Strong investment performance
Supported by improved investment in overseas reinsurance businesses and improved underwriting performance, China re 1H21 profits rose 63 per cent year-on-year. The improved underwriting performance of the overseas reinsurance business was mainly due to the exclusion of the epidemic from reinsurance coverage and the strengthening of reinsurance rates, which was offset by the weak performance of the direct property insurance business. Although the growth of premiums is affected by the direct insurance market, the life insurance business still maintains a good COR. We adjust the 2021 prime 2022 EPS to RMB 0.17 0.18) in 2023 (previous value: 0.18) to reflect the property insurance business underwriting deterioration in 2021 in 2022. According to our forecast, the company's current share price corresponds to 0.3 times the 2021 forecast PTNAV, and we think the valuation is not high. We maintain our target price of HK $1.10 and a "buy" rating based on SOTP.
Overseas property insurance reinsurance business is good
Benefiting from the strengthening of reinsurance rates and the optimization of business structure, China overseas reinsurance business achieved the best underwriting performance in 1H21, with a COR of 92 per cent. The compensation rate of domestic business in 1H21 deteriorated by 5 percentage points compared with the same period last year. We expect catastrophe compensation to be controlled so far this year. We estimate that the COR of the company's property insurance reinsurance business in 2021, 2022, and 2023 is 99.0%, 98.5, 99.2, and 99.0%.
The property insurance business of direct insurance is weak.
Mainly affected by the car insurance reform, the growth rate of premiums and underwriting performance of the direct property insurance business are weak. The decline in motor insurance premiums is greater than that in the same industry, because the auto insurance reform mainly affects the business of commercial vehicles. However, the costs of some long-tail businesses are high in the short term, and the absence of preferential social security policies this year has also led to a year-on-year rise in fees. We expect the COR of the direct property insurance business to remain above 100% in the short term. We estimate that the COR of the property insurance business of 2021, 2022, and 2023 will be 107.0, 103.1, and 101.2%, respectively.
The quality of guaranteed service is stable.
For the life insurance reinsurance business, the contribution of the most profitable indemnity business increased by 10.8 percentage points year-on-year to 33.8 per cent, while its 1H21 underwriting performance was robust, at 97.42 per cent. We use the SOTP method to revalue China, and our valuation is based on accounting and embedded value indicators. We give a "buy" rating and a target price of HK $1.10, corresponding to our forecast of 0.41 times the 2021 forecast PTNAV.
Risk tips: major property insurance reinsurance underwriting losses caused by catastrophe; health insurance premium growth slowed down; direct insurance property insurance business suffered large underwriting losses.
