PICC P&C presented solid 1H24 results, with a sequentially improved underwriting CoR (IFRS-based) by 1.3pct QoQ to 95.0% in 2Q24 (vs: 1Q24: 96.3%), amid hiking catastrophe claims across the industry (link). The CoR figure turned quarterly UW profit to RMB 6.65bn, +37.2% YoY, which trimmed the underwriting profit/net profit decline to -5.0%/-8.7% YoY in 1H24 (vs 1Q24: -49.1%/-38.3% YoY). Auto CoR was 0.3pct better than our estimate at 96.4% (CMBI est: 96.7%) thanks to streamlined cost control with expense ratio (25.2%) fell by 1.8pct to compensate for 1.5pct rise in claims ratio (71.2%). Non-auto CoR was also controlled beyond expectations to 95.8% (IFRS-based) in 1H24, despite a 1.4pct YoY increase led by commercial property (+7.6pct) and “other” segment (+3.5pct). The mgt. added in call that gross/ net non-auto losses amounted to RMB 9.1/7.0bn year-to-date, and if there were no significant catastrophe in coming September, aggregate losses would be less than that of last year at RMB 13.3bn/11.9bn after Typhoon Doksuri. With auto ticket size to stabilize and non-auto mix to optimize, we expect to see resilient underwriting in 2H24. On investment front, we observe the allocation shift towards cash-related and FICC assets to approx. 64% of total portfolio, +11.8% YoY from year-start. We regard this as a more prudent strategy in line with a change in P&C industry (link) to strike a balance between anchoring investment income and matching asset- liability duration. We expect investment income to marginally recover in 2H24 in face of a low base. Maintain BUY, with 12M-forward TP revised up to HK$12.8, implying 1.04x FY24E P/B.
Expect resilient underwriting in 2H24E. The insurer showed solid 2Q results in contrast to a 1Q miss, giving the quarterly CoR trimmed 1.3pct QoQ to 95.0%. This was driven by effective group-wide expense control, evidenced by 0.8pct decline in expense ratio (26.1%) to offset 1.2pct increase in loss ratio (70.1%). Auto CoR fell 0.3pct YoY to 96.4%, better than our estimate thanks to contracted expense ratio by 1.8pct to 25.2%. In 1H24, we see slowdowns of auto ticket size in industry due to intense competition, unconducive to insurers’ underwriting profitability in the long run, in our view. In earnings call, mgt. pointed that starting from 7M24, auto ticket size has appeared to stabilize and rebound, positively signalling for auto premium growth in 2H24. Non-auto CoR expanded 1.4pct YoY to 95.8%, yet different segments variedly performed. Agriculture CoR narrowed to 89%, -2pct YoY with declines in both loss (-1.5pct) and expense (-0.5 pct) ratios, which was dragged by underwriting scale-down from year start, with insurance revenue -7% YoY to RMB23.3bn and premium income rising 3.4% YoY below industry average(+6.3% YoY). A&H and commercial property saw CoR deterioration to 99.9%/99.6%, +1.4pct/7.6pct YoY, plummeting the lines’ UWP by 96.3%/94.3% YoY to RMB 13mn/38mn in 1H24. Looking ahead, mgt. guided policy-backed insurance, i.e. agriculture to recover till year-end. With expanding penetration of insured household NEVs and stabilized auto ticket size, we look positive in 2H24 underwriting. Given unclear 3Q catastrophe prospects, we adjust our auto/non-auto FY24 CoR forecasts to 96.6%/99.4% (vs prev. 96.7%/98.9%).
Prudent allocation to cash and FICC. Total investment income declined 7.9% YoY in 1H24, dragged by substantial retreats from realized gains in FVTPL and FVOCI debt assets by -89.2%/-57.4% YoY to RMB 110mn/193mn given low yields and volatile stock market. Total investment yield was 2.2% (not annualized), recovering from 0.8% in 1Q24, yet down by 0.4pct YoY from 2.6% in 1H23. We see evident changes in allocation to cash-related /term deposits by +30.3%/+37.4% vs year-start, and bonds esp. treasury bonds surged 84.5% to RMB86.7bn, driving FICC assets up by 10.9% to RMB388bn, taking 2.3pct more to 60.4% of the portfolio from year-start. Total equities fell 2.2% to RMB155bn, with funds (incl. mutual funds & AM products) and stocks -20.2%/+11.2% to RMB37bn/40bn in 1H24 vs year-start. Of which, stocks under FVOCI +12.7% to RMB 31.5bn, making up 79% of total stocks. We assume a great proportion of this amount was assigned to high-yield stocks to anchor long-run stable dividends. In 1H24, the insurer’s OCI stock returns outpaced market benchmark (CSI 300 Dividend Index) by 7.1pct to 19.5%, implying the strategy starts to bear fruit. Looking ahead, we expect investment income to marginally recover in 2H24 in face of a low base.
First interim dividends in place at RMB0.208/share, implying 25% payout. First interim dividends landed at RMB0.208 per share, implying 25% payout on basis of 1H24 EPS at RMB0.831. As the insurer maintained 5 years of paying at >40% payout, we suggest this interim dividend would accrete to FY24E total shareholder returns.
Valuation: The stock is trading at 0.85x FY24E P/B with 5.6% FY24E dividend yield and 12.3% three-year avg. ROE. We revise our 12M-forward price target to HK$12.8 (previous: HK$11.9), implying 1.04x FY24 P/B, based on P/B-ROE method with key assumptions as 1) 9.7% cost of equity, 2) 12.8% long-term return on equity, 3) 3% terminal growth, and 4) 30% underwriting cyclicality discount. Key risks include 3Q catastrophe claims exceeding expectations; slower-than-expected premium growth; prolonged low interest rate and volatile stock markets.