PICC P&C’s Auto Underwriting Margin in Line

PICC P&C 02328 reported 7.2% growth in net earned premium and 19.4% growth in net profit for 2022. As expected, the auto insurance combined ratio 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. Non-auto insurance CR improved 2.8 percentage points to 100.6% from 2021 on lower natural-disaster-related claims and ongoing business optimization. However, non-auto margin slightly missed our expectation, hit by lower margins in liability insurance and commercial property insurance during the fourth quarter on rising claim standards 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.

As results were largely in line, we retain our fair value estimate at HKD 11 per share. The stock appears undervalued, trading at 0.6 times our forecast 2023 book value. The market reacted negatively to the results as investors remain concerned about rising claim costs in 2023 as social activities gradually recover in China with reopening. We expect the share price to remain sluggish in the near term as investors still wait for more clarity about the claims outlook in 2023. However, given that the company has increased reserves for outstanding losses to the highest level since 2016 to 41.3% of net earned premium, there is a strong buffer to smooth future earning volatility and we are bullish for the medium term. We believe PICC P&C’s leading scale and strong risk pricing based on its vast customer base and strong distribution team should translate to industry-leading auto insurance margins and higher-than-peer return on equity.