Company Reports

New China Life, PICC Group, and PICC P&C reported larger-than-peer contractions in first-quarter net profits of 29%, 24%, and 38% year on year, respectively. This was partly due to the high base a year ago as a result of strong investment income for NCI and a record-low combined ratio for PICC P&C. We believe the results are largely in line to achieve our 2024 net profit growth of 19%, 22%, and 20% for PICC P&C, PICC Group, and NCI.

PICC Group and its property and casualty subsidiary, PICC P&C's 2023 net profit contracted 10.2% and 15.6% to CNY 22.8 billion and CNY 24.6 billion, respectively. The results of the P&C insurance business were largely in line, with full-year auto combined ratio, or COR, improving to 96.9% from 97.9% in the first three quarters, while nonauto COR edged up 5 basis points to 99.1%. Both ratios meet management’s targets of below 97% for auto insurance and below 100% for nonauto insurance, despite the record-high catastrophe-related net losses in the third quarter of 2023.

As China’s largest nonlife insurer, majority state-owned PICC P&C boasts first-mover advantage in major P&C insurance products, thanks to its extensive rural network and strong government support.

PICC Group and PICC P&C’s cumulative nine-month net profits unexpectedly contracted 15.5% and 26% year on year to CNY 20.5 billion and CNY 19.4 billion, respectively, in contrast to their 8.7% and 5.4% growth in the first half. Similar to peers that reported double-digit declines in investment return, both companies’ weaker-than-expected investment returns were attributable to fair value losses in bond and equity fund investments. In addition, the first-nine-month combined ratio, or CR, an indicator for P&C insurers’ underwriting cost, also reported a larger-than-expected increase of 1.7 percentage points year on year to 97.9%, owing to an about CNY 3.4 billion year-on-year increase in catastrophe claims related to typhoons and heavy rains in the third quarter. Despite the unfavorable seasonality, management remains confident about achieving the 2023 CR targets of below 97% for auto insurance and below 100% for nonauto insurance.

We are maintaining our fair value estimates of CNY 65 per A share and HKD 71 per H share for Ping An; CNY 23 per A share and HKD 26 per H share for New China Life or NCI; and HKD 4 per share for PICC Group and HKD 11 per share for PICC P&C following interim results. As expected, China’s insurers reported stronger new business value, or VNB, growth for first-half 2023 of 18%-33% year on year, as customers rushed to buy high-yield savings products before the pricing rate cut by end-July. We continue to expect Ping An and PICC P&C to deliver above-peer results in coming quarters. Both stocks are undervalued, trading at 0.5 times 2023 price to embedded value for H-share Ping An and 0.8 times 2023 price/book ratio for PICC P&C. We prefer Ping An as our top pick given its larger discount to our fair value estimate, better growth prospects following the successful implementation of the four-year in-depth life insurance reform and low earnings sensitivity to the volatile stock market.

We expect the upcoming interim earnings results to show that new business value, or VNB, growths of China’s insurers accelerated between 15% and 35% in the first half of 2023, from 8% to 17% year on year in the first quarter of 2023, as customers rushed to buy high-yield savings products before the pricing rate cut by end-July. However, the weaker equity market performance and falling interest rates in the second quarter are likely to weigh on net profits and shareholders’ equity under the new accounting rules. Nevertheless, we think downside risk to H-share prices is contained, with the H-shares of Chinese insurers trading at a historical low of 0.2 times to 0.6 times forward price/embedded value, or EV.

As China’s largest nonlife insurer, majority state-owned PICC P&C boasts first-mover advantage in major P&C insurance products, thanks to its extensive rural network and strong government support.

PICC P&C’s IFRS-17-based total revenue and net profit in the first quarter grew 9% and 22%, respectively, year on year, with its underwriting margin outperforming peers. Notably, the combined ratio, or CR, recorded a solid improvement of 0.9 percentage point to 95.7% against the year-ago period. Performance is on the high end of prior management guidance. As results were largely in line, we retain our fair value estimate at HKD 11 per share. The shares have rallied about 20% since late March when management provided very positive margin guidance for 2023. Trading at 0.8 times our forecast 2023 book value, the stock remains undervalued and we continue to like PICC P&C for its strong fundamentals and dominant position in an oligopolistic market. The company commanded about 33% of total premium and 50% of industry profit in 2022.

