A beneficiary of current conditions
- Reduced accident frequency, solid car sales and auto premium growth, and strong non-auto premium growth has led to better 3Q22 net profit growth.
- PICC P&C announced that its estimated 9M22 net profit rose 25-30% yoy, with underwriting profits ‘increased substantially’ yoy.
- We think that the segments that drove the strongest yoy growth for 3Q22F underwriting profits were auto, credit & surety, and agriculture.
- Remains our top pick of the China insurers. We see it as a beneficiary of China’s continued Covid-zero policy. Reiterate Add, TP raised to HK$11.7.
Raise our FY22-24F EPS by 1.2-3.1% on a strong 3Q22F
PICC P&C announced on 17 Oct 2022 that it expects its 3Q22F net profit to increase by 25-30% yoy. The company attributed this to rapid premium growth, which it had earlier reported to be 10% yoy for 9M22, or 11% yoy in 3Q22 (Fig 1).
3Q22F strong underwriting profit continues 2Q22’s strength
With 2Q22 underwriting profits having risen 160% yoy (Fig 4), PICC P&C’s guidance that 3Q22 underwriting profit increased substantially yoy continues this strong profitability.
Auto, credit & surety and agriculture likely the strongest segments
We think that the auto, credit & surety and agriculture segments likely drove this substantial 3Q22 profit growth. We had already seen auto underwriting profits rise 319% yoy in 2Q22 (Fig 4), driven by falling auto combined ratios (COR) (2Q22: -3.9%-pts yoy), and we think reduced claims frequency once again helped 3Q22F. Credit & surety insurance premiums also rose 128% yoy in 9M22 (Fig 1) with this segment having strong underwriting profitability (1H22 COR of 63.4%, -26.3%-pts yoy in Fig 5). 9M22 agriculture
insurance rose 23% yoy, with this segment also having strong underwriting profitability (1H22 COR 89.4%, -7.6%-pts yoy). PICC has also successfully slowed the growth of segments which have weak underwriting profitability (Fig 1), with this helping its 3Q22 overall COR.
Reduced catastrophe-related claims likely also helped
Another factor that may have helped the yoy underwriting performance in 3Q22 was the lack of a catastrophe in 3Q22 of the scale of the Jul 2021 Henan floods, which we believe resulted in Rmb2.2bn of claims (or 0.6%-pts of FY21 combined ratio).
Reiterate Add rating; GGM-based TP rises 3.5% to HK$11.7
PICC P&C is our top pick of the listed China insurers. We think that it can continue to benefit from the current Covid-zero policy in China via reduced accidents, and hence, lower claims frequency. Our higher TP of HK$11.70 (see pages 5-6 for details) is mainly due to 1.2-3.1% higher FY22-24F EPS due to lower combined ratios. Rerating catalysts: faster premium growth, higher investment yields. Downside risks: intensifying competition, stricter regulations, and greater policy risks.