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

*Weak Results Showing No Signs Of Improvement: Ping An Insurance (2318.HK) [Ping An] reported abbreviated results for 3Q20, coming in at CNY 34.5 bn which declined CNY 8.2 bn (19.2%) on a linked quarter basis. The decline in earnings is attributed to a CNY 10.1 bn (8.7%) decline in Ping An Life (PAL) net earned premiums; a CNY 40.7 bn (43.7%) decline in investment income as rates and markets stabilized; and a CNY 8.5 bn (20.1%) increase in SG&amp;A;*Insurance Remains Fundamentally Challenged: Despite the Investor Day cheerleading session, PAL’s value of new business (VONB) declined 33% YOY in 3Q, driven by larger than expected margin decline associated with mix of reduced agent motivation during COVID-19 and demand weakness. Ping An P&amp;C’s combined ratio rose 1.0% to 99.1% in 3Q20 - barely allowing this business any breathing room. This increase would appear to be attributed to auto insurance reform, which is placing downward pressure on pricing; andBank Risk: Ping An Bank (000001.CH) [PAB], 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. 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.

*Weak Results Showing No Signs Of Improvement: Ping An Insurance (2318.HK) [Ping An] reported abbreviated results for 3Q20, coming in at CNY 34.5 bn which declined CNY 8.2 bn (19.2%) on a linked quarter basis. The decline in earnings is attributed to a CNY 10.1 bn (8.7%) decline in Ping An Life (PAL) net earned premiums; a CNY 40.7 bn (43.7%) decline in investment income as rates and markets stabilized; and a CNY 8.5 bn (20.1%) increase in SG&amp;A;*Insurance Remains Fundamentally Challenged: Despite the Investor Day cheerleading session, PAL’s value of new business (VONB) declined 33% YOY in 3Q, driven by larger than expected margin decline associated with mix of reduced agent motivation during COVID-19 and demand weakness. Ping An P&amp;C’s combined ratio rose 1.0% to 99.1% in 3Q20 - barely allowing this business any breathing room. This increase would appear to be attributed to auto insurance reform, which is placing downward pressure on pricing; andBank Risk: Ping An Bank (000001.CH) [PAB], 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. 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. 

Ping An Insurance – The Drip Drop Of Bad News

*Another Poor Set Of Results Expected: Pre-market on November 11, 2020, AIA Group (1299.HK) [AIA] is set to release its usual limited set of results. By our calculation, AIA’s overall Value of New Business (VONB) is expected to decline 30% YOY on a constant exchange rate basis – remaining flat on a linked quarter basis, however - due largely to weaker volumes and margins; *It’s More Than VONB: AIA’s product mix remains sub-optimal with the single premium product remaining the focus due to the COVID-19 impact on face-to-face agency sales. Equity markets where AIA operates had setbacks: Hong Kong (down 4%); Singapore (down 5%); and Thailand (down 8%). AIA’s EV also suffered an 8% impairment due to an investment portfolio challenges – which is a continued worry for us given the global economic challenges that all corporates and sovereigns are facing; and   *No Hong Kong Rebound In Sight: The focus should remain Hong Kong, where a 60% plus YOY decline in VONB would not be out of the question as its border with mainland China continued to remain closed due to COVID-19 restrictions. This should continue to weigh on results over the next few quarters as well.

*Another Poor Set Of Results Expected: Pre-market on November 11, 2020, AIA Group (1299.HK) [AIA] is set to release its usual limited set of results. By our calculation, AIA’s overall Value of New Business (VONB) is expected to decline 30% YOY on a constant exchange rate basis – remaining flat on a linked quarter basis, however - due largely to weaker volumes and margins; *It’s More Than VONB: AIA’s product mix remains sub-optimal with the single premium product remaining the focus due to the COVID-19 impact on face-to-face agency sales. Equity markets where AIA operates had setbacks: Hong Kong (down 4%); Singapore (down 5%); and Thailand (down 8%). AIA’s EV also suffered an 8% impairment due to an investment portfolio challenges – which is a continued worry for us given the global economic challenges that all corporates and sovereigns are facing; and   *No Hong Kong Rebound In Sight: The focus should remain Hong Kong, where a 60% plus YOY decline in VONB would not be out of the question as its border with mainland China continued to remain closed due to COVID-19 restrictions. This should continue to weigh on results over the next few quarters as well.