PICC P&C reported 7.2% growth in net earned premium and 19.4% growth in net profit for 2022. As expected, the auto insurance combined ratio, or CR, improved to 95.6% from 97.3% in 2021. Despite a challenging macro environment, PICC P&C continued to enjoy the highest underwriting margin in the industry, reflecting its scale advantage, strong cost management, and distribution strength in the auto insurance market. Nonauto insurance CR improved 2.8 percentage points to 100.6% from 2021 on lower natural-disaster-related claims and ongoing business optimization. However, nonauto margin slightly missed our expectation, hit by lower margins in liability insurance and commercial property insurance during the fourth quarter on rising claim standard for personal injuries and claim liability of historical high-risk business. With PICC P&C’s continued efforts to clean up historical high-risk business and better risk pricing, we expect the ongoing product innovation and economic recovery to support better margins of these businesses.

PICC P&C’s third-quarter results continued to deliver stronger-than-expected improvement in underwriting margins across major insurance lines, underpinning the company's scale advantage, strong cost management, and distribution strength despite a challenging macro environment. Nine-month net profit grew 30% year on year, at the high end of the 25%-30% range disclosed in previous earnings alerts. Notably, third-quarter net profit grew 98% against the year-ago period on accelerating premium growth and improvement in underwriting margin during the quarter. The stock appears undervalued, trading at 0.6 times 2022 book value. The market reacted positively right after the results announcement but was dragged by overall market weakness later in the day. The company is likely to face some headwinds in 2023, including slower auto sales and higher claims as social activities gradually recover. Still, we believe its leading scale and strong risk pricing by leveraging its vast customer base and strong distribution team should translate into industry-leading auto insurance margins and higher-than-peer returns on equity. The ongoing business optimization in nonauto insurance business and potential improvement in pricing regulations is a potential positive for growth in 2023.

PICC P&C’s brief third-quarter earnings alert reported 25% to 30% year-on-year growth in net profits for the first nine months. This indicates 70% to 99% growth in third-quarter net profits, a significant increase from 15% growth in the first half. Our fair value estimate of HKD 11 per share for PICC P&C is unchanged as we believe the company is on track to deliver our full-year forecast net profit growth at around 22% for 2022. We attributed accelerating growth to lower natural disaster-related claims in the third quarter compared with the year-ago period, and improved underwriting margins on reduced traffic and related claims during coronavirus lockdowns. We believe the shares remain undervalued, trading at 0.7 times the 2022 price/book ratio. The stock is the top pick for Chinese insurers due to the favorable industry trend and the company’s strong competitive position in the property and casualty insurance market.

PICC P&C’s second-quarter results reflected the company’s scale advantage, strong cost management, and distribution strength, which translated to a better-than-expected improvement in underwriting profits despite challenging macroenvironment, in our view. First-half underwriting profits grew 52% from the year-ago period, with the second-quarter underwriting profits surging 160% against last year on reduced traffic and related claims during COVID-19 lockdowns, and a low base in the second quarter of 2021. Six-month combined ratio, or CR, improved 1.2 percentage points from the year-ago period, to 96% on 1 and 0.2 percentage point reductions in expense ratio and claim ratio to 24.5% and 71.5%, respectively. First-half combined ratios of auto and nonauto insurance business reported 1.3 and 1.1 percentage point declines to 95.4% and 96.8%, respectively. Given the better-than-expected improvement in auto insurance margin, we reduce our 2022 auto CR assumption by 50 basis points to 96.5% and leave our 2022 nonauto CR assumption unchanged at 99.8% as we expect higher natural disaster-related losses in the second half to drive 2022 nonauto CR higher. The assumption changes result in an increase in our fair value estimate to HKD 11 from HKD 10.50 per share.

