PICC secures earnings boost on reduction in business taxes
Bei Hu and Christine Chan
Tax concessions will boost PICC Property & Casualty's net profit this year by about 700 million yuan (HK$653.81 million), according to a research report its joint global co-ordinator has issued.
The income boost, which would account for about half of projected net profit this year, came after Beijing cut the business tax levied on all mainland financial institutions from 6 per cent to 5 per cent, China International Capital Corp (CICC) said.
At the same time, Beijing lifted the corporate tax threshold for PICC and it would not pay corporate tax this year, it said. The dual reductions would add about 402 million yuan and 300 million yuan, respectively, to PICC's bottom line, while it would earn 1.46 billion yuan this year and generate a return on equity of 13.8 per cent, CICC said.
PICC - China's largest property and casualty insurer - controls 70 per cent of the mainland market, enabling it to yield an average 4.3 per cent underwriting gain in the past three years, outpacing others. However, CICC said PICC had a huge 910 million yuan charge-off for unconsolidated claims at its sub-branches in the second-half of last year, wiping out a large chunk of its earnings and equivalent to 41 per cent of PICC's underwriting profit during the period.
Last year also saw adjustments made for charge-offs, resulting in lower earnings that year. CICC forecast PICC would earn 278 million yuan last year.
CICC said: 'It is rather hard to judge whether [the] revised balance is sufficient for all the prior years as of the latest balance sheet.
'As a consequence, even actuarial reserves taken based on historical settlement patterns might turn out to be less than sufficient and future reserve adjustments are possible, but impossible to quantify at this stage.'
Meanwhile, PICC's solvency margin at the end of last year was lower than the 100 per cent required minimum ratio set by the mainland, due mainly to heavy fixed-asset holdings and a relatively small equity base.
High premium-to-equity ratio is another concern for PICC.
'The company's net retained premium-to-net asset ratio has been close to or above 4:1 in the past three years, much higher than the 1.15:1 industry average in developed markets and roughly 2:1 for auto underwriters overseas,' wrote CICC, adding that a high leverage could result in much faster earnings deterioration in underwriting losses.