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Morningstar | PICC Group faces uncertainties during its strategic transformation toward value-oriented growth.

PICC Group is the oldest and largest state-owned insurance group in China. The company aims to transform from a leading property-casualty insurer into an integrated one-stop shop for financial services. However, we see significant headwinds, given the current soft P&C insurance market and lackluster life insurance product mix, which are likely to result in mounting product maturity pressure.The flagship P&C subsidiary, PICC P&C, operates in the highly concentrated and fast-growing Chinese P&C insurance market. With 34% share and an extensive network covering most urban areas and 89% of villages and towns in China, the firm enjoys scale advantages and early entrance into burgeoning rural markets. This is also evident in its peer-leading expense ratio. However, the ongoing auto insurance pricing liberation, ever-changing regulatory environment, and soft market cycle decrease our conviction that the firm will continue to outperform throughout the cycle. Weakening economic activities also depressed the company's underwriting profits of its nonauto insurance products; as a result, the overall combined ratio worsened in 2016.Its life and health insurance segments have been rapidly expanding and are threatened by leading players with captive agent forces and strong product innovation capacity, as well as bank-owned insurers leveraging parents' wide-ranging distribution networks. Short-duration single-premium products constitute much of its product portfolio, with the firm successfully growing into the fifth-largest life insurer from scratch in 2005. Along with peers, PICC Group started its life insurance business transformation with increasing focus on longer-term and protection-type products in 2015. We expect it to lag major peers in business transformation, given the significant effort and time needed for the development of a premier agent force. Besides, the company is stubbornly reliant on growth in short-term premium income to cope with rising surrenders of the savings-type products rapidly sold during the past few years. We expect this will weigh on profitability and challenge management's execution of its strategic transitioning toward value-oriented growth.