 22nd in Shenzhen. Ping An stressed that it has already built the largest online healthcare user portal; one of the largest off-line networks of medical providers; and the leading healthcare technology capabilities. Ping An reaffirmed its long-term strategic ambitions for healthcare and health technology with its announcement to invest another CNY 20-30 bn; *Investment Push Into Healthcare:For the next five years, we anticipate another CNY 100 bn to be invested in R&amp;D, but the healthcare ecosystem will be allocated an even larger percentage at 20%-30%; and*Fundamentally Challenged Still: Despite the cheerleading session,Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans.

Thematic (Sector/Industry)

*High Court Ruling: The United Kingdom High Court ruled on a test case brought forth by the Financial Conduct Authority (FCA) indicates that the "COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover". The decision on th Business Interruption (BI) case against the insurance industry is mostly in favorable to policyholders; and *Asia-Pac To Follow: As many countries in Asia-Pacific are Common Law nations, High Court rulings such as this have a tendency to set precedent. It also wouldn’t be a surprise to see significant capital raises given the challenges to solvency.

*High Court Ruling: The United Kingdom High Court ruled on a test case brought forth by the Financial Conduct Authority (FCA) indicates that the "COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover". The decision on th Business Interruption (BI) case against the insurance industry is mostly in favorable to policyholders; and *Asia-Pac To Follow: As many countries in Asia-Pacific are Common Law nations, High Court rulings such as this have a tendency to set precedent. It also wouldn’t be a surprise to see significant capital raises given the challenges to solvency.  

Asian Insurers – High Court Ruling A Harbinger For Region

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

With everything almost done and dusted on the HSCEI 2020 dividend futures, the focus has shifted firmly to the HSCEI dividend futures contract expiring in 2021.The HSCEI 2021 dividend futures contract has dropped from a high of almost 500 index points in May 2018 and 400 index points in January 2020 to just 278 index points now. The change is mostly driven by Hang Seng Indexes' decision to include WVR securities and Secondary Listings in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a>, and with COVID-19 contributing to a sharp drop in company earnings.The HSCEI 2021 dividend futures are trading near our fair value at the moment. However, there are still many more catalysts that will keep things interesting for the next few months. Further changes in the index composition and the capping applied to WVR securities and Secondary Listings, pressure on megabanks to support the real economy at the expense of profits and shareholder return, and companies that have never paid dividends starting to pay are just some of them.We discuss all this in more detail below.

With everything almost done and dusted on the HSCEI 2020 dividend futures, the focus has shifted firmly to the HSCEI dividend futures contract expiring in 2021.The HSCEI 2021 dividend futures contract has dropped from a high of almost 500 index points in May 2018 and 400 index points in January 2020 to just 278 index points now. The change is mostly driven by Hang Seng Indexes' decision to include WVR securities and Secondary Listings in the Hang Seng China Enterprises Index (HSCEI INDEX), and with COVID-19 contributing to a sharp drop in company earnings.The HSCEI 2021 dividend futures are trading near our fair value at the moment. However, there are still many more catalysts that will keep things interesting for the next few months. Further changes in the index composition and the capping applied to WVR securities and Secondary Listings, pressure on megabanks to support the real economy at the expense of profits and shareholder return, and companies that have never paid dividends starting to pay are just some of them.We discuss all this in more detail below.

HSCEI Dividends: Multiple Catalysts to Drive Fair Value Changes

China

China Pacific Insurance (Group) Company, Ltd. is an integrated insurance services provider. The Company offers life and property insurance products through its subsidiaries.

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China Pacific Insurance (2601 HK)

Peoples Insurance – Investment Led Profit Increase

PEOPLES INSURANCE: Were It Not For Strong Investment Income, Both the Life Unit and PICC P&C Would Each Have Posted Diminishing Returns.

Thomas J. Monaco

Ping An Insurance – Bank Fundamentals Worsening

PING AN INSURANCE: PING AN BANK Reported A Completely Manufactured 3Q20 Earnings Result, Cutting Provisions Despite Substantially Weaker Credit

Thomas J. Monaco

Ping An Insurance - Investor Day

*Healthcare Ecosystem Discussed: Ping An Insurance (2318.HK) [Ping An] hosted a healthcare ecosystem investor day on September 22nd in Shenzhen....

Thomas J. Monaco

Asian Insurers – High Court Ruling A Harbinger For Region

*High Court Ruling: The United Kingdom High Court ruled on a test case brought forth by the Financial Conduct Authority (FCA) indicates that the...

Thomas J. Monaco

HSCEI Dividends: Multiple Catalysts to Drive Fair Value Changes

With multiple catalysts driving fair value estimates, there will be significant trading opportunities in the HSCEI 2021 dividend futures.

Brian Freitas

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