PREVIEW-Weak Shanghai stocks may hurt Chinese insurers' results

* WHAT: China insurers report Q2 earnings

* WHEN: Ping An (24), China Life (25)

* Shanghai stocks fell 22 pct in Q2, hitting insurer profits

* Investing overseas may help lower volatility

By Kelvin Soh

HONG KONG, Aug 23 (Reuters) - A stock market slide in the second quarter could weigh on results of China Life (2628.HK) and Ping An (2318.HK) for the period, forcing China's two biggest insurers to write down the value of their stocks.

While volatility of stocks may pose a short-term risk to insurers' earnings, foreign competition could also challenge the Chinese incumbents longer term in a market they now dominate.

The risks may be mitigated to an extent by a relaxation of investment rules for insurers announced by China this month.

Shanghai's benchmark stock index .SSEC fell over 22 percent in the second quarter, potentially forcing the top two companies to take large write-downs for their paper losses in that period. It has bounced back 10 percent since then, though any gains from the rebound won't be realised until the third or fourth quarters.

"The fall in the Shanghai stock market is likely to have a huge effect on their earnings this time around," said Xu Liping, an analyst at China Galaxy Securities in Shanghai.

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For StarMine comparative table: r.reuters.com/bev56n

For a graphic on how China's insurance sector compares:

r.reuters.com/paw26n

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China's move to introduce new rules that would allow insurers to invest as much as three times their previous limit in overseas capital markets is likely to help over the longer term, as the insurance companies become increasingly adept at managing their premiums. [ID:nTOE67A086]

Such a relaxation will allow China Life (601628.SS) and Ping An (601318.SS) to diversify away from their core Shanghai stock market, notorious for its volatility and susceptability to the whims of retail investors.

China Life reported a 56 percent jump in its investment income in the first quarter of this year to over 18 billion yuan ($2.65 billion), a feat it will be hard-pressed to repeat in the April-June quarter due to the stock market slide.

"Allowing insurers to invest more outside of China where markets are less likely to be hit by retail investors may help in the long run, although not in the current or next quarter," said China Galaxy's Xu.

LOW PENETRATION RATES

China Life is expected to report its second-quarter net profit fell 13 percent to 7.39 billion yuan, while Ping An is likely to see its net profit rise 4.6 percent to 3.35 billion yuan, according to a Reuters survey of five analysts.

Ping An shares have been suspended since June 30 as it integrates its 30 percent purchase of Shenzhen Development Bank (000001.SZ) into its own banking unit.

China Life's Hong Kong shares are down more than 13 percent so far this year, worse than the 4 percent decline on the benchmark Hang Seng Index, and its Shanghai shares are down 24 percent, more than the 19 percent decline of the Shanghai Composite Index .SSEC.

China is attractive for many foreign insurers for its low penetration rates, but companies are usually restricted by having to join with local partners that can often have little or no experience in the sector such as Aviva's (AV.L) pairing with local food company COFCO.

"Insurance is very much a business based on a lot of trust in a brand, and these foreign players will need to spend a lot more on marketing than China Life and Ping An, which may in turn eat away at profits," said Olive Xia, an analyst at Core Pacific-Yamaichi. (Editing by Doug Young and Muralikumar Anantharaman)