EUR 850.00 For Business Accounts Only

Morningstar | PICC Group's 1Q Net Profit Rebounds on Strong Investment Return and Lower Tax Rate

With revenue growing 7%, no-moat PICC Group’s first-quarter net profit growth rebounded 12% from the year-ago period, up from a 20% decline in 2018. As expected, the results reflected ongoing restructuring of the life insurance business and worsening underwriting profitability of the property-casualty insurance business. The 24% increase in investment return and lower tax rate helped offset this negative impact over the quarter, leading to a solid bottom-line rebound. Because the results are largely in line, we retain our HKD 3.50 fair value estimate. The results confirmed our long-term thesis that the group’s auto insurance business is facing rising pressure in terms of intensifying competition, increasing technology adoption by peers, and ongoing pricing liberalization.

Life insurance premium grew 3.3%, up from a 12% decline in 2018. This was lower than the 12% and 8% respective growth for China Life and Ping An Insurance. Market share continued to fall, declining 0.6 percentage point to 4.56%. The silver lining was in strong growth in first-year regular premium at 22%, up from the 17% decline in 2018. However, the proportion of first-year regular premium remained much lower than peers, despite increasing to 21% of total premium from 18% in the year-ago period. Another reason for our less optimistic view for life premium growth is that the company tends to boost sales via shorter-term savings-type products during its new year sales campaign, where long-term protection products merely represented about 12% of total new premium, according to management.

The P&C insurance business reported mixed results for the quarter. The combined ratio increased to 98.2% from 95.3% in the year-ago period. This was attributable to a 3-percentage-point increase in the claim ratio while the expense ratio remained relatively flat. Competition in the auto insurance business remained fierce. Growth in auto insurance premium remained flat at 3.6% versus 3.9% in 2018. We expect 4% growth for the full year as the government’s policies to boost auto consumption should translate to a modest pickup in car sales in the following quarters. We have yet to see meaningful improvement in PICC’s auto insurance underwriting profitability, as combined ratio is estimated at 100.2%, flat with the level during the second half of 2018 and higher than the 96.7% in the first half of 2018. We suspect this was attributable to a higher claim ratio due to lower average contract pricing as a result of ongoing auto pricing reform and increased competition. Commission expense saw a 7-percentage-point decline to 16% of total premium as the tightened rules managed to contain aggressive commission paid to distributors. However, we suspect much of the overpaid expenses were disguised as other operational expense, leading to the expense ratio holding steady at around 34.2% compared with the year-ago quarter.

Nonauto insurance premium continued its strong growth momentum, with premium growth further accelerating to 39% versus 28% in 2018 and representing 49% of total premium versus 42% in the year-ago period. The strong growth was partly due to strong seasonality and the government’s promotion of policy-related insurance such as agriculture insurance and critical illness insurance. Credit guarantee insurance is also a major growth driver, but we’re a bit concerned about its underwriting risks given rising defaults on the peer-to-peer platform and credit card loans. The company started to make impairment expense related to such product for the first time in the past quarter, putting additional pressure on the overall combined ratio.