S&P Global Ratings affirmed China Pacific Property Insurance Co., Ltd (CPPIC)’s ‘A’ long-term local currency insurer financial strength and issuer credit ratings, with a stable outlook.
This is the first time S&P has assessed CPPIC’s rating since the new criteria were released on November 15, 2023.
S&P Global views CPPIC as a core subsidiary of the China Pacific Insurance Co., Ltd. (CPIC Group) and will remain so for the next two years. It also expects CPIC Group to maintain satisfactory capital and earnings with its ‘very strong competitive position in China,’ in the next two years.
Ratings drivers
S&P estimates that the insurer will continue to post underwriting profits in the next two years, given a 96%–99% combined ratio (based on IFRS 17). Also, even if the P/C insurer’s growing exposure to the nonmotor sector, especially given natcat risks, may increase its underwriting performance’s volatility, S&P says it expects that the insurer will continue to enhance risk selection while actively reviewing its retained exposures.
S&P expects CPPIC’s capital to remain deficient over the projected period of the rating agency’s risk-based capital requirements at the 99.5% confidence level. However, it noted that the improved capital buffer may help the insurance firm weather underwriting volatility caused by large-loss events, along with changes in investment income and a possible increase in capital required for business expansion.
CPPIC’s solid market presence in China, being the third largest P/C insurer, along with its connections to its parent company, should help it maintain its strong competitive position.
By the end of 2023, CPPIC had contributed about 21% of the group’s consolidated capital and 23.9% of the group’s total net profit. As such, S&P also expects that the CPIC Group will provide timely and ongoing support to CPPIC when it comes to capital.
According to S&P, the CPIC Group’s reinforced capital buffer based on the rating agency’s new capital model may help it face market headwinds from interest rate and asset risks. It may also help absorb growing capital needs from business expansion, despite low interest rates and ongoing market volatility in China.
The rating agency noted, however, that having an elevated holding of high-risk assets may increase CPIC Group’s vulnerability to credit and market risk. Included in its high-risk assets are speculative-grade fixed income instruments (including alternative investments), equity, and investment property.
Given the new IFRS 17 and 9 accounting standards, along with market fluctuations, the group’s net profit in 2023 dropped 27% year-on-year.
China Pacific Life Insurance
S&P also assessed CPIC Group’s capital and earnings as ‘satisfactory,’ noting that it includes a positive adjustment that demonstrates its life insurance arm, China Pacific Life Insurance’s (CPLIC) flexibility to adjust non-guaranteed policyholder dividends, thus helping mitigate volatility of capital and earnings.
The flexibility also shows CPLIC’s substantial number of profit-sharing liabilities. As such, the credit rating agency mentioned that it anticipates the group to evolve its risk control over credit risk amid China’s credit recovery delay.
CPLIC will likely maintain its spot as the dominant revenue and profit contributor to the group, the ratings agency said. As such, S&P expects CPLIC to also push its market presence to facilitate channel and product reform. This may help increase the focus on value generation.
S&P also notes that CPLIC saw a strong recovery, with a 30.7% year-on-year growth in the value of new business for 1H 2024. This took place even with flat written premiums coming from new policies during the same period, which were affected by stricter regulatory oversight in the bancassurance channel’s commission expenses.
