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Morningstar | Weakening Underwriting Profitability Continues in PICC P&C's 1Q

As China’s largest nonlife insurer, majority-state-owned PICC P&C boasts first-mover advantage in major P&C insurance products, thanks to its extensive rural network and strong government support.Auto insurance represents over 70% of the firm's total premium. During 2015-18, the regulator introduced three rounds of auto insurance pricing reforms, leading to lower average premium per car. The third round of pricing reform is ongoing, which is now on trial in three areas including Shanxi, Guangxi and Qinghai provinces where auto insurance pricing are allowed to fully liberalize. A survey has showed average pricing has reduced by 20% to 30% for these areas two months after the reform was implemented in September 2018. THe regulatory-driven pricing pressure was compounded by weakening auto sales in recent years. As new auto sales contracted by 5.8% in 2018, the first decline in sales over the past 28 years, competition has further intensified. As a result, industrywide combined ratio reached a record high, driven by rising expense ratio since 2016. During this period, PICC P&C maintained industry-leading underwriting profitability in the auto insurance market. Its auto insurance combined ratio has been lower than listed peers over the past few years. However, as competition further intensified, the ratio significantly worsened to 98.4% from 96.3% in 2017. While its closest competitor Ping An Insurance achieved a steady cost ratio at 97.4%. With regulatory focus shifting toward stricter expense control, we expect the deepening pricing reform is likely to result in lower average pricing and moderating pressure for expense competition, as smaller insurers will have little room to further increase expenses paid to distributors. This will result in rising market concentration toward Tier 1 firms. The company's higher pricing flexibility will help it better manage its loss ratio in the long run, supporting our near-term outlook for relatively steady underwriting profitability.Nonauto insurance lines saw strong premium growth. Contributing to 10% and 7% of total premium, accidental injury and health and agriculture insurance were major growth drivers.