PICC Property and Casualty:Chinks in the armour

Earnings composition weaker than expected. The headline EPS result (up40% yoy) had been pre-announced and so our focus was on earningscomposition. In this regard, normalised EPS (ie. excluding capital gains) roseby only 17%, which was 7% behind our forecast. COR 96.5% was slightlybehind our 96.3% and the running yield 4.4%pa was 40bp below our forecast.

Motor the predominant driver. Relative to our forecasts, motor (73% ofGWP) was the only product to beat our margin expectations (COR 96.1% vsour 97.0%). Motor margins have continued to improve for two years as claimsfrequency falls. We note a lower reserving strain in 2H15 was also acontributor to the improved loss ratio (refer Fig 5).

Motor reforms to continue. Thus far, the majors appear to be benefitingfrom pricing liberalisation despite the 7-10% decline in premium rates in the 6pilot provinces. We attribute this to a more efficient no-claims discount systemwhich is reducing claims frequency by more than price declines. As the pilotrolls out to 12 more provinces this year, we expect the majors can continue toexploit their superior underwriting capabilities, reduce cross-subsidisation anddefend their margin advantage.

All other non-motor product categories missed. Whilst property sufferedfrom seasonal events, the main area of weakness was in A&H (COR 107% vsour 102.5%) where it appears both individual and group channels suffered.

Personal accident margins fell amid intense competition and lower pricing,while group critical illness looks set to be a fast-growing loss leader. WhilstA&H GWP was almost 7% of FY15 total, our forecasts allow for the rapidgrowth to slow and margins to improve towards break-even.