PICC’s Health Insurance NBV Shows Strong Growth

PICC Group 01339 reported 3.9% growth in 2022 full-year revenue, flat with its revenue growth rate in the third quarter. Its net profit growth of 12.8% was stronger than most peers, supported by the 19% earnings growth in subsidiary PICC P&C.

PICC P&C reported a strong 1.9-percentage-point improvement in the full-year combined ratio to 97.6% on reduced road traffic and the absence of big natural disasters. The full-year auto insurance CR improved strongly to 95.6% despite a modest increase in the expense ratio during the fourth quarter. The non-auto insurance CR slightly deteriorated from the third quarter to 100.6%, dragged by worsened margins in liability insurance and commercial property insurance during the fourth quarter on rising claim standard of personal injuries and claim liability of historical high-risk business. Life insurance new business value reported a smaller-than-peer contraction of 17.3% in 2022, and health insurance NBV increased strongly at 35% thanks to strong momentum in online insurance, expanding bancassurance network, and solid foundation in group insurance business. However, the agent channel remained under significant pressure, as agent headcount further contracted 25% from mid-2022, larger than the 14% declines for Ping An and China Pacific Insurance.

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 for both the life insurance and health insurance businesses. The stock appears undervalued, trading at less than 0.4 times 2023 price/book. We expect the near-term market reaction to remain muted as investors still wait for more clarity on the claims outlook for 2023. But given that the company has increased the reserve for outstanding losses to the highest level since 2016 to 41.3% of net earned premium, we expect such a high level of reserve should provide a strong buffer to smooth future earnings volatility.