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Shanghai float to fuel Chinese insurer PICC's drive to diversify

People's Insurance Co. (Group) of China Ltd.'s proposed secondary listing in Shanghai is a significant step toward diversifying the Chinese state-controlled company's sources of income as its main business is increasingly squeezed, analysts said.

The company said in announcing regulatory approval for the move that its aim is to replenish capital. Based on the group's 2017 net asset of 3.23 yuan per share, it could potentially raise at least 14.85 billion yuan from the float. That would come on top of a combined 30 billion yuan raised via issuances of capital supplementary bonds by the group and unit PICC Life Insurance Co. Ltd.

An internal source at the company said the Shanghai listing has been a long-standing desire aimed at supporting the group's push to revamp its property and casualty, life and health insurance subsidiaries while promoting its digital, integrated and international strategies.

Though the Hong Kong-listed group, which was founded in 1949, has 11 subsidiaries with operations ranging from life insurance to asset management, it generated 69.2% of revenue and 94.2% of net profit from PICC Property & Casualty Co. Ltd., according to the prospectus for the Shanghai listing. PICC P&C is China's biggest nonlife insurer by far, with about a third of the market and premiums more than 60% higher than its nearest rival in 2017.

Diversification needed

By contrast, PICC Life and PICC Health Insurance Co. Ltd., both founded in 2005, are younger and seen as less competitive than the corresponding units of five other listed Chinese insurers. PICC Life ranked ninth in market share in 2017, with less than a fifth of the premiums of the leader, China Life Insurance Co. Ltd.

Its 2017 net profit of 623 million yuan was dwarfed by China Life's 32.25 billion yuan, but perhaps more tellingly by the 5.38 billion yuan booked by New China Life Insurance Co. Ltd., which is 10th by market share.

PICC Health, meanwhile, was hit in 2017 by the Chinese insurance regulator's campaign to curb the sale of wealth management-type policies, resulting in a 16.4% year-over-year decline in gross written premium and just 7 million yuan in net profit. Both the life and health units have also been pushed to shift away from the bancassurance channel of sales and recruit more agents to sell long-term protection-oriented insurance products.

"It is important for PICC Group to further grow its life and health insurance operations," said Grace Zhou, vice president and head of financials at the research department of ICBC International in Hong Kong. It would be "meaningless for them to list as a group" and then continue to rely heavily on PICC P&C, she added.

SNL Image

PICC Group's Hong Kong listing ceremony in December 2012

Source: Associated Press

But that sort of transformation needs capital, because recruiting and training agents to sell protection-oriented policies is expensive and may further erode solvency ratios, Zhou said. As of 2017-end, PICC Life's comprehensive solvency ratio was lowest among its listed peers at 219%.

Auto insurance price war looms

The need to shift its business mix is made starker by the prospect of a tougher road ahead for PICC Group's key auto insurance business. China is rolling out pricing reforms in commercial auto insurance, allowing insurers to charge more flexibly and offer more premium discounts to creditworthy customers.

This move is likely to "make the price war more severe and result in higher commissions paid to intermediaries," said Ken Shih, research director at DBS Vickers Securities in Hong Kong.

And for PICC P&C and other Chinese auto insurers, that could tip a business responsible for more than 70% of nonlife premiums into unprofitability. PICC P&C's combined ratio, which measures claims and other costs as a share of premiums, was 97.26% in 2017, not far from the 100% break-even point.

"If PICC P&C wants to maintain its dominance in the auto insurance market, it may have to do so at the price of a rising combined ratio," Shih said.

Shifting the balance of its business further toward life insurance may also boost its prospects in the stock markets, Shih observed. He said investors in China and Hong Kong generally favor life insurers over P&C companies when market rates are trending up, because the duration of their assets, usually fixed-income instruments, is typically seven to nine years, he said, while their liabilities span 20 to 30 years.

This means they can borrow at lower cost and achieve higher investment yields. At PICC P&C, the average liability duration is a year or less, Shih noted.

Based on the market capitalization of both the group and PICC P&C, which is also listed in Hong Kong, Zhou said PICC's life, health and asset management businesses are practically "given for free."

Fintech ambition

State-backed PICC Group has also shown an ambition to be a strong financial technology player. In April, it announced digital strategies to integrate its various business lines and tap new business models. And according to the internal source, fintech subsidiary PICC Financial Service, founded in October 2016, may take up more capital than other units from the proceeds of the planned Shanghai float.

Analysts said promoting fintech strategies just before the potential Shanghai listing may boost the group's valuation, but it remains too early to predict how the young fintech unit will fare.

Zhou said the plan makes sense for PICC Group because a large proportion of its products are relatively standardized P&C insurance, even if pure digital insurers in China, including ZhongAn Online P & C Insurance Co. Ltd., have not yet broken even. On the other hand, Ping An Insurance (Group) Co. of China Ltd., among the first Chinese insurers to develop fintech, recorded a net profit of 14.62 billion yuan in 2017 from its fintech and healthtech business lines.

Shih said: "Any [Chinese] company as large as PICC Group would want to develop fintech to help it expand and operate with lower costs... as long as it's not just talk."

As of June 20, US$1 was equivalent to 6.47 Chinese yuan.