PICC P&C reported weaker-than-expected first-quarter results given the 1Q24 CoR slightly increased to 97.9% (vs: FY23: 97.8%) and auto/non-auto premium growth dropped to +1.9%/+5.0% YoY (1Q23: +6.5%/+12.8% YoY). Dragged by increased claims for low-temperature and freezing rain in 1-2M24, transportation recovery and premium slowdown, the insurer's underwriting profit (UWP) slid by 49.1% YoY to RMB2.4bn, adversely impacting net profit by -38.3% YoY to RMB 5.9bn. Investment result concerned market as net investment yield (not annualized) was 0.8%, lower than that of some life peers. We regard the weaker-than-expected investment more of an issue of asset allocation than of investment capability, given 1) most equity-type investments were allocated into funds, i.e. FOFs, which were designated into FVTPL under IFRS 9, with their value fluctuations directly offsetting net profit; 2) 21% (out of 40% in total) of bond investments was assigned to FVOCI, for which the fair value gains were recorded in OCI, not P/L net profit. Despite a weak 1Q print, we remain confident on the insurer's UW resilience given 1) catastrophe-induced claims were fully released in first quarter, and 2) monthly premium growth recovered as 1Q seasonality faded out. Considering the persisting effect of asset allocation and market fluctuations, we revise down FY24-26E EPS by 2%-6% for investment volatilities. Maintain BUY, with TP at HK$11.9, implying 1.0x FY24E P/BV.
Auto/non-auto growth dipped for seasonality. In 1Q24, auto premium growth slid to +1.9% YoY (vs 1Q23: +6.5% YoY), lower than our long-run projection of 5% (link), primarily dragged by lower avg. ticket size offered by small- to mid- sized peers who intended to gain more share at year-start, causing the industry pricing level to decline. Non-auto was tugged by postponed tenders of policy- backed biz, i.e. agriculture insurance, which was +3.2% YoY (vs 1Q23: +23.2% YoY). With increased claims paid for freezing rain and recovered transportation in 1Q24, we expect the reserve surplus of small- to mid-sized insurers' to be used up, which would bring the industry's auto pricing back to normal. Looking ahead, we think the insurer has stronger-than-peers' upside in auto expansion even if new car sales paced down because of an optimized structure, where 65% of NEVs were home-owned with CoR less than 100%, and claims for commercial vehicles could be compensated by repricing. With contracted expense rates, we expect FY24E auto CoR to be 96.7% (CMBI est), meeting year-start guidance of <97%. For non-auto, agriculture premium increased by +14.7% YoY in Mar, reflecting strong momentum once the government tender projects recovered. We remain positive on growth of A&H and expect non-auto CoR at 98.9% (CMBI est).
Investment weighed on NP. The insurer's investment missed in 1Q24, with rpt. investment income (incl. contributions from AJVs) -36% YoY to RMB2.15bn; if excl. profit from AJVs, the figure was -52.5% to RMB1.23bn. Despite low interest rates, the insurer realized a fair value loss of RMB164mn (vs 1Q23: RMB1.2bn gain). We view the weaker-than-expected result more of an issue of allocation rather than the insurer's investment capability, given 1) most equity-type assets were allocated to funds, i.e. FOFs, which were designated to FVTPL under IFRS 9, with value fluctuations directly offsetting net profit; 2) 21% (out of 40%) of bonds was assigned to FVOCI, for which the fair value gain was recorded in OCI, not in P/L net profit. As the change in investment structure may take longer, we revise down our EPS forecast by 2%-6% to RMB1.32/RMB1.43/RMB1.55 in FY24-26E to imply current allocation and investment volatilities.
Valuation: The stock is now trading at 0.8x FY24E P/BV, with price dipping after worse-than-expected 1Q24 results. We remain positive on the P&C leader given 1) its UW resilience on the back of the biggest market share at 35.5% by 1Q24; and 2) a defensive play delivering >40% payout and an est. 6.0% FY24E dividend yield. Maintain BUY with TP at HK$11.9, implying 1.0x FY24E P/BV.