SINGAPORE (Standard & Poor's) Dec. 22, 2014--Standard & Poor's Ratings Services today assigned its 'A+' long-term insurer financial strength and issuer credit ratings to China Reinsurance (Group) Corp. (China Re Corp.) and its core subsidiaries China Property & Casualty Reinsurance Co. Ltd. (China Re P&C) and China Life Reinsurance Co. Ltd. (China Re Life). The outlook is stable. At the same time, we assigned our 'cnAAA' long-term Greater China regional scale rating to the three entities.
The ratings on China Re Corp. and its core subsidiaries reflect their 'a' group credit profile (GCP) and our assessment that there is a "high" likelihood that the insurers will receive extraordinary support from the Chinese government.
We assess the China Re group's business risk profile as very strong and its financial risk profile as upper adequate. We derive our GCP for the insurance group from a combination of these factors.
"We view China Re P&C and China Re Life as core subsidiaries of the group and believe that the potential government support would flow down to the subsidiaries. For that reason, we equalize the ratings on China Re P&C and China Re Life with that on China Re Corp.," said Standard & Poor's credit analyst Connie Wong. Meanwhile, we believe that there is no structural subordination of China Re Corp. to the group because China Re Corp. is an operating holding company, with premium income accounting for about 47% of its total revenue in the first half of 2014. Therefore, the ratings on China Re Corp. reflect the group's credit profile without any notching.
We view China Re Corp. as a government-related entity. The Chinese central government owns 100% of the company via the Ministry of Finance and its arm Central Huijin Investment Co. Ltd.
"The China Re group's very strong competitive position reflects its reputation as the largest reinsurer in China, its strong connection with the primary insurers, as well as its good operational diversity. The China Re group's market position is somewhat constrained by its lesser geographical diversity, technical support, and market knowhow outside China than key global reinsurers or reinsurance groups." Ms. Wong said.
We expect the combined ratio of the China Re group's P&C business to be about 100%, which is in line with the market performance. Investment returns support the company's profitability.
The insurance risks in China are relatively short tail (predominantly motor insurance, and other personal lines where claims are settled mostly within a few years of the start of the policy term). However, the potential unexpected or unmodeled catastrophe risks due to continued urbanization and climate changes in China are emerging risks, in our view.
We expect growth in the group's life reinsurance operation to remain strong and stable over the next 12-24 months.
We consider the China Re group's capital and earnings to be moderately strong. In our base case, we anticipate that the group's premiums will grow about 8% on average between 2014 and 2016, with return of equity at 7%-10%. We do not expect significant volatility in performance over the next one to two years. The key risk charges for our capital analysis include market risks, underwriting, and catastrophe risks.
In our view, the China Re group has a moderate risk position, reflecting the potential volatility in capital and earnings due to catastrophe risks, and concentration risk in investments in financial institutions. China Re's lower ratio of catastrophe exposure to adjusted capital than international peers, thanks to its significant volume of motor business, helps it to maintain a moderate risk assessment. High P&C catastrophe risks contribute to the high risk position of a number of the China Re group's international peers.
"The stable outlook reflects our view that the China Re group is likely to maintain its competitive position and government linkages over the next two years," Ms. Wong said. At the same time, Standard & Poor's expects the company's capital and earnings to remain moderately strong and financial risk profile to be upper adequate over the next two years despite potential catastrophe risks.
We may raise the ratings if: (1) the group's capital and earnings strengthen materially to a strong level; and (2) we raise the sovereign credit rating on China (AA-/Stable/A-1+; cnAAA/cnA-1+).
We may lower the ratings if: (1) the group's capitalization and earnings deteriorate to a upper adequate level or lower due to unexpected drop in underwriting performance or profitability because of losses or volatility in the investment portfolio; (2) the group's exposure to catastrophe risks increases significantly amid its overseas development, leading to more volatility in capital and earnings and a higher risk profile; (3) we lower the sovereign credit rating on China; or (4) China Re's relationship or importance to the central government reduces.
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