Insurance Margins Will Decline As EV Risks And Disasters Mount

Key Takeaways

• Slowing economic growth, EV adoption, and climate risks threaten premium growth, profitability, and margins in PICC's core insurance segments.
  
• Bureaucratic inertia and limited innovation put PICC at risk of losing market share and declining returns as competition and regulation intensify.
  
• Diversification, digital transformation, and supportive industry trends are positioning PICC P&C for sustainable growth, improved profitability, and increased market share amid evolving demand.

Catalysts

Engages in property and casualty insurance business in People’s Republic of China.

• As China's GDP growth continues to slow and the middle class reaches saturation, future demand for property and auto insurance is likely to decelerate, severely limiting PICC Property and Casualty's premium revenue growth and making current top-line expansion rates unsustainable.
  
• The rapid expansion of electric and intelligent vehicles threatens PICC's core auto insurance segment, as EVs are generally cheaper to insure and have lower claim frequencies, compressing premiums and narrowing underwriting profit margins for what remains the company's largest line of business.
  
• Intensifying climate-related catastrophes have already driven claims losses to levels 51% above the five-year average, and further increases in the frequency and severity of natural disasters will elevate payouts and claims volatility, undermining the combined ratio and eroding long-term profitability despite efforts at risk reduction and reinsurance optimization.
  
• Persistent reliance on the auto sector, alongside sluggish structural innovation and inherent bureaucracy from state ownership, signals that PICC P&C risks losing market share to more agile, tech-driven competitors, ultimately resulting in stagnant or falling net margins as legacy advantages dissipate.
  
• Continued low interest rates in China are placing structural pressure on PICC's investment yield, which is a critical contributor to earnings, and further industry regulatory tightening will force higher capital retention and restrict investment flexibility, diminishing return on equity and future dividend growth.

PICC Property and Casualty Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on PICC Property and Casualty compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming PICC Property and Casualty's revenue will grow by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.2% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach CN¥37.5 billion (and earnings per share of CN¥1.73) by about September 2028, down from CN¥38.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 10.1x today. This future PE is greater than the current PE for the HK Insurance industry at 8.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

PICC Property and Casualty Future Earnings Per Share Growth

Risks

• Sustained and broad-based growth in China's middle class and rising urbanization are unlocking significant long-term demand for insurance products, which may drive PICC P&C's premium revenue higher, supporting both top-line growth and future earnings.
  
• The company is aggressively advancing digital transformation and AI-powered data analytics, resulting in improved operational efficiency, more precise risk selection, and better claims management, which can lower loss ratios and strengthen net profit margins.
  
• Structural reforms within China's insurance industry, including regulatory policies favoring large, well-capitalized players, are likely to help PICC P&C capture greater market share and capitalize on industry consolidation, which could result in outsized revenue gains and higher return on equity over time.
  
• PICC P&C is undertaking significant diversification of its business portfolio, with rapid expansion in non-auto product lines such as liability, health, agriculture, and long-term care insurance, which reduces reliance on the maturing auto segment while creating new streams of premium income and supporting sustainable growth in overall net income.
  
• Enduring secular tailwinds-such as increased public and regulatory focus on risk mitigation, climate change, health care needs, and the growing importance of social protection-favor underlying demand for PICC's core offerings, suggesting there is robust support for future growth in revenue, margins, and long-term earnings.

Valuation

• The assumed bearish price target for PICC Property and Casualty is HK$14.33, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of PICC Property and Casualty's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$22.0, and the most bearish reporting a price target of just HK$14.33.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥549.2 billion, earnings will come to CN¥37.5 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of HK$18.94, the bearish analyst price target of HK$14.33 is 32.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.