Investment is a drag on financial performance

EPS's 1H22 fell 58.1% year-on-year, underperforming its peers. Volatility in the capital markets and impairment of investments in Great Wall assets are the main reasons for weak investment, which has dragged down profits, with the annualized return on investment falling to 2.76 per cent of 1H22 from 6.55 per cent in the same period last year. Property reinsurance achieved a strong year-on-year increase in premiums of 25.2 per cent in 1H22, while the composite cost rate (COR) rose 1.0pp to 98.5 per cent. Affected by the domestic life insurance direct insurance market, life reinsurance premiums fell 6.9% in 1H22 compared with the same period last year. The total 1H22 premium of property insurance direct insurance increased by 4.6% compared with the same period last year, and the underwriting loss narrowed somewhat. Taking into account the volatility of the capital market, we will reduce the 2022 EPS to RMB0.14/0.19/0.23 (previous value: RMB0.16/0.21/0.26). We lowered the target price based on the SOTP valuation method to HKD0.9 (previous value: HKD1.0) to maintain the buy rating.

Property reinsurance has a strong growth momentum

Domestic property reinsurance premiums increased by 30.0% in 1H22 compared with the same period last year, with agricultural insurance and non-car insurance being the main sources of growth. The premiums of overseas business in the same period benefited from the increase in rates in the international market, which also achieved a year-on-year increase of 17.7%. Domestic business COR improved slightly to 99.6% in 1H22. Affected by the Russian-Ukrainian conflict reserve set aside by the bridge agency business, the 1H22 COR of overseas business deteriorated to 96.5%.

We believe that domestic business is expected to maintain strong growth, and COR will remain at around 99 per cent. Overseas business with rising rates is also expected to maintain a rapid growth rate, but COR may still depend on natural disasters.

Life reinsurance is dragged down by the direct insurance market

Life reinsurance business in 1H22 was negatively affected by slowing growth in the domestic life insurance market and a decline in new orders in Hong Kong and Singapore, with total premiums falling 6.9 per cent year-on-year in 1H22. In terms of business structure, domestic security business with higher profit margin and domestic financial reinsurance business with lower profit margin both achieved year-on-year growth of about 12 per cent in 1H22, accounting for 41.1 per cent and 41.3 per cent respectively. We believe that the weak performance of the domestic life insurance direct insurance market may continue to drag down the growth of reinsurance reinsurance premiums in the short term.

Property insurance direct insurance business is still under pressure

After the implementation of the comprehensive reform of automobile insurance, the premium growth and COR of small and medium-sized property insurance companies are facing greater pressure.

In the past, the way of relying on increasing commission investment to achieve growth was difficult to sustain after the decline of car insurance rates, and the head company's competitive advantage in brands, channels and services was gradually strengthened. As a result, the medium-sized property insurance direct insurance business in the industry recorded only 4.6 per cent year-on-year growth in total premiums at 1H22.

COR improved to 103.0% of 1H22 from 110.3% last year, but still recorded an underwriting loss.

We expect that the future property insurance direct insurance business will continue to be affected by increased competition in auto insurance, premium growth may continue to be sluggish, and the trend of COR pressure is expected to be difficult to change in the short term.

Risk tips: significant deterioration of premium growth; significant underwriting losses; major investment losses.