Bullish Bets on China Life Surge as Profit May Reach Record

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Bullish bets on China Life Insurance Co. surged to an all-time high on optimism government support for the world’s fastest-growing insurance industry will drive profit to a record this year.

Calls that pay should China Life gain 10 percent cost 6.4 points more than equivalent bearish bets on Friday, three-month options data show. The gap climbed to 7.4 points on May 4, the widest in Bloomberg data dating back to February 2010. China Life reported last month that quarterly profit jumped 70 percent from a year earlier, boosted by growth in the value of new insurance policies and higher investment income amid the mainland’s world-beating equity rally.

“Earnings growth in the near term will continue to be favorable,” Pauline Dan, head of Greater China equities at Pictet Asset Management Ltd. in Hong Kong, said by phone. “Insurance penetration in China is still low, and once you start putting in a well-trained sales force, the numbers will continue to climb. Insurers are getting better returns from investments, particularly in the stock market.”

The insurance industry is getting a boost as China encourages citizens to purchase policies, with the government saying last week it will test tax deductions for buyers of health coverage. Insurers’ investment income has surged as the Shanghai Composite Index more than doubled in the past 12 months on a flood of liquidity to stimulate growth. China Life rose 1.6 percent today at the close in Hong Kong.

Earnings Outlook

China Life reached a more than five-year high last month in Hong Kong after posting first-quarter profit of 12.3 billion yuan ($2 billion), while investment income jumped 59 percent. Analysts estimate net income at China’s biggest insurer will increase 33 percent to a record 42.8 billion yuan this year, according to a Bloomberg survey.

Profits are spurring analysts to raise consensus forecasts for China’s life insurers faster than their Asia-Pacific peers, with price targets climbing an average 9.5 percent last month compared with a 4.2 percent increase across the region, according to data compiled by Bloomberg Intelligence. China Life is expected to reach HK$39.74 in 12 months.

China Life’s valuation rose to 26 times trailing earnings Friday, compared with 18 times for Ping An, the nation’s second-largest company in the industry, according to data compiled by Bloomberg. Calls to China Life seeking comment were not returned.

“Relative to its peers, China Life looks expensive,” Mark Kellock, an analyst at CIMB Securities Ltd. in Hong Kong, said by phone. “There’s probably an opportunity to switch to other insurance names. In the large-cap space, we recommend Ping An, which has been trading at a discount given the perceived higher risk element within its business.”

Ping An

Concerns about Ping An’s exposure to the banking business appear overblown considering that its life and non-life insurance businesses are quite strong, Kellock said. Analysts expect Ping An’s profit to grow 30 percent this year. A representative for the insurer declined to comment on its performance.

With China’s equity bull market stretching into a second year, some are saying the rally has been overdone. The Shanghai Composite Index fell 2.8 percent on Thursday after Morgan Stanley cut its buy rating on Chinese stocks for the first time in more than seven years, citing the weakest corporate profits since 2009. The equity benchmark retreated 7.1 percent through Friday after reaching a seven-year high on April 27, nearing the 10 percent threshold that some traders consider a correction.

The HSI Volatility Index, which tracks the cost of options on the Hang Seng Index, dropped 3.8 percent to 20.57 today. The Chicago Board Options Exchange Volatility Index, or the VIX, lost 15 percent to 12.86 on Friday, its biggest drop in almost five months.

Insurance Demand

Implied volatility, used to gauge the cost of options, for three-month options with an exercise price 10 percent above China Life shares was 41.5 on Friday, compared with 35.1 for puts 10 percent below, according to data compiled by Bloomberg.

“China Life’s strong profit growth can be sustained since growth in new business revenue has been strong,” said Wenbing Li, a Hong Kong-based analyst at Bocom International Holdings Co. “Demand for insurance products in China is huge.”