PING AN LIFE
The affirmation of Ping An Life's A2 IFSR incorporates (1) the company's standalone credit profile of a1, reflecting its prominent market position in China, strong agency force with high productivity and solid capitalization; and (2) a one-notch downward adjustment from the standalone credit profile, reflecting Ping An Life's exposure to contagion risk from other non-insurance business and investments owned by Ping An Group. Potential risks from these businesses and investments could indirectly affect the group's insurance operations through contagion, as well as more directly, if the group's insurance companies were called upon to support its affiliates in times of stress.
With its strong brand recognition, Ping An Life maintains a prominent market position as the second-largest life insurer in China, with a 15.0% market share by original premiums in 2020. The insurer also benefits from an integrated financial product platform, which promotes cross-selling, given its ownership by Ping An Group, a large financial conglomerate.
Although Ping An Life's new policy sales have been and will continue to be challenged by intensified competition and social distancing measures imposed because of the coronavirus pandemic, especially regarding selling long-term protection products through traditional offline agents, its overall premium scale will be supported by a high proportion of renewal premiums in its premium mix.
Ping An Life has maintained good profitability and solid capitalization. It reported RMB92.1 billion in net income during 2020, a 11% increase from 2019. The insurer's high-value product mix supports its internal capital generation capacity.
Its comprehensive solvency ratio stood at 239% as of the end of March 2021, well above the minimum level of 100% as prescribed by the regulator. Nevertheless, its core solvency ratio is likely to drop significantly but remains above the minimum regulatory requirement under China Risk Oriented Solvency System (C-ROSS) Phase II, which is expected to be implemented in 2022, largely because of tighter requirements on recognizing future profits as core capital.
These strengths are offset by Ping An Life's rising asset risk with significant exposure to equity and alternative investments relative to its capital, which could translate into volatility in earnings and capital. The insurer is also exposed to high single-name concentration risk in its equity portfolio.
In particular, Ping An Life is exposed to credit stress in China Fortune Land Development Co., Ltd. (CFLD), given its RMB19.3 billion of long-term equity holdings in CFLD as of the end of 2020 and the CFLD-related assets, with total invested amount not exceeding RMB15.5 billion, it took from Ping An Annuity Insurance Company of China, Ltd. in 2021. Related impairment losses in CFLD will weaken the insurer's profitability in 2021. In addition, its acquisition of interests in six Raffles City developments in China will further increase its equity exposure to the property industry, making it more vulnerable to property market cycles.
Furthermore, Ping An Life's proposed acquisition of an equity interest in New Founder Group, as part of the restructuring of Founder Group, will further increase the insurer's equity exposure and could introduce higher volatility to its capitalization and profitability because the maximum consideration amount represents close to 20% of its capital base, which is significant.
Although Ping An Life's agency productivity remains high compared with rated peers, the level is declining due to challenges from the pandemic and intensified competition to recruit and retain high-quality agents. Moody's expects Ping An Life's agency productivity to improve gradually as the company executes its agency reforms.
Ping An Life's senior unsecured MTN program rating is (P)A3, which is one notch below its A2 IFSR. Given that the senior unsecured MTN program is junior to the liabilities of the insurance policyholders, the one-notch spread reflects the subordination of senior debtholders to Ping An Life's policyholders.
The stable outlook reflects Moody's expectation that Ping An Life will maintain its leading market position, strong distribution capability and solid capital adequacy over the next 12-18 months.
PING AN P&C
The affirmation of Ping An P&C's A2 IFSR incorporates its standalone credit profile of a1, reflecting its consistently strong franchise, product reach and strong profitability. These strengths are offset by the insurer's high guarantee insurance exposure and its large exposure to alternative investments.
The A2 IFSR also incorporates one-notch downward adjustment, reflecting Ping An P&C's exposure to contagion risk from other non-insurance business and investments. Potential risks from these businesses and investments could indirectly affect the group's insurance operations through contagion, as well as more directly, if the group's insurance companies were called upon to support its affiliates in times of stress.
As the second-largest P&C insurer in China, Moody's expects it to maintain its strong market position and strong franchise despite intense competition. This is because of its diversified and extensive distribution channels, including its strong online capabilities.
