Research Update: Ping An Property & Casualty Insurance Co. of China Ltd. Outlook Revised To Negative; Ratings Affirmed At 'A-'
Overview
- China-based Ping An Group's capital buffer will likely contract over the next two years amid challenging capital market conditions and lower-for-longer interest rates. The need to increase reserve provisions and exposure to volatile investment markets will dent the insurance group's earnings prospects.
- We regard Ping An P&C as a core entity of Ping An Group, reflecting its critical role in the parent group's business strategy.
- We are revising our outlook on Ping An P&C to negative from stable and affirming our 'A-' long-term ratings on the insurer.
- The negative outlook reflects our view that lower-for-longer interest rate conditions and heightening investment market volatility will weigh on Ping An Group's capital and earnings position over the next two years.
Rating Action
On May 4, 2020, S&P Global Ratings revised its outlook on Ping An Property & Casualty Insurance Co. of China Ltd. (Ping An P&C) to negative from stable. At the same time, we affirmed our 'A-' long-term insurer financial strength and issuer credit ratings on the China-based insurer.
Rationale
The revised outlook and affirmation of ratings on Ping An P&C reflect our view of the credit profile of the wider Ping An Insurance (Group) Co. of China Ltd. (Ping An Group). In our view, Ping An Group's narrowing capital buffers had already increased its sensitivity toward capital market volatility and the need to increase reserve provisions. Amid a slowing macro-economic outlook for China, Ping An Group's insurance and banking operations will likely see lower profits in 2020--slowing capital accumulation. We anticipate Ping An P&C's underwriting performance will deteriorate, given increasing reserve provisions and slower top-line growth. Like its parent group, we expect Ping An P&C to maintain its very strong market presence in the Chinese property/casualty insurance marketplace, underpinned by its strong distribution channels, branding, and technological capabilities.
As a key property/casualty provider in China, Ping An P&C plays a critical role in the parent group's strategy to provide comprehensive financial services. The insurer also benefits from its parent group's strategy to increase cross-selling across various subsidiaries and investment management. We continue to view Ping An P&C as a core entity of Ping An Group.
We expect Ping An P&C's underwriting profits to deteriorate over 2020-2021, given slower new motor insurance business and worsening underwriting performance for its credit guarantee business. Credit guarantee insurance represented 12.8% of the property/casualty insurer's total premiums and 45.3% of its non-motor portfolio in 2019. Rising unemployment amid a bleaker economic outlook will raise delinquencies on its credit guarantee businesses, which primarily comprises individuals and small and micro-business owners. We expect Ping An P&C to further top up its reserve provision for credit guarantee business and likely register underwriting losses. The reserves for this portfolio increased throughout 2019 amid worsening domestic economic and financial conditions. We estimate that Ping An P&C's overall combined ratio to be around 99% over 2020-2021, compared with a five-year historical average of 96.3%. A combined ratio less than 100% signifies underwriting profit.
We expect Ping An P&C's stand-alone capital position to remain modest, in light of strong growth in non-motor business. We also expect Ping An P&C to maintain a sufficient buffer over its regulatory solvency requirements. The insurer reported a comprehensive solvency ratio of 261.6%, and core solvency ratio of 219.3% as of March 31, 2020.
Falling profit contributions from Ping An Group's insurance and banking operations will likely dent its capital buffers over the next two years. In our view, the asset-accumulative nature of its life insurance operations exposes the insurance group to swings in asset valuation. In addition, lower-for-longer interest rate conditions will mean higher life insurance reserve provisions and lower net interest margins for the group's bank. Further, social distancing initiatives amid the COVID-19 outbreak and a much bleaker macro-economic outlook will inadvertently hurt generation of new business. We also consider Ping An Group's increasing investment risk appetite toward equities could heighten the group's susceptibility to mounting economic headwinds.
In our view, lower interest rates will necessitate additional reserve provisions and slower value-in-force (VIF) generation for the group's life insurance businesses. We expect the life operations' VIF growth to slow to approximately 16% for 2020 and 2021, with revised estimated growth of around 12%-15% over the same period. The reduced propensity to meet with life insurance agents hinders the distribution of long-term protection-type life insurance policies, which we view as having higher profit margins. Ping An Group reported a 24.0% drop in new business value for its life and health business in the first quarter of 2020. In addition, we believe sluggish economic conditions and rising unemployment will lift credit costs in 2020, weighing on Ping An Bank Co. Ltd.'s profitability.
Outlook
The negative outlook on Ping An P&C reflects our view that the wider Ping An Group's capital buffer will likely reduce over the next two years, amid capital market volatility and lower-for-longer interest rates due to the COVID-19 pandemic. We expect Ping An Group to maintain its excellent competitive position over the next two years, supported by its strong distribution channels, branding, and technological capabilities. We also expect Ping An P&C to remain a core subsidiary of Ping An Group. The ratings on Ping An P&C will therefore move in tandem with the group's credit profile.
On a stand-alone basis, we believe Ping An P&C will maintain its leading position in China's property/casualty insurance market over the next two years.
Downside scenario
We may lower the ratings on Ping An P&C if Ping An Group's capital position weakens persistently over the next two years. This could happen if:
- The group's operating performance deteriorates substantially on a persistent basis; or
- The group's risk appetite and sensitivities toward capital market volatility heightens substantially through a more aggressive investment strategy with greater allocation to high-risk assets.
Upside scenario
We may revise the outlook on Ping An P&C to stable if Ping An Group restores its capital and earnings profile, backed by stabilizing profitability and risk appetite.
Ratings Score Snapshot
| To | From | |||||
|---|---|---|---|---|---|---|
| Issuer Credit Rating | A-/Negative/-- | A-/Stable/-- | ||||
| Financial Strength Rating | A-/Negative/-- | A-/Stable/-- | ||||
| Anchor* | a- | a- | ||||
| Business Risk Profile | Very Strong | Very Strong | ||||
| Competitive position | Very Strong | Very Strong | ||||
| IICRA | Intermediate Risk | Intermediate Risk | ||||
| Financial Risk Profile | Fair | Fair | ||||
| Capital and earnings | Fair | Fair | ||||
| Risk exposure | Moderately low | Moderately low | ||||
| Funding structure | Neutral | Neutral | ||||
| Modifiers | ||||||
| Governance | Neutral | Neutral | ||||
| Liquidity | Adequate | Adequate | ||||
| Comparable ratings analysis | 0 | 0 | ||||
| Support | 0 | 0 | ||||
| Group support | 0 | 0 | ||||
| Governtment support | 0 | 0 | ||||
| *This is influenced by our view of Ping An P&C's leading position in areas of innovative product development and distribution platforms in China P/C market, which better position the company to further enhance earnings and business sustainability. | ||||||
Related Criteria
- Criteria | Insurance | General: Insurers Rating Methodology, July 1, 2019
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
- Criteria | Insurance | General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Ratings List
| Ratings Affirmed; CreditWatch/Outlook Action | ||
|---|---|---|
| To | From | |
|
Ping An Property & Casualty Insurance Co. of China Ltd. |
||
| Issuer Credit Rating | ||
| Local Currency | A-/Negative/-- | A-/Stable/-- |
| Financial Strength Rating | ||
| Local Currency | A-/Negative/-- | A-/Stable/-- |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
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