PICC Group and PICC P&C Earnings: Net Profit Hit by Weak Investment Return, Auto Combined Ratio Deteriorated

PICC 02328 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.

Though PICC’s third-quarter results were overshadowed by rising claim costs and weak investment return, we believe its competitive strength in P&C business remains intact. We retain our fair value estimates of HKD 4 for PICC Group and HKD 11 for PICC P&C as we leave key assumptions unchanged. PICC Group and PICC P&C are undervalued, trading at 26% and 19% discounts to fair value, implying 0.5 and 0.8 times 2023 price/book ratios, respectively. We prefer PICC P&C over PICC Group, as we believe the life insurance business remains weaker than peers and adds little value to the group.

The 6% year-to-date decline in the CSI300 fund index and a rebound in government bond yields in the third quarter resulted in disappointing investment performance for insurers, a sharp contrast to the first half, which witnessed a 3.7% increase in the SSE Composite Index and falling government bond yields. The first adoption of IFRS9 in 2023, which marks financial assets to market, also magnified the underperformance for insurers against the high base in 2022.