Matters:
China Financial Insurance released its 2023 annual report. The company achieved net profit of 24.6 billion yuan in 2023, -15.6% year on year; comprehensive cost ratio reached 97.8%, +1.2pct year on year; total return on investment 3.5%, -0.3 pct year on year; ROE reached 10.8%, -1.9 pct year on year; planned dividend of 0.489 yuan per share, +2.3% year on year, with a dividend ratio of more than 40%.
Commentary:
The growth rate of industrial insurance premiums remained high, and the comprehensive cost ratio reached the target set at the beginning of the year. In 2023, the company achieved insurance service revenue of 457.2 billion yuan, +7.7% year over year, mainly from auto insurance, ijian insurance, and agricultural insurance contributed 3.3%/2.0%/1.2%; achieved underwriting profit of 10.2 billion yuan, -29.1% year over year; comprehensive cost ratio reached 97.8%, +1.2pct year on year, of which car insurance 96.9%/non-vehicle 99.1%, still reached the target set in early 2023 against the backdrop of extreme weather such as Dusurui and Sea Anemone in 2023, demonstrating the company's mature risk management capabilities and good profits level. The comprehensive compensation rate was +1.2pct to 70.6% year on year, and the comprehensive expense ratio was 27.2%, the same as the previous year.
Auto insurance is growing steadily, and under pressure, COR remains at the leading level in the industry. Auto insurance achieved insurance service revenue of 282.2 billion yuan in 2023, +5.3% year on year; accounting for 61.7%, -1.4pct year on year. The comprehensive cost ratio reached 96.9%, +2.4 pct year over year, optimized 0.1 pct compared to the target set at the beginning of the year, and superior to peers (Ping An Insurance 97.7%, Sunshine Insurance 98.9%). Among them, the payout rate was +2.1 pct to 70.4% year on year, mainly affected by the clean-up of the epidemic, rising insurance rates, and natural disasters such as typhoons and torrential rains; under the influence of amortization of the costs of obtaining insurance policies under I17, the cost rate was +0.3 pct to 26.5% year over year. Furthermore, increased competition in the car insurance industry also caused the cost rate to rise to a certain extent.
The share of non-car insurance has increased, and multiple types of insurance have achieved COR optimization. In 2023, non-car insurance achieved total insurance service revenue of 175.1 billion yuan, +11.9% year on year; accounting for a total of 38.3%, +1.4pct year on year. Looking at insurance segments, iHealth Insurance/Agricultural Insurance/Corporate Financial Insurance/Liability Insurance were +23.8%/+10.6%/+5.1%/+3.2%, respectively. In terms of comprehensive cost ratio, non-car insurance reached a total of 99.1%, an optimization of 0.9 pct compared to the target set at the beginning of the year. Multiple insurance types achieved COR optimization, and eHealth Insurance/ Liability Insurance/ Corporate Financial Insurance -2.8pct/-2.1pct/ -0.4pct year-on-year to 97.7%/107.0%/103.8%. Among them, the cost rate of eHealth Insurance was 4.6pct year on year, mainly due to the company's strict cost control; the compensation rate was +1.8pct year over year, mainly due to factors such as the recovery in demand for medical treatment after the epidemic and the deepening of direct settlement policies for medical treatment from other places across provinces. Agricultural insurance COR increased 1.4 pct year over year to 95.8%, and still maintained good profitability. Among them, the cost rate is -0.8 pct year over year, and the compensation rate is +2.2 pct year over year. This is expected to be due to the increase in the frequency of natural disasters.
The overall return on investment declined due to the resonance between the new standards and the capital market. In 2023, the company began implementing I9. Against the backdrop of declining interest rates and increased equity market fluctuations, the company also faced the opportunity of increasing the book value of bonds and the challenge of equity assets falling and losing money due to fluctuations, achieving a total return on investment of 3.5%, -0.3 pct year on year after restatement. Total investment income of $20.8 billion, -1.6% year over year, mainly derived from interest income from financial assets not measured at fair value and changes included in profit and loss ($11.7 billion), and profit and loss attributable to joint ventures and joint ventures ($5.5 billion, +15.8% year over year). In terms of configuration structure, fixed income accounts for 58.2%, -1.3 pct year-on-year.
Among them, bonds accounted for 34.3%, +0.2pct year on year; non-standard accounted for 14.3%, +1.9pct year on year. Equities accounted for 26.4%, +2.0pct year over year; of these, stocks and funds accounted for 13.7%, or -0.1 pct year over year. Among stock assets, FVOCI/FVTPL accounted for 77.8%/22.2%, respectively. More stock assets were designated as OCI mainly to smooth out the impact of market capitalization fluctuations on the statements.
Investment advice: The company's underwriting premiums increased steadily in 2023. Even in the face of increased pressure from natural disasters such as typhoons and torrential rains in the second half of the year, COR still achieved the goals set in early 2023, demonstrating the leading strength of financial insurance and mature risk management capabilities. Looking ahead to 2024 and beyond, we believe that the company's gradually improved risk reduction system will consolidate its risk management moat advantage, support the continued upward trend in ROE, and raise the 2024 PB target value by 1.1x. Considering the impact of the switch between the old and new guidelines, we lowered the 2024-2026 EPS forecast value to $1.39/1.56/1.72 (the value before the 2024-2025 forecast was $1.82/2.18), corresponding to the 2024 target price of HK$13.54. Maintain a “Recommended” rating.
Risk warning: regulatory changes, intensification of natural disasters, equity market fluctuations, declining long-term interest rates