PICC Group: Net Profit Surged Under New Accounting Rules, P&C Margin Outperforms

PICC Group’s 01339 IFRS 17-based first-quarter total revenue and net profit grew 24% and 230%, respectively, year on year. The strong net profit growth was attributable to the 6% year-on-year growth in insurance service and the improved underwriting margin from its flagship P&C insurance segment as well as the 24% increase in investment return due to the adoption of IFRS 9. Net profit growth would show an easing to 25% year on year if not adopting the new accounting rules.

Given results were largely in line, we retain our fair value estimate of HKD 4. Our valuation implies a forward price/book ratio of 0.7 times for P&C insurance and 0.3 times, respectively, for the life insurance and health insurance businesses. The stock is undervalued and trading at less than 0.4 times 2023 price/book. We expect near-term market reaction to remain muted as investors have yet to see a turning point in net book value, or NBV, growth for its life and health insurance segments. As the company has increased reserves for outstanding losses to 41.3%, the highest level since 2016, of net earned premium in 2022, we expect the high level of reserves provides a healthy buffer to smooth future earnings volatility.

The P&C underwriting margin continues to outperform peers. Notably, the combined ratio, or CR, recorded a solid improvement of 0.9 percentage point to 95.7% against the year-ago period. We like the P&C segment for its strong fundamentals and dominant position in an oligopolistic market, which commanded about 33% of total premium and 50% of industry profit in 2022. We expect full-year auto CR to increase but should stay below the 97% level, thanks to a leading scale, strong cost management, and distribution strength in the auto insurance market. We also expect ongoing product innovation and economic recovery to support improvement in non-auto insurance CR to below 100% in 2023.