"The change in outlook reflects the improved capitalization of PICC P&C and the broader PICC Group over the past year," says Sally Yim, a Moody's Vice President and Senior Credit Officer.
"PICC P&C's gross underwriting leverage (based on Moody's methodology) has come down to below 7x from a high of 9.0x at end-2010. While this level still is high on a global basis, we take into account the relatively low capital intensity of PICC P&C's underwriting profile with about 70% of its premiums sourced from motor insurance, which is short-tail and has lower reserving risk," she adds.
Improving profitability has contributed to stronger organic capital growth. For the first half of 2012, the combined ratio was 92.4%, substantially down when compared to 97.8% in 2010. Relatively benign catastrophe losses, favorable loss experience in motor insurance and commercial property insurance, as well as lower expense ratio driven by cost control have driven stronger underwriting results.
While there are negative headwinds on profitability from deregulation of commercial motor premium rates, as well as increased expenses for acquisition of business, investment in underwriting and claims infrastructure, compliance, etc., we believe that PICC P&C will be able to maintain a good level of underwriting profitability due to its market leadership and focus on selective underwriting.
The parent of PICC P&C, PICC Group, has completed its initial public offering on the Hong Kong Stock Exchange on December 7, 2012. The Group has indicated that all of the IPO proceeds will be used to strengthen the capital base of its subsidiaries to support business growth. At this stage, it is uncertain as to whether PICC Group will inject capital into PICC P&C, as the group's life and health insurance affiliates are more in need of capital because of weak solvency margin ratios.
"Nonetheless, the Group now holds additional capital following the IPO. Should there be any capital needs, the Group would now have the ability to inject capital into PICC P&C," says Yim.
Given the listing of PICC Group, the effective government ownership of PICC P&C has declined to 57.5% from 69% (or to 56.1% if an over-allotment option is exercised). Nonetheless, Moody's believes that the level of support from the Chinese government to PICC P&C would not change significantly, given that the government remains the majority shareholder and the company's strategic importance as the industry's flagship company.
PICC P&C's rating continues to be underpinned by the company's outstanding industry position in China, as well as its huge underwriting capacity, which is a solid competitive advantage when it solicits business from large corporations and state-owned enterprises.
These strengths are offset by PICC P&C's relatively weak capital adequacy as indicated by its high, yet moderating, gross underwriting leverage, though we take into account its less risky product profile which focuses mainly on motor insurance. Its financial leverage is also high, as it has issued a total of RMB19 billion of subordinated debt in order to replenish its solvency over the past five years.
PICC P&C's A1 IFS rating receives a one-notch uplift from the a2 baseline credit assessment. This incorporates the potential for support to be provided to the company in the event of stress by the Chinese government, either directly or through funding sources under its control.
Upward rating pressure could emerge if (1) its gross underwriting leverage decreases to below 5x; (2) financial leverage at PICC P&C decreases to below 20%; (3) its profitability further improves with a combined ratio consistently below 92%.
However, given the current baseline credit assessment of a2, under the current support and dependence assumptions, PICC P&C's rating would not be upgraded if China's sovereign rating (currently with a positive outlook) is upgraded.
On the other hand, downward rating pressure could emerge if: (1) capital adequacy weakens again, with its gross underwriting leverage increases to above 7x; (2) PICC P&C incurs a significant catastrophe loss (net, after-tax), which exceeds 10% of its shareholders' equity; (3) its combined ratio consistently stays above 100%; or (4) a significant decline in Moody's assessment of the level of potential support from the Chinese government.
The methodologies used in this rating were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Beijing, PICC Property & Casualty Co Ltd is the largest P&C insurance company in China, offering motor vehicle insurance, commercial property insurance, cargo insurance, and others. For first-half 2012, gross written premiums were RMB101.2 billion. As of June 30, 2012, total assets amounted to RMB290.6 billion, and shareholders' equity was RMB43.7 billion.
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Sally Yim VP - Senior Credit Officer Financial Institutions Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Stephen Long MD - Financial Institutions Financial Institutions Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (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 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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