The Potential Opportunity in the China Insurance Companies

China healthcare have grown a lot. However, expenditures remain at 6.4% of GDP, which is far below the OECD average of 9%.

The chart above measures the health expenditure per person. China ranks in the 92nd place worldwide.

In the BCA report, global healthcare systems can be classified in the three categories, either Germany, UK or US. China’s system is closer to that of Germany.

Here is something interesting:

In 2000, just over 20% of Chinese citizens had healthcare coverage. The SARS outbreak in 2003 was a wake-up call for Chinese leaders. Thanks to heavy government subsidies and political commitments, China achieve universal healthcare coverage in 2011. Nearly 95% of its citizens have healthcare coverage.

Public health insurance may not be enough. And key signs is the increase in penetration of private health insurance.

In chart 8, we see that the CAGR for insurance premiums are growing at double digits. There may be signs of steady asset expansion.

A high and steady growth in premiums, during a period of low discount rate, may warrant a higher PE.

Faced with financial strains and growing demand for healthcare services, the government is supporting private healthcare providers by relaxing regulatory restrictions and offering tax incentives to Chinese consumers when they buy health insurance.

Early in July, the regulators also raised the equity investment cap for all insurers form 30% to 45% of total assets. In May, they also allowed insurers to invest in the secondary capital bonds issued by banks as well as perpetual bonds. This will expand the investment opportunity for insurers to diversify their investment portfolios and improve the asset/liability management.

In terms of performance, the investable insurer stocks in China have not done as well as the overall China stocks. The insurance stocks have rallied off the March lows but still lag the benchmark.

These charts show the profit margin of health and life insurance. This is calculated as (insurance premiums – insurance payments)/insurance premiums.

It looks like not a lot of insurance payouts!

Chart 13 shows that the equity valuation in terms of Price earnings are rather low compared to other sectors.

Chart 14 showed some hidden risks that we should be aware about. If we look at the investment portfolio, 38% is in other investments which can be made up of project-based debt schemes, trust plans and long-term equity investments.

Lastly, the other way to invest in this sector, is to invest in healthcare stocks. The above charts shows the relative valuations of the healthcare stocks.

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