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Rating Action:

Moody's affirms PICC Re's A3 IFSR, outlook stable

 The document has been translated in other languages

03 November 2020


Hong Kong , November 3, 2020 - Moody's Investors Service has affirmed PICC Reinsurance Company Limited's (PICC Re) A3 insurance financial strength rating (IFSR). The outlook on the rating is stable.

RATINGS RATIONALE

The affirmation of PICC Re's A3 IFSR reflects its baa2 baseline credit assessment (BCA) and a total of two notches of uplift stemming from the support from the Government of China (A1 stable) and its parent, The People's Insurance Company (Group) of China Limited (PICC Group), mainly through its subsidiary, PICC Property and Casualty Company Limited (PICC P&C, IFSR A1 stable).

Moody's has raised PICC Re's baseline credit assessment (BCA) to baa2 from baa3, primarily reflecting the reinsurer's improving market position and profitability.

PICC Re's premium grew strongly in the past three years and it has gradually established its franchise in the reinsurance industry. It is integrated with PICC Group through investment and risk management, and shares PICC Group's strong brand. It will continue to benefit from a stable source of premiums assumed from PICC P&C with historical loss data and low acquisition cost. In the meanwhile, PICC Re has achieved rapid growth in third-party market business through the partnership with local insurers and many international brokers.

Additionally, since investment income has increased and underwriting losses narrowed, PICC Re's profitability has improved. The reinsurer reported bottom-line profit for the first time in 2019, and continued to report a profit of RMB44 million in H1 2020.

Nonetheless, PICC Re's profitability is still weak and this will constrain organic growth in its shareholders' equity in the next 12-18 months. Its anticipated premium growth would also negatively pressure its capitalization. Its core and comprehensive solvency ratios both stood at 165% at end-June 2020, compared with the regulatory minimum of 50% and 100%, respectively.

On the other hand, PICC Re is still a relatively young reinsurer. It has not yet established an underwriting profitability track record, and its business and geographic diversification will remain limited over the next 12-18 months. In addition, the reinsurer is exposed to execution risks associated with its third party business expansion.

As one of strategically important subsidiaries within the group, Moody's assumes that both PICC Group and PICC P&C will support PICC Re in times of stress. PICC P&C's strong underwriting profitability and capitalization provide strong capacity for the group to support PICC Re.

Further, Moody's believes that the Chinese government is willing to provide support to PICC Re, considering the government's ownership of and affiliation with PICC Group, as well as the increasing importance of the reinsurance industry to the economy. As a result, Moody's assumes moderate levels of support from and dependence on the government, given PICC Re's exposure to China's economy.

Given these considerations, the A3 IFSR incorporates a one-notch uplift of support from the Chinese government and a one-notch uplift of parental support from PICC Group and PICC P&C.

The outlook on the rating is stable, reflecting Moody's expectation that the reinsurer's solid capitalization and the level of support it receives from PICC Group, PICC P&C and the Chinese government are unlikely to change over the next 12-18 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given that PICC Re is a relatively young reinsurer without an established track record of underwriting profitability, an upgrade of its rating is unlikely in the near term. However, Moody's would consider raising PICC Re's BCA or upgrading its rating if it further expands its franchise, establishes a track record of underwriting profitability and expands its operations with more meaningful business and geographic diversification.

On the other hand, Moody's could downgrade PICC Re's ratings if (1) its profitability meaningfully deteriorates due to underwriting missteps ; with its combined ratio exceeding 106% or it reports net losses consistently; (2) its capitalization weakens meaningfully without capital replenishment, such that its comprehensive solvency ratio drops below 150% on a sustained basis; (3) there are signs of weakening support from its shareholders or a decrease in PICC Re's strategic importance to PICC Group and PICC P&C; and/or (4) Moody's assesses that the level of support it will receive from the Chinese government significantly declines.

The methodologies used in these ratings were Reinsurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187551 , and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Beijing, China, PICC Reinsurance Company Limited was 51% and 49% owned by PICC Group and PICC P&C, respectively as of the end of June 2020. It provides property, casualty, accident and short-term health and life reinsurance. As of the end of 2019, its total assets stood at RMB12.5 billion and shareholders' equity at RMB3.8 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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
MD-Financial Institutions
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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