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Rating Action:

Moody’s affirms PICC P&C’s A1 IFSR; outlook stable

 The document has been translated in other languages

16 October 2019

Hong Kong , October 16, 2019 – Moody's Investors Service has affirmed the A1 insurance financial strength rating (IFSR) of PICC Property and Casualty Company Limited (PICC P&C).

The rating outlook remains stable.

RATINGS RATIONALE

The affirmation of PICC P&C's A1 IFSR reflects 1) the company's Baseline Credit Assessment (BCA) of a1; 2) Moody's expectation of a strong level of support in times of need, given the effective ownership by the Ministry of Finance and the Social Security Fund, which is effectively an arm of the Chinese government (A1 stable), and PICC P&C's status as the country's flagship P&C insurance company and one of the major financial institutions; and 3) a moderate level of dependence with the Chinese government, reflecting the company's exposure to China's economic environment, while there are moderate links between the credit profiles of PICC P&C and the government.

PICC P&C's a1 BCA reflects its strong business and financial profile. PICC P&C maintains an outstanding market position in China's property and casualty (P&C) insurance sector, huge underwriting capacity, solid capitalization and good profitability. Compared with its domestic peers, the company has a lower underwriting expense ratio and derives a higher portion of premiums from non-motor insurance, resulting in good product diversification.

Offsetting such strengths, Moody's highlights that majority of PICC P&C's invested assets and business operations are in China. Moody's typically constrains insurance company BCAs when the exposure to the sovereign and its related risks rise to such a level as to limit an insurer's ability to separate itself from potential deterioration of sovereign credit.

As China's largest P&C insurer, PICC P&C has been able to maintain its outstanding market position and significant lead over the second-largest insurer, Ping An P&C Insurance Company of China, Ltd. (insurance financial strength rating A2 stable), over the past few years. Supported by strong growth in its non-motor insurance line, PICC P&C's absolute market share was 33% in 2018 by premium income, ahead of Ping An P&C's 21% share.

The company's government background, long track record and substantial underwriting capacity provide it with a strong competitive advantage in conducting businesses with large corporations and state-owned enterprises. It also serves a policy role in leading the development of agricultural insurance and government-subsidized critical illness insurance.

In addition, the company has maintained a solid and stable solvency ratio over the past few years. At the end of June 2019, its comprehensive solvency ratio of 286% was well above the minimum regulatory requirement. And while PICC P&C has significant catastrophe exposure to natural disasters in China, such as earthquakes and typhoons, it has adequate reinsurance in place to mitigate this risk to manageable levels relative to its overall capitalization.

At the same time, the company has increased its investments in the banking sector, which adds concentration risk and subjects its capitalization and earnings to higher volatility.

As the strongest subsidiary in the People's Insurance Company (Group) of China Limited (PICC Group), PICC P&C may also be called upon to support other group affiliates for strategic purposes or capital needs through direct investments or dividends upstream.

The rating outlook is stable, reflecting Moody's expectation that (1) the company will maintain its strong position in China's P&C market, and (2) its capitalization will remain solid, (3) it will maintain good underwriting profitability, and (4) that the level of government support will remain largely stable.

Given that PICC P&C's a1 BCA is already at the same level as China's sovereign rating, Moody's has not incorporated any additional uplift in the final IFSR of PICC P&C, given that the majority of its business is in China and its key standalone credit fundamentals (asset quality, capitalization, profitability and financial flexibility) are partly correlated with and therefore linked to the economic and market conditions in China. The rating is therefore at the same level as China's A1 sovereign rating.

RATING DRIVERS

An upgrade of PICC P&C's rating is unlikely, because the rating is already at the same level as the sovereign rating, and currently PICC P&C's business is predominantly in China.

Nevertheless, the rating could be upgraded if (1) the company's overseas business starts contributing to a significant portion of the firm's revenue and earnings; (2) its invested assets become more geographically diversified; while the company maintains solid and stable capitalization and profitability, with Moody's-adjusted gross underwriting leverage consistently below 4x and combined ratio consistently below 95%.

On the other hand, PICC P&C's rating could be downgraded if (1) the company's capital adequacy deteriorates, with its Moody's-adjusted gross underwriting leverage consistently above 5x; (2) its shareholders' equity erodes by more than 10%, for example as a result of a major catastrophe or investment losses; (3) its combined ratio consistently remains above 100%; and/or (4) China's sovereign rating is downgraded, given the company's significant business and asset exposure to the Chinese economy.

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Property & 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.

Headquartered in Beijing, PICC Property and Casualty Company Limited (PICC P&C) is the largest P&C insurance company in China.

At 30 September 2019, the company was 69% owned by PICC Group, which was in turn 60.84% owned by the Ministry of Finance and 16.54% (including both A shares and H shares) owned by the Social Security Fund of the People's Republic of China.

PICC P&C offers a wide range of insurance products, including motor vehicle insurance, accidental injury and health insurance, and agricultural insurance.

The local market analyst for these ratings is Qian Zhu, +86 (212) 057-4098.

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 provide 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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