AIA Group – 3Q Results Will Remain Very Challenging

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

Haidilao International Holding / Event-Driven

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.With only 3 changes permitted in the September <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> review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.We see a high probability of <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>, <a href="https://www.smartkarma.com/entities/china-feihe-ltd" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe (6186 HK)</a>, <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing (981 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> being included 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 of <a href="https://www.smartkarma.com/entities/china-taiping-insurance-hldgs-co-ltd" target="_blank" data-smartkarma-citation="entities:489:1" rel="noopener">China Taiping Insurance Hldgs (966 HK)</a>, <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom Corp Ltd (H) (728 HK)</a>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Banking H (1988 HK)</a>, <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd-h" target="_blank" data-smartkarma-citation="entities:18368:1" rel="noopener">China Vanke Co Ltd (H) (2202 HK)</a>, <a href="https://www.smartkarma.com/entities/fosun-international-ltd" target="_blank" data-smartkarma-citation="entities:433:1" rel="noopener">Fosun International (656 HK)</a>, <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a> and <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua Energy Co H (1088 HK)</a> being deleted from the index.Depending on price movements between now and 30 September, <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a> and <a href="https://www.smartkarma.com/entities/hansoh-pharmaceutical-group" target="_blank" data-smartkarma-citation="entities:23675:1" rel="noopener">Hansoh Pharmaceutical (3692 HK)</a> could be included in the index, which would see <a href="https://www.smartkarma.com/entities/want-want-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:355:1" rel="noopener">Want Want (151 HK)</a> and <a href="https://www.smartkarma.com/entities/picc-property-casualty-h" target="_blank" data-smartkarma-citation="entities:350:1" rel="noopener">PICC Property &amp; Casualty H (2328 HK)</a> being deleted.Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.With only 3 changes permitted in the September Hang Seng China Enterprises Index (HSCEI INDEX) review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.We see a high probability of China Overseas Land &amp; Investment Ltd (688 HK), JD.com (HK) (9618 HK), Alibaba Health Information Technology (241 HK), Haidilao (6862 HK), China Feihe (6186 HK), Semiconductor Manufacturing (981 HK) and Evergrande Real Estate Group (3333 HK) being included in the Hang Seng China Enterprises Index (HSCEI INDEX), and of China Taiping Insurance Hldgs (966 HK), China Telecom Corp Ltd (H) (728 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK), Fosun International (656 HK), China Citic Bank Corp Ltd H (998 HK) and China Shenhua Energy Co H (1088 HK) being deleted from the index.Depending on price movements between now and 30 September, NetEase (9999 HK) and Hansoh Pharmaceutical (3692 HK) could be included in the index, which would see Want Want (151 HK) and PICC Property &amp; Casualty H (2328 HK) being deleted.Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.

HSCEI Index Rebalance Preview - December 2020: HUGE Number of Changes and Turnover Expected

Hong Kong

China Taiping Insurance Holdings Company Ltd., through subsidiaries, underwrites life and property/casualty insurance and reinsurance.

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China Taiping Insurance Hldgs (966 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 – The Drip Drop Of Bad News

PING AN INSURANCE: First It Was The Bank Who Reported Manufactured Results, As Credit Worsened. Now The Insurers Continue To Struggle With No End...

Thomas J. Monaco

AIA Group – 3Q Results Will Remain Very Challenging

AIA GROUP: Previewing 3Q Results, We Note VONB Challenges And Other Risks - Hong Kong Not Rebounding, Weak Equity Markets, and Further Investment...

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 Index Rebalance Preview - December 2020: HUGE Number of Changes and Turnover Expected

The Hang Seng Indexes Company Limited (HSIL) will announce the results of the 2020 Q2 review of the Hang Seng Family of Indexes in mid August. The...

Brian Freitas

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