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Rating Action:

Moody's affirms China Life P&C's A1 IFSR; outlook stable

 The document has been translated in other languages

09 Nov 2018

Hong Kong, November 09, 2018 -- Moody's Investors Service has affirmed the A1 insurance financial strength rating (IFSR) of China Life P&C Insurance Company Limited. The outlook is stable.

RATINGS RATIONALE

The affirmation of the A1 IFSR considers China Life P&C's a2 baseline credit assessment (BCA) and that the insurer will continue to enjoy a strong level of support from the Government of China (A1 stable).

The a2 BCA reflects China Life P&C's solid market position, conservative investment portfolio and good financial flexibility. Offsetting these credit strengths are its weaker underwriting profitability than its major domestic peers and its weakening capitalization.

China Life P&C is the fourth-largest property & casualty (P&C) insurer in China, with an absolute market share of 5.9% by gross premiums in H1 2018. The insurer has good brand recognition, benefiting from its life affiliate — China Life Insurance Co Ltd's (China Life, IFSR A1 stable, BCA a1) leading franchise.

China Life P&C's investment portfolio is conservative, with low equity exposure. High risk assets — including equities and unrated bonds — relative to shareholders' equity was low at 50% at the end of 2017 compared with major peers in China. Its alternative investments exposure is also not significant.

The insurer has good financial flexibility, and benefits from the very good access to the capital markets of its life affiliate — which is also one of its major shareholders, China Life.

However, China Life P&C's underwriting profitability is weaker than that of its major domestic peers, with its combined ratio further deteriorating to 101.7% in H1 2018 from 100.6% the year before. This situation was primarily driven by the insurer's higher motor loss ratio than its major domestic peers. In addition, its profitability of non-motor business is notably weaker than that of its major Chinese peers because of its lower premium rates and consistently unfavorable claim experience.

In addition, the insurer's overall net income dropped to RMB125 million in H1 2018, down 75% when compared to H1 2017, mainly due to poorer underwriting results as described above and high tax expenses stemming from the fact that part of its commission expenses are not tax-deductible.

Moody's believes that it would be challenging for the insurer to materially improve its combined ratio to below 100% in the next 12-18 months, amid a further liberalization in motor premium pricing.

In addition, its capital adequacy will remain under pressure because of premium growth and weakened profitability which contribute to weak internal capital generation. The insurer's gross underwriting leverage (GUL) rose to around 5x at the end of June 2018 from 4.7x at end-2017 (4.3x at end-2016). Its comprehensive solvency ratio under China's Risk-Oriented Solvency System (C-ROSS) was 196% at the end of September 2018, and Moody's expects it to lower to 170-180% in the next 12-18 months, in the absence of capital replenishment bond issuance.

China Life P&C's A1 IFSR incorporates a one-notch uplift from its BCA of a2, reflecting the potential support from the Government of China, given the government's 87.36% effective ownership and the insurer's strategic importance to China Life Group's efforts to expand its P&C business. The uplift also reflects a moderate level of dependence, reflecting the insurer's exposure to the domestic economy and its holdings of debt securities issued by the government and related entities.

RATING DRIVERS

Given that China Life P&C's IFSR is at the same level as China's sovereign rating, upward rating pressure is limited. However, Moody's could raise the company's BCA if its: 1) underwriting performance improves consistently, such that the combined ratio falls below 95%; 2) product mix becomes more diversified, without a deterioration in its overall underwriting profitability; and/or 3) capitalization strengthens, with its GUL below 3x.

On the other hand, Moody's could downgrade China Life P&C's rating if: (1) China's sovereign rating is downgraded, and (2) there are signs of weakening support from the Chinese government.

In addition, Moody's could lower the insurer's BCA if: 1) its combined ratio remains above 100%; 2) its comprehensive solvency ratio falls below 175% or GUL exceeds 6x consistently; 3) its reserve adequacy weakens as reflected in material adverse reserve development; and/or 4) the credit profiles of its major shareholders - China Life or China Life Insurance (Group) Company, deteriorate significantly.

The methodologies used in this rating were Property and Casualty Insurers published in May 2018, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

China Life P&C Insurance Company Limited provides various insurance products in China, including motor, property, liability, agriculture, and accident and health. At the end of 2017, its total assets and shareholders' equity were RMB80.3 billion and RMB20.5 billion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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
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

Yat Man Sally Yim
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

No Related Data.
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