We expect PICC P&C, the P&C forerunner, to meet both auto and non-auto combined ratio (CoR) guidance of 97%/100%, to land at 96.9%/99.8%, based on our forecast. With a benign competitive landscape under tightened regulatory scrutiny and the industry self-discipline convention led by 8 top P&C insurers in Nov 2023, we expect the insurer’s auto expense ratio to drop in 2H23, primarily in 4Q23, to 27.5%, flat vs FY22, whereas the loss ratio to rise to 69.4% (vs 68.1% in FY22), affected by increasing natural catastrophic (NAT CAT) claims in 3Q23. In 2024E, we estimate the underwriting profit to rise ~12% YoY, driven by 7% total premium growth and a slight CoR improvement to 98.0% (-0.1pct from FY23E’s 98.1%), thanks to an optimized non-auto structure with risk clearance in some loss-making lines, i.e. liability and commercial property. We see a positive outlook for the company ahead given: 1) its appealing NEV market share (~34%) and it being the first-in-sector to achieve a NEV CoR less than 100%; 2) growing household vehicles contributing 70%+ of auto premiums in the past few years, and 3) an improved non-auto structure with expanding individual A&H. Reiterate BUY.
　　Auto: industry front-runner to realize the new-energy vehicle (NEV) CoR <100%. With tightened regulatory oversight, auto expense ratio peaked in 3Q23 and has been declining since 4Q23, based on our channel check. Yet the claims ratio increased notably given a low base in 2H22, and increasing NAT CAT claims in 3Q23, possibly totalling RMB9.2bn (CMBI estimate). Despite increased frequency and higher ticket-size per case, we see little pricing pressure for the insurer as: 1) the claims ratio is still much lower than the actuarial assumption of 75%, and 2) the impact can be partially offset by lower expense ratio given the insurer’s operational efficiency. Beyond this, the insurer strived to realize NEV profitability (namely, NEV CoR <100%), from which it could further capitalize on rising NEV penetration. Household vehicles made up 70%+ (1H23: 72%) of auto premiums over the years, implying the insurer’s risk mitigation strategy by leaning toward lines of low accident rates.
　　Non-auto: optimal structure with rising focus on individual A&H. The individual business, mainly Accident & Health (A&H), achieved underwriting profitability by reaching <95% CoR in 2023, from our channel check. The line made up 12% of non-auto premiums by 1H23, and is expected to reach ~20% as of year-end (CMBI estimate). Concurrently, the insurer scaled back its loss-making corporate lines, i.e. liability and commercial property, with a continued >100% CoR and lack of visibility to breakeven in the short run. Recent policy support of Huiminbao and the government notice on the integration of medical and commercial insurance data provide additional catalysts in A&H, in our view.
　　Valuation: defensive play with a negative beta; absolute DPS likely. PICC P&C acts as a defensive play against macro headwinds, given its 1) stable earnings to ensure an avg.13% ROE; 2) stable leading position with one-third of total P&C market share and 3) ~40% payout ratio over the years. We recommend BUY, with target price at HK$11.7 based on P/B-ROE method, implying 1.0x FY24E P/BV (the stock is now trading at 0.8x FY24E P/BV).
　　Profitable NEV business to scale up with rising NEV penetration: In 1H23, the company’s NEV premiums rose by 54.7% YoY to RMB12.6bn, amounting to 9.4% of auto premiums. Given a 3-4pct increase in NEV premium as a percentage of auto premiums, we estimate by end-2023, the NEV premiums may have contributed 10-11% of total auto premiums, amounting to RMB32bn.
　　Increasing contribution to underwriting of household vehicles: We maintain our auto premium growth forecast at ~6% YoY in the long run, driven by new car sales growth, as stated in our 2024 outlook (link). In 1H23, household vehicles contributed 72% of auto premiums, with the remaining 28% generated from commercial vehicles. Given increased risk awareness of household car owners compared to those who drive for commercial purposes, an optimized structure of 70%+ underwriting from the household side enables the insurer to cut CoR by reducing the claims ratio.
　　A floating dividend policy to ensure absolute DPS likely: Mgmt. stated preference for a floating dividend policy in 2023, by ways of increasing the payout to above 40%, to ensure the absolute quantity of DPS. Detailed information has not yet been announced as the company would need approval from the Ministry of Finance for any modification in dividend policy. Given a dividend yield stable at 6-7%, we anticipate the floating dividend policy will exert limited impact on the insurer’s dividend yield, as it may be partially offset by the increase in share price within the year.