Ping An P&C's profitability is also strong. Its underwriting profitability is better than most of its domestic peers, with a combined ratio of 99.1% in 2020. This underpins the insurer's stringent risk selection, particularly in its motor insurance segment. The insurer's strict expense management and its risk pricing capability will also alleviate profitability strain due to motor pricing reform. The insurer's profitability also benefits from technological advancements.
These strengths are offset by Ping An P&C's higher exposure to guarantee insurance. The credit quality of guarantee insurance borrowers are susceptible to economic shocks. In fact, this business line turned into underwriting losses in 2020, mainly because of the economic downturn resulting from the pandemic that weakened borrowers' repayment ability.
Nonetheless, Moody's expects the insurer to maintain around the same scale of its guarantee insurance business over the next 12-18 months, mainly because of a likely higher capital consumption under C-ROSS Phase II.
Ping An P&C also maintains a high exposure though that has declined over the past few years, to alternative investments, mainly through trust plans, compared with its capital base. Potential impairment losses could diminish the insurer's capitalization. The insurer's stringent credit risk management partly mitigates this concern while the counterparties of invested trust plans are mainly large state-owned enterprises.
The stable outlook reflects Moody's expectation that the insurer will maintain its strong capitalization and achieve a profitable underwriting performance over the next 12-18 months.
PING AN BANK
The affirmation of PAB's ratings and assessments reflects the resilience of the bank's financial fundamentals to the negative economic effects of the coronavirus outbreak.
The change in outlook to positive from stable reflects Moody's expectation that (1) its continuous strategic alignment and business synergy with the group entities will increase growth prospects and the possibility of a higher level of affiliate support, (2) the bank's profitability will likely recover on resilient pre-provisioning profitability and lower credit costs, and (3) PAB's retail franchise will continue to improve with rising deposits and more integrated product offerings.
PAB's rating is based on China's Moderate+ Banking System Macro Profile. PAB's baa3 Adjusted BCA incorporates a two-notch uplift for affiliate support. Ping An Group, owning 58% of the bank, will support PAB in times of need because Moody's sees increased integration of the bank's operations with those of other subsidiaries of Ping An Group. This integration will likely testify to potentially a higher level of affiliate support, which benefits the bank's product offerings and deposit base.
Moody's expects PAB's asset quality to recover over the next 12-18 months, supported by the bank's successful measures in addressing legacy nonperforming loans (NPLs), improving risk assessment, and China's continued economic recovery. As of 31 March 2021, PAB's NPL ratio was 1.1% and provision coverage was 245.2%; both improved consistently from the end of 2018. That said, continuous fast loan growth could expose the bank to unseasoned asset risks.
Moody's expects PAB's pre-provisioning profitability to be resilient as diversified product and services offerings broaden revenue streams and underpin pricing power. This, together with elevated, albeit declining, credit costs, will point to a modest expansion of return on average assets (ROAA) and support the bank's capital position.
PAB has a good liquidity position. The bank's reliance on market funds increased during the pandemic when interbank funding was cheaper than deposits. It remained stable in the range of 25%-30% of market funds to tangible banking assets from 2016 to 2020. Its liquid banking assets are of high quality, consisting mainly of cash and balances with the central bank and investments in government bonds.
China does not have an operational bank resolution regime. As such, Moody's has applied a basic Loss Given Failure approach to rating PAB's debt securities and assumed a moderate level of support from the Chinese government in times of need given the bank's 1.3% share of system deposits in China as of 31 December 2020. PAB's deposit ratings incorporate a one-notch uplift from a moderate level of government support, while its Counterparty Risk Assessment and Counterparty Risk Rating incorporate a two-notch uplift.
The positive outlook reflects the rating agency's expectation that the bank's increasing business integration with Ping An Insurance (Group) Company of China Ltd (Ping An Group) will likely lead to a higher level of affiliate support and underpin the improvement of the bank's profitability and asset performance over the next 12-18 months.
The affirmation of PAOH's Baa2 issuer rating reflects the strong parental support from and high integration with Ping An Group; the company's stable business growth, supported by demand for overseas investments from Ping An Group and its affiliates; and PAOH's good brand recognition because of its affiliation with Ping An Group.
The company's third-party asset management business has been growing strongly and increasing its contribution to the company's overall earnings over the past few years. Its assets under management (AUM) increased to USD23.3 billion as of the end of June 2021 from USD15.6 billion as of the end of June 2019. The proportion of third-party AUM to total AUM increased to 34% from 13% during the same period. Moody's expects its third-party business to continue to expand, which could over time change its business and financial profiles.
