Silver Point

Thomas J. Monaco

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

*VONB Better Linked Quarter: AIA Group (1299.HK) {AIA} reported 3Q20 Value of New Business (VONB) of USD 706 mn, increasing 22% linked quarter with positive growth noted in Malaysia, Singapore and India – but VONB declined 28% YOY;*Greater China Challenges: Hong Kong’s pure domestic business reported modest linked quarter growth in VONB, but is still likely struggling with mainland Chinese clients as the border remains closed due to quarantines. Mainland China too was weaker as demand for protection products remains challenged. AIA China's VONB in 3Q20 was broadly in -line with 2Q20, but was likely lower YOY given the savings shift, and lower VONB margin; and* Watch The Investment Portfolio: Yields drive the bottom-line at life insurers. Rates have been reduced to all-time lows in most markets globally, and investment returns at AIA’s bottom-line will continue to be challenged. In addition, ratings agency downgrades are expected to negatively impact AIA solvency margins.  With over USD 220 bn in corporate debt issues likely on the verge of downgrade by the venerable ratings agencies (which is greater than the actual USD 147 bn downgraded during the GFC) the market must be prepared for substantive hits to AIA’s investment portfolio.

*VONB Better Linked Quarter: AIA Group (1299.HK) {AIA} reported 3Q20 Value of New Business (VONB) of USD 706 mn, increasing 22% linked quarter with positive growth noted in Malaysia, Singapore and India – but VONB declined 28% YOY;*Greater China Challenges: Hong Kong’s pure domestic business reported modest linked quarter growth in VONB, but is still likely struggling with mainland Chinese clients as the border remains closed due to quarantines. Mainland China too was weaker as demand for protection products remains challenged. AIA China's VONB in 3Q20 was broadly in -line with 2Q20, but was likely lower YOY given the savings shift, and lower VONB margin; and* Watch The Investment Portfolio: Yields drive the bottom-line at life insurers. Rates have been reduced to all-time lows in most markets globally, and investment returns at AIA’s bottom-line will continue to be challenged. In addition, ratings agency downgrades are expected to negatively impact AIA solvency margins.  With over USD 220 bn in corporate debt issues likely on the verge of downgrade by the venerable ratings agencies (which is greater than the actual USD 147 bn downgraded during the GFC) the market must be prepared for substantive hits to AIA’s investment portfolio.

AIA Group – Greater China and Investments Remain Risks

*Weak Great Eastern Returns: Great Eastern Life (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers.

*Weak Great Eastern Returns: Great Eastern Life (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers. 

Oversea Chinese Banking Corp – Still Not A Great Eastern

*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

Canada

Manulife Financial Corporation provides financial protection products and investment management services to individuals, families, businesses, and groups. The Company conducts operations in Canada, the United States, and Asia, as well as reinsurance operations on a global basis.  Manulife offers products such as annuities, pension products, life insurance, health insurance, and mutual funds.

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Manulife Financial (MFC CN)

AIA Group – Greater China and Investments Remain Risks

AIA GROUP: While VONB Has Seen Improvement Linked Quarter, Greater China Challenges and The Investment Portfolio Are Big Risks To The Bottom-line

Thomas J. Monaco

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco

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

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