As China’s largest nonlife insurer, majority state-owned PICC P&C boasts first-mover advantage in major P&C insurance products, thanks to its extensive rural network and strong government support.

We have increased our fair value estimate for no-moat PICC P&C to HKD 10.50 from HKD 9.00 per share following its first-quarter results as we modestly lift our assumption for investment income and our underwriting assumption for nonauto insurance business including commercial property, liability, and accident insurance in 2022.

As China’s largest nonlife insurer, majority state-owned PICC P&C boasts first-mover advantage in major P&C insurance products, thanks to its extensive rural network and strong government support.

PICC P&C’s 7.2% year-on-year net profit growth missed our expectation on higher-than-expected underwriting losses for non-auto insurance business and weaker investment return in the fourth quarter. We retain our fair value estimate of HKD 9 per share as our weaker profitability assumption of non-auto insurance business was offset by better profitability outlooks for auto insurance business. Dragged by a sharp increase in natural disasters-related claims and intensifying competition, non-auto insurance business saw a combined ratio deteriorating to 105% in the second half, up 47 basis points from the second half of 2020. The auto insurance combined ratio reached 97.3%, beating our expectation for 98%. This reflected PICC P&C’s strong underwriting profitability despite lower average pricing and surging natural disasters-related claims in 2021. Its combined ratio rose 68 basis points to 99.6% from 98.9% in 2020. If excluding the net impact of CNY 8.3 billion losses related to natural disasters, we estimate this ratio would improve to 97.5%.

As China’s largest nonlife insurer, majority state-owned PICC P&C boasts first-mover advantage in major P&C insurance products, thanks to its extensive rural network and strong government support.

PICC P&C’s third-quarter results were mixed, in our view. Auto insurance business continued to deliver strong profitability despite the negative impact from the Henan flood, while nonauto insurance business saw broad-based underwriting losses on the occurrence of natural disasters during the third quarter and intensified competition. Net profit growth for the first three quarters slowed to 15.3% year on year from 25% in the first half of 2021. As expected, the declining net profit growth was primarily attributable to increased claims related to the Henan flood in the third quarter that is estimated to be a net loss of CNY 2.8 billion. Growth in the first three quarters net earned premium was largely steady, down 2.1% year on year, versus a 2.4% decline in the first half. As the results were largely in line with our forecast, we retain our fair value estimate of HKD 9 per share for PICC P&C. The results again reflect PICC P&C’s strong cost control and better-than-peer expense management, thanks to its large scale, deep understanding of its vast customer base and distribution strength.

PICC P&C’s first-half net profit growth slowed to 25% year on year from 41% in the first quarter, on track to deliver our projected 2021 net profit growth at 22%. However, the company’s stock price declined by close to 3.5% after the results, as the market was disappointed by deteriorating margins in the second quarter for major business lines including auto and property insurance. Second-quarter auto combined ratio climbed to 98.7% from 94.6% in the previous quarter. As noted in our first-quarter note, we had expected the increasing contribution from lower-priced auto insurance to current in-force policies to add upward pressure to claim ratio in coming quarters. Management alluded to a stabilizing trend in household motor insurance pricing and a significant rebound in pricing for commercial vehicles since May. Given this, we retain our expectation for 2021 auto combined ratio to be at about 98% in 2021.

We increase our fair value estimate for no-moat PICC P&C to HKD 9 from HKD 7.50 per share following its first-quarter results as we modestly increase our underwriting assumption for the auto insurance business over our forecast period. Trading at about a 6% dividend yield, we expect the dividend payout ratio to be maintained at about 40%. The stock is undervalued. PICC P&C delivered stronger-than-expected performance in combined ratio, which declined 1.4 percentage points to 95.7% year on year. Despite a low base in the year-ago period, auto combined ratio merely increased by 0.4 percentage point. The results again reflect PICC P&C’s strong cost control and better-than-peer expense management, thanks to its large scale and distribution strength.