PICC P&C Results: Positive Surprise But More Time Needed

The property & casualty insurance leader in China, PICC Property & Casualty Company Ltd (SEHK: 2328), announced its first-half results on 27 August.

In this article, I’ll take a look at its latest earnings and see if the company can potentially change my initial bearish view on the stock.

Overview of results

The company’s first-half top line (gross written premiums) increased by 4% year-on-year, driven by motor, accident & health, and agriculture insurance.

The company’s combined ratio has, for the first time, improved from 99.2% in 2019 to 97.3% in the first half of 2020.

Both expense ratio (expenses related to selling the insurance/net premiums earned) and loss ratio (insurance claims and reserves paid to insurance policyholders/net premiums earned) improved by almost 1% each.

A combined ratio measures the underwriting profitability of an insurance company (the lower, the better).

If the combined ratio is lower than 100%, it indicates that the insurance company has an underwriting profit.

Thanks to the company’s better combined ratio, its first-half underwriting profit increased by 23% year-on-year.

The company’s book value at the end of June was almost flat compared to what it was at the beginning of the year.

Positive surprise

In my opinion, the company’s improvement in its combined ratio came as a positive surprise.

What’s more encouraging is that the company’s combined ratio was lower than that of Ping An P&C (combined ratio of 98.1% in the first half of 2020) for the first time in a long time.

The last time the company’s combined ratio was lower than Ping An P&C’s was back in 2013, before the commercial motor insurance pricing deregulations in China.

There are two reasons behind this. On the one hand, PICC P&C has endeavoured to speed up its digital transformation, after witnessing the advantages Ping An P&C has gained over the past few years because of this initiative.

It has launched and sped up the adoption of apps such as “PICC e-Tong” to drive insurance sales through the online channel.

The company has also embraced online claim services to increase efficiency and to reduce costs.

The online customer rate of household motor insurance increased to 78% in the first half of 2020 (an improvement of 18% compared to 2019).

The online claim service usage rate of household motor insurance increased to 91% in the first half of 2020 (an improvement of 25% compared to 2019).

As a result, the company’s distribution channel has had tremendous changes in the first half of 2020.

The insurance premiums sold through the agency channel has dropped by 10% in the first half of 2020 as compared to 2019.

And the insurance premiums sold through the direct sales channel has increased by 10% in the first half of 2020. To a certain extent, Covid-19 also helped accelerate such a transformation.

On the other hand, we have to remember that business for Ping An P&C in the first half of 2020 was not good. It had a short-term increase in guarantee insurance claims due to Covid-19. As such, its combined ratio was higher than before.

Foolish takeaway

PICC P&C’s first-half results are definitely encouraging, but it is also too early to make a call and conclude that PICC P&C has transformed itself.

Investors will need to continue to monitor the progress of the company’s digital transformation and its impact on underwriting profitability.

If the company can keep up with this trend, investors should then revisit the original investment case.