1H22 top-up reserves to help 2H22F
- 2Q22 underwriting profit rose an exceptional 160% yoy. It is impressive that this was achieved despite conservative top-up reserves (Fig 6).
- We think 1H22’s COR of 96% (-1.2%-pts yoy) could have been lower by about 5%-pts if not for such conservative reserves by PICC (Fig 5).
- 1H22’s strong combined ratio performance (with 2Q22’s ratio -2.3%-pts yoy) was driven by auto, credit & surety, agricultural and commercial property.
- Reiterate Add. TP raised to HK$11.30 due to 16-20% higher FY22-24F EPS.
Strong 1H22, driven by impressive 2Q22 auto results
1H22 net profit was up 15% yoy, with 2Q22 net profit up an impressive 37% yoy, a turnaround from 1Q22’s 3% yoy fall. This was driven by an impressive underwriting result, with 1H22 combined ratio (COR) at 96%, -1.2%-pts yoy and 1H22 underwriting profit up 52.5% yoy. 2Q22 was especially strong, with 2Q22 COR of 96.4%, -2.3%-pts yoy (1Q22: 95.6%, -0.1%-pts yoy), and 2Q22 underwriting profit up 160% yoy (1Q22: 11%) (Fig 1). 1H22 net profit comprised 83% of our original FY22F net profit estimate and 69% of our new FY22F net profit estimate.
What we liked about the results
i) 1H22’s strong net profit and underwriting profit performance was achieved despite conservative insurance top-up reserves in 1H22 (especially 2Q22). The ratio of the net change in loss & loss adjustment expense reserves to net earned premiums of 11.7% in 1H22 was the highest since 1H11’s 12.7% (Fig 5), due to 2Q22’s ratio rising to 17% (2003–2021 average = 6.7%). We also note that while 1Q20’s ratio spiked to 15% at the onset of the pandemic, this ratio rapidly fell over 2Q20-4Q20 (Fig 6), and we think a similar pattern could happen in 2H22F. We also think 1H22’s COR could have been
lower by about 5%-pts if not for such conservative reserves by PICC; ii) The ratio of 1H22 auto COR was 95.4%, -1.3%-pts yoy, with 2Q22 at 94.9%, -3.9%-pts yoy (1Q22: 96%, +1.4%-pts yoy) (Fig 2). 2Q22’s auto underwriting profit was up 319% yoy (1Q22: -21% yoy). 2Q22’s auto underwriting profit comprised 81% of total underwriting profits (1Q22: 58%); iii) Despite Covid-19 outbreaks, 1H22 COR for credit and surety fell to 63%, -26%- pts yoy (Fig 3); iv) 1H22 agricultural COR was 89.4%, -7.6%-pts yoy (Fig 3); v) 1H22 COR for the government segment was between 95-100% (Fig 7); vi) 2Q22 investment income rose 11% yoy, with 1H22 investment income -3% yoy (much better than peers).
What we did not like
i) 1H22 liability COR was 106.3%, up 6.9%-pts yoy; ii) 1H22 total investment yield was 5.3%, -0.6%-pts yoy, though 1H22 net investment yield was 3.9%, +0.1%-pts yoy.
Reiterate Add rating; TP raised to HK$11.30 from HK$9.80
Our GGM-based TP rises to HK$11.30 (pg. 5-6) due to 16-20% higher FY22F–24F EPS due to lower COR. Re-rating catalysts: faster premium growth, higher investment yields. Downside risks: intensifying competition, stricter regulations and greater policy risks.
