Company Reports

PICC Group aims to transform from a leading property-casualty insurer into an integrated one-stop shop for financial services. However, we see significant headwinds, given growing pressures on P&C underwriting margin and its lackluster agent-force performance.

We retain our fair value estimate for PICC Group at HKD 3.8 per share following its 6% and 4% year-on-year growth in insurance revenue and net profit. These results are in line with our full-year forecast of 6.5% and 17% growth for these metrics. The first-half growth in value of new business, or VNB, for life and health insurance exceeded our expectations, surging 91% and 159% year on year. Life VNB growth accelerated from the 82% growth in the first quarter, despite a high base in the second quarter of 2023 driven by last-batch sales of 3.5% pricing insurance products. The bancassurance channel was the key growth driver, with a 250% increase and contributing 49% of life VNB, compared with 33% growth and 50% VNB contribution from the agent channel. Although we expect this strong momentum to continue into 2024, future growth is likely to gradually normalize to levels more in line with peers, as the one-off VNB margin boost from the regulatory commission rate cut in late 2023 will diminish and further rapid growth from a larger base will be challenging. PICC Life and Health's total VNB reached nearly CNY 7 billion, about 1.8 times that of New China Life and 77% of China Pacific Insurance's VNB. We maintain our view that PICC Group's past strong performance was driven by expanding bancassurance sales and favorable change in product mix from a low base, while its agent sales channel still needs time to improve productivity. The stock is undervalued, trading at 0.5 times 2024 book value and offering nearly a 6% dividend yield. Future upward re-rating will depend on whether the company's life VNB can continue to exceed market expectations.

We expect China’s life insurers under our coverage to report a double-digit increase in second-quarter net profits versus the year-on-year contraction in the first quarter. While we expect their new business value growth in the first half will slow from 20%-50% in the first quarter, growth should stay healthy at 10% to 25% thanks to margin improvement and resilient demand for savings products as the deposit rate continues to trend down. We also expect property-casualty underwriting margin to improve from the first quarter, helped by reduced catastrophe losses. Despite the earnings improvement, we expect industrywide headwinds, including falling asset yield, potential commission rate cut in the agent channel, and uncertainty in catastrophe losses, will continue to weigh on investor sentiment.

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 aims to transform from a leading property-casualty insurer into an integrated one-stop shop for financial services. However, we see significant headwinds, given growing pressures on P&C underwriting margin and its lackluster agent-force performance.

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.

China Life‘s year-to-Sept. 30 year-on-year growth in premium slowed to 4.5% from 5.6% in August. As the first insurer to report monthly premium growth, the performance generally tracks our expectations. The year-on-year contraction in September premium narrowed to 7% from 10% in August on low base in the year-ago period. We expect slowing sales for other Chinese life insurers in September and October due to weakened product demands after the last-batch sales of 3.5% guaranteed rate savings products in July. We also expect ongoing regulation of bancassurance sales (an arrangement between a bank and an insurance company through which the insurer can sell its products to the bank's customers) to adversely affect September and October sales, but the impact should be small given these two months usually report weak sales. Despite the industrywide trend of slowing sales, we expect Ping An and PICC Life to see less downward pressure supported by lower base in the second half of 2022. We expect third-quarter new business value, or VNB, to decelerate significantly from the second quarter’s level, but fourth-quarter growth should rebound on low base and the resumption of bancassurance sales.

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.

PICC Group aims to transform from a leading property-casualty insurer into an integrated one-stop shop for financial services. However, we see significant headwinds, given growing pressures on P&C underwriting margin and its lackluster agent-force performance.

PICC Group’s 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.

PICC Group reported a 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 its subsidiary, PICC P&C.

PICC Group’s third-quarter results were solid. Growth in nine-month net profits accelerated to 15% year on year from 6.6% in the first half, while growth in premium income slightly declined to 8.2% for the first three quarters versus 9.4% in the first half. Similar to peers, PICC Life reported lower premium income growth and weaker profitability in the third quarter compared with the first half on weaker investment performance and slower life insurance sales. On the contrary, its flagship business, PICC P&C, reported accelerating growth in premium income and strong improvement in underwriting margins in the quarter. As results were largely in line, we retain our fair value estimate of HKD 4 per share. Our valuation implies a forward price/book ratio of 0.75 times for the property and casualty insurance business and 0.2 times for the life insurance and health insurance businesses. The stock appears undervalued, trading at less than 0.4 times forward book value. There is no change to our long-term positive outlook for the P&C business, thanks to strong scale advantage to achieve lower-cost operations and better risk pricing backed by a long-history operation and deep knowledge of the company's vast customer pool.

