20180827-高盛-中国人民保险集团-01339.HK-Earnings_beat,_life_business_quality_improves,_but_more_is_needed_7页_306kb

PICC Group (1339.HK) Summary: 1H18 Earnings and Business Outlook

Core Content Overview

PICC Group (1339.HK) reported its 1H18 earnings, which showed a net profit of Rmb10bn, representing a 14% year-over-year (YoY) increase and 24% above Goldman Sachs' (GSe) estimate of Rmb8.1bn. This performance was primarily driven by better-than-expected underwriting profit in its property and casualty (P&C) division and higher investment income. The book value reached Rmb145bn, a 6% YoY increase, and was broadly in line with GSe's estimate of Rmb144bn.

Main Points and Key Information

Earnings Highlights

• Net Profit: Rmb10.0bn (+14% YoY, +24% above GSe estimate)
• Pre-Tax Profit Contribution: P&C made up 89% of the pre-tax profit
• Combined Ratio: 95.9% (+0.4 pt YoY, 0.7 pt below GSe estimate of 96.5%)
• ROE: 13.6% (annualized), +2.7 pp YoY, +0.6 pp above GSe estimate of 11.5%
• EPS: 0.21 Rmb (+26% YoY, +14% above GSe estimate of 0.19 Rmb)

Life Insurance Business

• New Business Value (NBV): Rmb3.1bn for PICC Life, -21% YoY, -20% below GSe estimate of Rmb3.37bn
• FYP Decline: 36% YoY drop, but improved business quality reflected in 1.3pt margin expansion
• PICC Health NBV: Rmb284mn, +44% YoY, +7% above GSe estimate
• FYP Decline: 40% YoY drop, but 7% NBV growth due to 1.4pt margin expansion

Agent Headcount

• PICC Life: -18% YoY to 210k agents
• PICC Health: -26% YoY to 26k agents
• This indicates that the agency restructuring is still in progress, with a significant decline in agent numbers suggesting ongoing efforts to improve agent and product quality

Investment Performance

• Net Investment Yield: 5.1% (annualized), +0.0 pp YoY, +0.3 pp above GSe estimate
• Overall Investment Yield: 5.3%, +0.6 pp YoY, -0.2 pp above GSe estimate
• Total Investment Assets: Rmb823.3bn, -1% YoY, +6% YTD, +7% above GSe estimate for full year

Solvency Ratios

• Group Solvency Ratio: 296%, +24.0 pp YoY
• Life Solvency Ratio: 199%, +74.0 pp YoY
• Health Solvency Ratio: 235%, +129.5 pp YoY
• P&C Solvency Ratio: 290%, -9.5 pp YoY

Key Takeaways

• Earnings Beat: PICC Group exceeded expectations in net profit, driven by P&C underwriting and investment income.
• Life Insurance Quality Improves: Despite a significant decline in FYP, the new business margin expanded, indicating better product mix and operational efficiency.
• Agent Restructuring Ongoing: The large decline in agent headcount suggests the company is still restructuring its agency network to enhance quality.
• Investment Income Strong: Investment yield remained stable, contributing positively to overall profitability.
• Solvency Ratios Improved: All segments showed improved solvency ratios compared to the prior year, reflecting strong capital positions.

Risks and Outlook

Upside Risks

• Significant improvements in agent productivity
• Better product mix leading to higher margins
• Stronger investment returns

Downside Risks

• Sharp decline in long bond yields
• Increase in agent attrition
• Deterioration in P&C earnings

Analyst Ratings and Price Targets

• Rating: Neutral
• 12-month SOTP-based TP: HK$4.15
• Current Price: HK$3.38
• Upside Potential: 22.8%

Additional Notes

• The GS Factor Profile indicates that PICC Group is not a top priority for acquisition, with an M&A Rank of 3, suggesting a low probability of being acquired.
• Quantum database is used for detailed financial analysis and comparison.
• GS SUSTAIN strategy focuses on identifying high-quality industry leaders with superior returns on capital and sustainable competitive advantages.
• The disclosure appendix includes information on regulatory compliance, analyst relationships, and potential conflicts of interest.

Conclusion

PICC Group delivered stronger-than-expected earnings in 1H18, with notable improvements in life insurance business quality and stable investment returns. However, the ongoing restructuring of the agency network and decline in agent headcount indicate that there is still work to be done to fully realize the potential of these improvements. The Neutral rating and unchanged price target suggest that the market remains cautiously optimistic but not overly bullish on the company's future performance.