HSBC 汇丰：中国财险 PICC 04.23

PICC Property & Casualty

23 April 2007 16页

FY2006 underlying results were worse than those for FY2005. Investment gains more
than accounted for the improvement. Despite the reported improvement to the bottom line,
the dividend was omitted. Although solvency capital was 135% of the minimum
requirement, this is low, compared with peers, and the premium-to-capital rule meant a
dividend could not be paid. In economic terms, PICC’s capital position is stronger than
the regulatory one as it is general for rating agencies to regard subordinated debt as quasiequity.
The other issue for PICC is reserving. Although the company played this down, yearearlier
top-ups continued in 2006. The issue first arose in the 2004 interim results
following the IPO. At the time, the reserve inadequacy was attributable to the 2003
accident year. It now seems as though PICC provided for the 2003 accident year at the
expense of 2004. In 2005, the 2004 accident year seems to have been provided for at the
expense of 2005. Now the same thing has happened in 2006. At the interim 2006 stage,
we estimated that a charge of RMB5bn was needed to settle this issue and to establish a
proper incurred but not reported (IBNR) provision. Our calculation was based on reserve
ratios and comparisons with both our benchmark and reserve ratios of PICC’s peers.
However, PICC is constrained by the PRC solvency rules, although we expect an easing
of these constraints if growth is controlled. Nevertheless, in our view, PICC does not have
sufficient capital to take the charge in the immediate future. That, in our opinion, leaves
PICC with little option other than to run a limited strategy – constrained growth and an
uncertain outlook for the dividend. The market appears to have priced in recovery, and
although we anticipate that PICC’s financial condition will improve, we reiterate our
Underweight (V) rating, but we are raising our target price to HKD3.75 from HKD3.31
reflecting the impact of capital gains in 2006 on PICC’s net asset value.