PICC Group posted a solid second-quarter result with total revenue growing 7.4% to CNY 336.9 billion and net profits increasing 5.7% to CNY 17.9 billion year on year. Second-quarter net profit growth improved strongly to 32% year on year, versus an 11% decline in the first quarter. The accelerated growth was a result of a 160% increase in second-quarter P&C underwriting profits on reduced traffic and related claims during COVID-19 lockdowns, and a low base in the second quarter of 2021.

PICC Group posted solid first-quarter results with total revenue growing 9% to CNY 189.6 billion and net profits declining 13% to CNY 8.7 billion year on year. Its flagship P&C insurance business reported a better-than-peer performance with net profit merely declining 3%, as the life insurance business reported a 33% decline in net profit. The trend was in line with other life insurers. PICC Group’s investment performance was better than peers. Total investment return dropped 10% year on year to CNY 15.9 billion, in contrast to the 26% decline for China Life.

As the oldest state-owned insurance group in China, PICC Group aims to transform from a leading property-casualty insurer into an integrated one-stop shop for financial services. However, we see significant headwinds, given growing pressures on P&C underwriting margin and its lackluster agent-force performance.

PICC Group’s 2021 results were mixed, in our view. Net profits grew 8.2% from 2020 to CNY 21.6 billion. The fourth quarter saw net profits shrinking 35% year on year to CNY 860 million, mainly driven by a CNY 5.4 billion reduction in profit before tax due to an unfavorable change in economic assumptions. Total premium grew 3.9% from 2020 to CNY 585.4 billion, driven by 3.8%, 0.7%, and 11% respective growth in property and casualty, life, and health insurance premium. Return on equity was largely flat with 2020 at 10.3%. The results reflected strengthening advantages in auto insurance business after the comprehensive auto reform that began in September 2020, while the life insurance business continued to struggle, with new business value seeing a larger-than-peers decline of 35% from 2020. However, bancassurance channel remained positive growth in NBV.

PICC Group’s net profit for the first three quarters grew 11% year on year to CNY 20.8 billion. The slowing growth was attributable to losses related to natural disasters, and A-share market’s underperformance following a strong rally in early 2021. The third quarter reported an underwriting loss of CNY 2.2 billion, dragged by increased claims of Henan flood which is estimated to be a net loss of CNY 2.8 billion. Return on equity improved one percentage point to 9.9% from the year-ago period despite the difficulties. We retain our fair value estimate of HKD 4. Our valuation implies a forward price/book ratio of 0.8 times for P&C insurance, and 0.4 times respectively for the life insurance and health insurance businesses. The stock is undervalued and trading at 0.4 times forward PB. We are positive on the long-term outlooks of its P&C business, thanks to strong scale advantage to achieve lower-cost operations and better risk pricing backed by a long-history operation and deep knowledge of its vast customer pool.

No-moat PICC Group’s first-half net profit grew 34% year on year. Due to slower sales in life insurance products following the new year sales campaign in the first quarter and weakening profitability of auto insurance, second-quarter net profit growth slowed to 24% from the 42% growth in the first quarter. Net profit growth exceeded our expectation, which was primarily attributable to a hike in investment return to 6.7% versus 5.5% in the year-ago period. Other aspects of the business were largely in line. The overall combined ratio of the P&C insurance business was 97.2% in the first half, increasing 1.5 percentage points from 95.7% in the first quarter. Embedded value, or EV, of the life and health insurance businesses grew 6.6% and 9.6%, respectively, from 2020. We lifted our investment return assumption for 2021 but it was not enough to change our valuation. Thus, we retain our fair value estimate at HKD 4 per share. Our valuation implies a forward price to book ratio of 0.8 times for P&C insurance, and 0.4 times respectively for the life insurance and health insurance businesses. The stock is undervalued and trading at 0.4 times forward price to book.

We modestly increased our fair value estimate for no-moat PICC Group to HKD 4 from HKD 3.70 per share, to reflect our increased valuation for its flagship P&C insurance arm, PICC P&C’s by 20%. Our new valuation implies forward price to book ratio of 0.8 times, for P&C insurance, and 0.4 times respectively for the life insurance and health insurance business. These segments accounted for 73%, 18% and 2% of total the group’s shareholders’ equity in 2020. The stock is undervalued and trading at 0.4 times forward price to book. We believe current low sentiment for the H shares is attributable to the deteriorating margin of the property and casualty insurance business and lack of visibility of long-term growth in the life insurance business. However, we believe the life insurance business structure is improving from a low base and its weak fundamentals are factored into our valuation. We expect the ongoing auto reform is expected to weed out weaker players and speed up industry consolidation. PICC’s P&C business should benefit from such trends, in our view. The company has a strong scale advantage to achieve lower-cost operations and better risk pricing, given its long operating history and huge customer base.