PICC P&C’s 2019 results were underscored by net profit increase (+49.7% YoY), motor insurance underwriting margin improvement, and better investment gains. However, non-motor business lines exhibited worsening loss ratio against macro and industry headwinds, thereby dragging underwriting profit. The Company suffered premium decline in Jan-Feb 2020. Going forward, we expect robust rebound coming from postponed P&C demand and recovering car sales. U/G to BUY.
- Result positives. 1) Net profit rose 49.7% YoY to RMB 24.3bn primarily on back of tax deductions (RMB 4.23bn), realized and unrealized gains (RMB 733mn vs. RMB 1.23bn net loss in 2018) and cost control. 2) Motor insurance business achieved improvement in combined ratio by 1.7ppt YoY to 96.7%, attributable to remarkable 4.3ppt cut in expense ratio to offset +2.6ppt in loss ratio. 3) Enhanced solvency position. The Company issued capital supplementary bond of RMB 8bn in Mar 2020, which is estimated to boost comprehensive solvency ratio by 12.4ppt, based on YE19 figures. 4) Dividend payout ratio was lifted from 39.1% to 42.2% in 2019, after being significantly raised in 2018 from 25.3% in 2017. Dividend yield would reach 6%.
- Underwriting profit shrank, following an increase in combined ratio to 99.2%, up 0.7ppt YoY, primarily resulted from non-motor business lines (combined ratio +6.2ppt to 104.7%). The majority of non-auto business lines witnessed worsening underwriting margin, and the case was more stark with respect to credit & surety, agriculture and cargo insurance. Combined ratio of credit & surety overshot to 121.7% in 2019 vs. 96.9% in 2018, and expense ratio rose 6.9ppt while loss ratio +17.9ppt.
- Negative impact of COVID-19 to diminish gradually. Premium growth -4.4% in Jan-Feb. Not only motor insurance suffered, but non-motor business lines as well. In 2019, about 36% of annual non-motor premiums were concentrated in 1Q. Uneven distribution is more marked regarding accidental injury and health insurance (49% in 1Q), which was the largest component of non-motor business. However, demand for P&C is delayed rather than disappear. As economic activities resume and auto market stimulus comes into play, we think P&C premium growth will rebound. Loss ratio of non-motor may increase, but that of motor is likely to improve due to reduced travels.
- U/G to BUY due to low valuation and expected rebound after COVID-19. We trim TP to HK$ 9.83 to reflect underwriting margin pressure and a change in cost of equity assumptions. Our TP corresponds to 1.0x FY20E P/B. The stock is currently trading at 0.85x/0.77x FY19A/20E P/B. Positive catalysts include rebound in P&C demand and recovering car sales.
