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Rating Action:

Moody's assigns first-time Baa2 IFSR to Sunlight Agricultural Mutual; outlook stable

 The document has been translated in other languages

19 November 2021


Hong Kong , November 19, 2021 - Moody's Investors Service has assigned Baa2 insurance financial strength ratings (IFSR) to Sunlight Agricultural Mutual Insurance Company. The outlook is stable.

This is the first time that Moody's has assigned a rating to Sunlight Agricultural Mutual.

The Baa2 IFSR reflects the strong business support from Sunlight Agricultural Mutual's founding member, Beidahuang Group, and the insurer's solid risk-based capitalization. However, these strengths are offset by the insurer's high catastrophe risks stemming from its concentration in Heilongjiang province's agricultural insurance, and its modest overall market position.

RATINGS RATIONALE

Sunlight Agricultural Mutual has a strong franchise and position in Heilongjiang province's agricultural insurance market, benefiting from its affiliation with Beidahuang, a conglomerate wholly owned by the Ministry of Finance. One of Beidahuang's business is managing sizable arable land in Heilongjiang province and providing extensive agricultural services to farmers leasing these lands. The insurer underwrites over two third of its agricultural premiums on these lands possessing robust loss data history and with low acquisition costs.

The insurer maintains solid capitalization against its risk underwritten. Moody's expects Sunlight Agricultural Mutual to continue to retain all distributable profit to strengthen its capitalization. Moody's also considers potential business and capital support from Beidahuang in times of stress. The insurer's core and comprehensive solvency ratios were solid at 197% at the end of September 2021.

The insurer's investment allocation is prudent with very low risky-asset exposure. Its investments mainly comprise highly liquid bank deposits and asset management products. It does not invest in trust plans or debt schemes, which are less liquid and entail higher credit risks.

The insurer, however, is highly exposed to windstorm, flooding and frost risks in Heilongjiang province. The company's gross modeled catastrophe exposure is significant, although its reinsurance arrangements help bring its net modeled losses to a manageable level relative to earnings and capitalization.

The insurer's profitability could be volatile because of its key agricultural line's vulnerability to extreme weather events in Heilongjiang province. The insurer's earnings dropped significantly in 2019 and 2020 compared with earlier years, primarily because of high crop losses from frequent typhoons and heavy rainfall. Its underwriting margin has weakened in recent years, as reflected in its combined ratio of over 100% in 2019 and 2020.

Sunlight Agricultural Mutual's overall market position will remain modest mainly because it lacks nationwide presence. Its market share by direct premiums was at 0.3% in 2020. The insurer is keen to improve its market position via growing new products like income protection and full cost agricultural insurance, and expanding outside of Heilongjiang. While these plan could alleviate the risk from the insurer's concentration in Heilongjiang's agricultural insurance, it could bring execution risk and increase the insurer's catastrophe exposure. In addition, the insurer could confront with mispricing risk on new products arisen from insufficient loss data.

The stable outlook reflects Moody's expectation that the insurer will maintain its solid risk-based capitalization in the next 12-18 months. Moody's also expects Beidahuang to continue providing strong business support, and potential capital support in times of stress.

The assignment of new rating on Sunlight Agricultural Mutual also takes into account its environmental and governance as part of our environmental, social and governance (ESG) considerations. The IFSR considers the insurer's exposure to physical climate risks because of its agricultural insurance focus and geographic concentration in Heilongjiang province. Increasingly frequent and severe extreme weather events brought by climate change could deteriorate crop loss patterns, thereby undermining pricing adequacy and potentially inducing volatile underwriting earnings.

The Baa2 IFSR also considers the insurer's good corporate governance, benefiting from its experienced and stable management team and the supervision of Beidahuang. In addition, the insurer has not had any material compliance findings.

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

Moody's could upgrade the rating of Sunlight Agricultural Mutual if Moody's assesses that Beidahuang's capacity to support the insurer improves significantly or if the insurer (1) significantly diversifies its business outside of Heilongjiang province without undermining its profitability; (2) significantly diversifies toward business lines that have granular risk exposure and low catastrophe exposure while establishing a track record of profitability; (3) meaningfully improves its profitability, with its combined ratio below 100% or its return on capital above 5% consistently.

On the other hand, Moody's could downgrade the rating if (1) the insurer's capitalization meaningfully weakens, which could be a result of significant catastrophe losses without capital replenishment, and that its comprehensive solvency ratio drops below 150% consistently; (2) its underwriting profitability deteriorates, such that its combined ratio is consistently above 104% or it reports persistent losses; or (3) business support from Beidahuang weakens or Beidahuang's capacity to provide support meaningfully deteriorates.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Property and Casualty Insurers Methodology published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1254163 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Heilongjiang province, Sunlight Agricultural Mutual Insurance Company provides various insurance products, including agricultural, motor, property, liability, guarantee, and accident and health insurance. As of 31 December 2020, the insurer reported total assets of RMB4.3 billion and shareholders' equity of RMB2.8 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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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