PICC P&C’s 1H20 performance was acceptable against all the challenges brought by COVID-19. GWP increased 4.4% to RMB 246.3bn. Underwriting profit increased 23% YoY thanks to the Company’s focus on “cost reduction and profitability improvement”. Net profit was RMB 13.2bn, representing YoY decline of 21.7% or YoY increase of +4.7% if excluding the impact of tax credits in 2019.
- Result positives. 1) Steady growth of premium income, which is in line with market pace. Motor insurance GWP +2.8% to RMB 131bn, accounting for 53.2% of total GWP, whereas non-motor GWP +6.2% to RMB 115.3bn. 2) Improving underwriting profitability. Underwriting profit rose 23% to RMB5.34bn. Combined ratio inching down 0.3ppt YoY to 97.3%, thanks primarily to reduction of expense ratio by 0.9ppt to 30% while loss ratio was up 0.6ppt to 65.3% in adverse market conditions. 3) Optimizing business structure, underpinned by higher percentage of non-motor insurance (46.7%), larger share of household automobile insurance (68.9% of auto GWP) and increasing number of individual customers (+4.3% YoY to 99.82 million). 4) Acceleration of digital transformation. For example, online customers reached 77.8% of household automobile insurance and online claim service usage rate climbed to 91.3%.
- Result negatives. 1) Credit and surety insurance incurred greater underwriting loss, combined ratio of which rose 40.6ppt to 138.6% (loss ratio rose to 120%) due to higher rate of delinquency in time of COVID-19. Although the Company has tightened underwriting criteria in 1H20 (GWP -59% YoY), we think loss ratio may stay high in 2H20 given the large amount of underwriting in 2019 and grim outlook on underlying loan quality. 2) Investment yield declined. NIY/TIY edged down 0.2/0.7ppt YoY, respectively, to 3.8%/4.6%. The Company also booked fair value loss on AFS financial assets to the amount of RMB 3.1bn in OCI.
- Risks. 1) Claim expenses and loss ratio are likely to rise in 2H20 because of severe floods in some provinces in southern and central China, thereby weighing on underwriting profitability for the whole year. 2) Worsening outlook on credit and surety insurance business if delinquency rate keeps going up.
- Cut TP and maintain BUY. We adjust net profit forecast by -7.2%/11.5% in FY20/21 to reflect improving underwriting profit, yet more taxes to be paid in 2020. We thereby cut TP to HK$ 9.06, which corresponds to 1.0x FY20E P/B. Maintain BUY.
