Here’s Why Fanhua Inc. Stock Is Falling Today

MarketsMotley Fool

What happened

Fanhua Inc. (NASDAQ: FANH), a China-based insurance company offering property-casualty and life insurance products, has reported its fourth-quarter and 2017 financial results. Despite an astronomical 180% rise in earnings per share over 2016, the stock fell by as much as 22% following the release.

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So what

It may sound odd that a company that nearly tripled its EPS would see its stock plunge. However, there were a few items in the report that could potentially be disappointing investors.

While earnings per share increased dramatically, that mainly seems to have stemmed from expense reductions, not stronger revenues. In fact, Fanhua's 2017 revenue was virtually flat compared to 2016. Alarmingly, its property and casualty insurance revenue fell by 51% year over year, though that was offset by strong growth on the life insurance side of the business.

More significantly, comments from Chairman and CEO Chunlin Wang could indicate a slowdown ahead.

"As we enter 2018, new premiums were down across the life insurance market during the Jumpstart sales season, due to the drastic decline in the sales of annuity and universal products which used to be the major contributors behind the rapid growth in life insurance premiums in the past two years," Wang said.

He went on to say that he still expects operating income growth of about 40% in 2018. However, even at growth at that rate, the company is still trading for 17 times forward earnings, which many investors could consider a high valuation given the uncertainty.

Now what

It's also worth pointing out that Fanhua stock has roughly tripled over the past year, even after today's drop. In other words, the stock seemed to have been priced for a best-case scenario. In such cases, anything short of perfection can cause a post-earnings-report drop like the one Fanhua experienced.

It doesn't seem like much is wrong with the insurer's business. Rather, the optimism seems to have just dropped down a notch or two.

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