PAOH is strategically important to Ping An Group, given that PAOH is Ping An Group's only directly and wholly-owned offshore financing and investment platform. The company manages a substantial portion of Ping An Group and its affiliates' overseas investments, and provides bridge funding to its fellow subsidiaries for their offshore investments. As of the end of June 2021, 66% of PAOH's AUM came from Ping An Group and its affiliates.
PAOH is also a highly integrated subsidiary within Ping An Group. Its management team and board are entirely appointed by the group. The company benefits from operating synergies with Ping An Group in terms of IT systems, financial reporting, investment procedures and risk management systems, as well as in terms of the distribution channels it utilizes to market its asset management products.
Ping An Group has historically provided capital injection to support the growth of PAOH. Moody's expects such support to continue to flow when needed, based on its close relationship with PAOH.
Furthermore, PAOH holds significant stakes in Ping An Group's key operating entities, including Ping An Financial Leasing (29.2% as of the end of 2020) and Lufax (15.4% as of the end of 2020). PAOH also holds HKD14.2 billion of convertible promissory notes from Lufax. The gain on share dilution of Lufax and the fair value gain from Lufax's convertible notes after the IPO of Lufax in October 2020 have improved PAOH's liquidity and profitability.
Although improving, PAOH's moderate liquidity and relatively high financial leverage make it dependent on the group's resources and support. In addition, recurring earnings from its asset management business has been increasing over the past two years but remains small in its earnings composition.
The stable outlook reflects Moody's expectation that PAOH will maintain its stable financial performance and manage its financial leverage at a reasonable level in the next 12-18 months. Moody's also expects Ping An Group will continue to provide capital and noncapital support to PAOH. The stable outlook also reflects Moody's expectation that Ping An Group will maintain a good level of earnings and solid capital adequacy at its insurance and banking subsidiaries in the next 12-18 months.
PAOH's senior unsecured debt rating and the senior unsecured medium-term note program rating are Baa2 and (P)Baa2/(P)P-2, respectively, which are at the same level as PAOH's Baa2 issuer rating, given the notes issued under the MTN program rank pari passu with all other outstanding senior unsecured obligations of PAOH.
The rating of the senior unsecured MTN program by Vigorous Champion International Limited and the rating of the senior unsecured debt issued under this program are (P)Baa2/(P)P-2 and Baa2, respectively. The ratings are at the same level as PAOH's Baa2 issuer rating, given that the notes issued by the program are guaranteed by PAOH, and the guarantee ranks pari passu with all other outstanding senior unsecured obligations of PAOH. In addition, the notes issued under this program rank pari passu with all other outstanding senior unsecured obligations of Vigorous Champion International Limited.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
PING AN LIFE
Ping An Life's credit profile is exposed to potential credit problems from other non-insurance business and investments in the form of contagion or direct support. Therefore, an upgrade of Ping An Life's rating is unlikely unless such exposure reduces significantly.
However, the insurer's standalone credit profile could be raised if: (1) the insurer consistently and significantly improves its capitalization, with adjusted capital/assets consistently above 7%; or (2) the company significantly reduces its exposure to high-risk assets and its single-name concentration, with high-risk assets/shareholders' equity consistently below 250%.
Moody's could downgrade the insurer's ratings if (1) its capitalization continues to weaken, with adjusted capital/assets below 4% or comprehensive solvency ratio below 150%, both on a sustained basis; (2) its standalone financial leverage rises above 40% or earnings coverage drops below 5x, both on a sustained basis; (3) there is a sharp deterioration in profitability, with return on capital below 8% on a sustained basis; (4) its asset quality deteriorates sharply with significant amount of impairment losses detrimental to its profitability and capitalization; or (5) potential support burdens related to other affiliate companies or investments.
PING AN P&C
Ping An P&C's credit profile is exposed to potential credit problems from other non-insurance business and investments, in the form of contagion or support. Therefore, an upgrade of Ping An P&C's rating is unlikely unless such exposure reduces significantly
However, Moody's could raise the insurer's standalone credit profile if there is (1) a sustainable improvement in profitability, such that its combined ratio falls below 94% on a sustained basis; (2) stronger capitalization, with its gross underwriting leverage (GUL) remaining below 3.0x or its comprehensive solvency ratio remaining above 230% on a sustained basis; (3) further business mix diversification, while the insurer maintains profitability and reserve adequacy; or (4) a significant decline in its guarantee insurance exposure.
