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Rating Action:

Moody’s affirms CPIC Life’s A1 IFSR; outlook stable

 The document has been translated in other languages

04 March 2020

Hong Kong , March 4, 2020 – Moody's Investors Service has affirmed the A1 insurance financial strength rating (IFSR) of China Pacific Life Insurance Co., Ltd. (CPIC Life).

The rating outlook is maintained at stable.

RATINGS RATIONALE

The affirmation of CPIC Life's A1 IFSR incorporates:

1) The company's Baseline Credit Assessment (BCA) of a2; and

2) A one notch uplift, reflecting our assumption of a moderate level of support from the Shanghai Municipal Government and the Government of China (A1 stable) in times of stress, given around 40% ownership of CPIC Life by state-owned entities through CPIC Life's parent, China Pacific Insurance (Group) Co., Ltd. (CPIC Group), and CPIC Life's strategic importance to the Shanghai Municipal Government as the flagship insurance company in Shanghai; as well as CPIC Life's moderate level of dependence on Shanghai Municipal Government, reflecting the company's exposure to Shanghai's economy.

CPIC Life's a2 BCA takes into account its strong franchise and brand recognition, distribution focus on the agency channel, and product mix, which focuses on long-term value creation.

CPIC Life has a strong market position and was the third-largest life insurer in China by premium income in 2019. Supported by its strong brand and distribution, CPIC Life has maintained solid premium growth over the past few years, even in 2018 when the industry premium growth was flat due to the regulatory clamp-down on short-to-medium term savings-type products. However, its premium growth slowed in 2019, due to a decline in new business. Its absolute market share dropped slightly to 7.2% in 2019 from 7.7% in 2018.

The outbreak of the coronavirus will likely dampen CPIC's new business sales in 2020, exerting pressure on its premium growth.

Agency force remains CPIC Life's dominant distribution channel, and represented 91.7% of total premium income in H1 2019. The agency force is selling products with higher profitability. Driven by the strong growth in renewal premium, premium income from the agency channel grew by 7.6% in H1 2019 from H1 2018.

CPIC Life has a favorable product mix, with a focus on long-term value creation. Regular-premium products accounted for 68% of first-year premium income in H1 2019. Although participating products still constitute the major product line, which allows the insurer to share the investment gains and losses with its policyholders, premiums from long-term health products continued to grow strongly and made up 20% of its total premiums in H1 2019.

CPIC Life also benefits from the strong financial flexibility of its parent, CPIC Group, given the group's low financial leverage, strong earnings coverage, a high level of liquid assets held at the holding company, and good access to the capital markets.

These strengths are offset by CPIC Life's moderate agency productivity compared with that of other major domestic leading insurers, and higher exposure to alternative investments relative to shareholders' equity.

In pursuit of higher yields, CPIC Life has been increasing its exposure to alternative investments ─ such as debt and equity investment schemes and wealth management products ─ over the past three years. Although these assets offer comparatively high investment returns versus traditional bonds, they introduce additional liquidity risk and credit risk from the underlying projects and sponsors of these plans/schemes.

The rating outlook is stable, reflecting Moody's expectation that the company's market share, capital position and profitability will remain solid over the next 12-18 months. Moody's also expects the increase in high-risk assets to remain at a manageable level.

RATING DRIVERS

Given that CPIC Life's IFSR is already at the same level as China's sovereign rating, upward rating pressure is limited.

Nevertheless, Moody's could raise the insurer's BCA if the company shows (1) significant improvements in agency productivity; and/or (2) sustained improvement in profitability, with a return on capital consistently above 15%.

Moody's could downgrade CPIC Life's IFSR if China's sovereign rating is downgraded, and if there are signs of weakening support for CPIC Life from the Shanghai Municipal Government or the Chinese government.

In addition, Moody's could downgrade CPIC Life's IFSR and/or BCA if the company's (1) local solvency margin ratio falls consistently below 150%; (2) profitability deteriorates sharply, with a return on capital consistently below 8%; and/or (3) high-risk assets/shareholders' equity remains consistently above 300%.

The methodologies used in these ratings were Life Insurers Methodology published in November 2019, and Government-Related Issuers Methodology published in February 2020. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Shanghai, China Pacific Life Insurance Co., Ltd. was the third-largest life insurer in China by premium income in 2019.

As the life insurance arm of its parent, CPIC Group, CPIC Life offers traditional life, participating, and accident and health insurance products.

The parent company also owns China Pacific Property Insurance Co Ltd (IFSR A1 stable), the third-largest property and casualty insurer in China by premium income.

As of 31 December 2018, CPIC Life's assets totaled RMB1.12 trillion and shareholders' equity RMB70.0 billion.

The local market analyst for these ratings is Qian Zhu, +86 (21) 2057 4098.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Kelvin Kwok, CFA
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Sally Yim, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Releasing Office :
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

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