JPM-China Reinsurance Group-H High retention ratio：Every cloud has a silver lining-20250917

China Re, as a leading reinsurer, operates underwriting risk by acceptingpremium ceded from primary insurers and covering a portion of potentialclaim losses, either proportionally or above a defined threshold. The retentionratio – measuring the proportion of underwriting risk retained by primaryinsurers – serves as a key indicator of risk appetite and underwritingdiscipline. Notably, China’s top non-life insurers have increased their retentionratio to 90.5% in 2024, up from 88.5% in 2015, reflecting improved riskmanagement and robust capital positions. Despite a modest trend of naturalcatastrophic (NAT CAT) losses YTD (8M25: -43% oya), we see limited near-term risk to China Re’s underwriting margin outlook. The company’s marginprofile is resilient, underpinned by a well-diversified profit structure givendomestic P&C reinsurance contributes below 10%, and a surging demand forinnovative reinsurance products with favorable profitability (2020-24: 17%CAGR) (link). Enhanced cost effectiveness amid softer pricing supportsmargin stability. The stock trades at a premium valuation of 5x FY26E P/E,offering a 4% dividend yield. We remain OW, on robust margin structure andattractive yield.

• Walk into the retention ratio. Under the previous accounting standard, netwritten premium was calculated as gross written premium minus premiumceded to reinsurers. The retention ratio, measured as the net writtenpremium divided by the gross written premium, primarily gauges the riskappetite of retaining premium within own book for primary insurers. Ahigher retention ratio signals primary insurers’ greater confidence in riskmanagement and a reduced inclination to cede premium to the reinsurers.

• Sector read-across. The analysis of China’s top three non-life insurers –PICC P&C, PingAn P&C, and CPIC Property, which collectively hold 63%market share – exhibits a steady increase in retention ratios, attributed toimproved underwriting discipline, favorable market conditions, and strongcapital bases. Nonetheless, China Re’s underwriting margin profile remainsresilient, supported by a well-diversified earning structure (Figure 2), andsurging demand for innovative offerings such as Inherent defect insurance(IDI). China Re has refined its product portfolio to boost profitability,mitigating the volatility from risk attachment, and capitalizing on thesector’s improved claim ratio development. Higher risk transfer among less-well capitalized insurers was also helpful.

• China YTD CAT loss. 8M25 catastrophic economic loss showed a modesttrend with a 43% oya decline (Table 2). Short-term CAT loss trends have aminimal impact on reinsurance risk appetite in our view, while the softeningcycle encourages primary insurers to cede more business, balancing cost andpotential claim from long-tail risk (link). Our current estimates for ChinaRe’s EPS growth are 2%/10%/3% for FY25E/26E/27E, respectively.