These concerns are well founded, in our view. The FY08 reporting season is going to be terrible for the China insurers. But it should not come as a surprise. As owners of financial assets (including equities), insurers‘ results are inherently exposed to equity market fluctuations, and the 65% decline in the Shanghai Composite Index in 2008 is about as severe as it comes.
Ping An is expected to report a loss for FY08. This has effectively been flagged since October when they took an impairment charge on the Fortis stake. PICC is forecast to report an 85% YoY decline in EPS. With the 1H08 loss underpinned by large catastrophe losses, our FY08 EPS forecast implies a moderate 2H08 recovery.
Within the sector, we prefer PICC as we believe its 2H08 results will provide evidence of cyclical improvement in operating profits. Confession season underway Earnings ”confession season‘ continued with CIIH releasing a profit warning that indicated it expected to report a net loss for FY08. This follows on from China Life‘s recent announcement that its PRC GAAP earnings would fall by more than 50% YoY.
This naturally leads to concerns about who is the next to come out with a profit warning and how bad might it be. In this note, we consider the prospects for Ping An and PICC.
Ping An
We expect Ping An to release a profit warning in the coming weeks. Given its A share listing, it is required to guide investors in relation to abnormal movements in its earnings and the FY08 results should certainly be considered abnormal.
We expect a FY08 loss of Rmb5.1 bn, or Rmb0.69 in EPS terms. Despite the shock value of such a large loss, it should not really come as a surprise. Ping An took an impairment charge of Rmb15.7 bn on its Fortis investment in its 3Q results and the combination of further falls in the value of this investment plus additional declines in the broader equity market should be sufficient to transform the Rmb1.8 bn profit achieved in 9M08 into a sizeable loss.
PICC
It is unclear whether PICC will release a profit warning. Given it is not listed in the A Share market, we do not believe it is required to provide a guidance on material earnings changes; however, like CIIH, it may decide it is good corporate governance to do so.
We forecast PICC will report a net profit of Rmb465 mn, representing an 85% YoY decline in EPS. While this is clearly a disappointing result, we believe a weak headline has largely already been known by the market since August when PICC reported a 1H08 loss due to abnormal catastrophe claims costs and weak investment markets.
Ironically, we are looking for signs of encouragement in this coming result. We believe underwriting profitability will show early signs of recovery based on stabilisation of premium rates, easing pressure on commission rates and PICC‘s focus on trimming costs from admin and claims settlement. After a difficult 1H08, evidence of improvement in 2H08 would bode well for the outlook for 2009.
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