Moody's could downgrade the insurer's rating if (1) its underwriting profitability deteriorates significantly, such that the combined ratio is above 100% on a sustained basis; (2) its capital adequacy worsens to the extent that its comprehensive solvency ratio is below 150% on a sustained basis; (3) its high-risk asset leverage increases significantly above 100%; or (4) there is potential support burdens related to other affiliate companies or investments.
PING AN BANK
Moody's could upgrade PAB's deposit ratings on higher level of affiliate support from Ping An Group, if both the bank's business integration with the group entities and the parent's capacity to provide support strengthen.
Moody's could upgrade PAB's BCA if the bank's capitalization strengthens, as measured by tangible common equity (TCE)/ risk weighted assets (RWA) consistently above 9%, its profitability improves, as measured by net income/tangible asset consistently above 0.8%, and its asset quality remains stable, with problem loans/gross loans consistently below 1.5%.
PAB's BCA could also be upgraded if the bank's quality of liquid banking resources improves consistently and remain 30%-35% of tangible banking assets.
Moody's could downgrade PAB's deposit ratings if the parent's capacity to provide support to PAB weakens or the bank's strategic importance to the parent declines.
PAB's BCA could be downgraded if the bank's asset quality and profitability weaken significantly, as measured by problem loans/ gross loans consistently above 3%, net income/tangible asset consistently below 0.6%, respectively; RWA grows rapidly and leads to a weaker capital position, as measured by TCE/RWA consistently below 7.5%, and/or reliance on market funding increases, with its market funds/tangible banking assets consistently above 40%.
Because PAOH's rating is closely linked to Ping An Group's credit profile, its rating could be upgraded if Ping An Group's credit profile improves, which will be reflected in rating upgrades for Ping An Life, Ping An P&C or Ping An Bank.
PAOH's issuer rating could be downgraded if: (1) the support from or the company's strategic importance to Ping An Group deteriorates or if the ratings of Ping An Life, Ping An P&C or Ping An Bank are downgraded; (2) it engages in significantly riskier businesses that strain its capital or liquidity; or (3) it encounters significant risk management issues or missteps that impair its franchise and management stability.
The principal methodology used in rating Ping An Life Insurance Company of China, Ltd. was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . The principal methodology used in rating Ping An P&C Insurance Company of China, Ltd. was Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . The principal methodology used in rating Ping An Bank Co., Ltd was Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625 . The principal methodologies used in rating China Ping An Insurance Overseas (Holdings) Limited and Vigorous Champion International Limited were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 and Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Ping An Life Insurance Company of China, Ltd. (Ping An Life) is the second-largest life insurer in China. Ping An Life offers various insurance products including traditional life, participating insurance, and accident and health products in mainland China. As of 31 December 2020, Ping An Life reported total assets of RMB3.5 trillion and shareholders' equity of RMB265.5 billion.
Ping An P&C Insurance Company of China, Ltd., is the second-largest P&C insurer in China. The insurer provides various insurance products, including motor, property, liability, guarantee, and accident and health insurance. As of 31 December 2020, Ping An P&C reported total assets of RMB450.7 billion and shareholders' equity of RMB103.4 billion.
Ping An Bank Co., Ltd is a nationally licensed joint-stock bank in China. As of 31 March 2021, the bank had a consolidated asset base of RMB4.6 trillion.
China Ping An Insurance Overseas (Holdings) Limited is Ping An Insurance (Group) Company of China's only directly and wholly owned offshore investment and financing platform. Through its subsidiaries, it engages in a wide range of businesses, including general insurance in Hong Kong, asset and investment management and overseas project investments and others. As of 31 December 2020, Ping An Overseas reported total assets of HKD108.9 billion and shareholders' equity of HKD49.3 billion.
The local market analyst for Ping An Life Insurance Company of China, Ltd.'s, China Ping An Insurance Overseas (Holdings) Limited and Vigorous Champion International Limited's ratings is Qian Zhu, +86 (21) 2057 4098.