AM Best Revises Issuer Credit Rating Outlook to Positive for China Reinsurance (Group) Corporation and Its Subsidiaries; Affirms Credit Ratings of China Reinsurance (Hong Kong) Company Limited

HONG KONG–(BUSINESS WIRE)–AM Best has revised the outlook to positive from stable for the Long-Term Issuer Credit Ratings (Long-Term ICR) and affirmed the Financial Strength Ratings (FSR) of A (Excellent) and the Long-Term ICR of �a” of China Reinsurance (Group) Corporation (China Re) (China) and its subsidiaries. The outlook of the FSR is stable. (See below for a detailed listing of the companies.)

At the same time, AM Best has affirmed the FSR of A- (Excellent) and the Long-Term ICR of “a-” of China Reinsurance (Hong Kong) Company Limited (China Re HK) (Hong Kong). The outlook of these Credit Ratings (ratings) is stable. China Re HK is a wholly owned subsidiary of China Life Reinsurance Company Ltd. (China Re Life).

The ratings of China Re reflect its balance sheet strength, which AM Best categorises as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The revision of China Re’s Long-Term ICR outlook to positive reflects its continued international expansion, with its 2019 acquisition of Chaucer, the collective franchise comprising China Re International Holdings Limited, Chaucer Insurance Company Designated Activity Company and China Re Australia HoldCo Pty Ltd, significantly boosting the group’s overseas property/casualty (P/C) reinsurance revenue to one-third of its overall P/C reinsurance book. AM Best does not expect China Re’s leading position in its domestic P/C and life reinsurance markets, as well as being a top player in the country’s primary P/C segment, to be challenged over the short to intermediate term. AM Best expects China Re to continue diversifying its book of business through strengthening its position in the global reinsurance market, while maintaining its balance sheet strength and operating performance at levels consistent with the current ratings.

China Re’s consolidated risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), remained at the strongest level at year-end 2019. Total capital and surplus increased by 11% to RMB 97.0 billion (USD 13.9 billion) in 2019, supported by partial retention of net profits and favourable capital gains, while the amount remained stable as of 30 June 2020. China Re has demonstrated favourable financial flexibility with a track record of raising capital through equity and debt capital markets. Its investment portfolio comprises mainly fixed income securities and maintains a good level of liquidity. Other supportive factors to the balance sheet strength include the group’s prudent reserving practices and the low to moderate financial leverage.

The group has a track record of profitable operating results, mainly attributed to favourable investment returns supported by a growing stream of interest income sourced from fixed-income investments. The five-year (2015-2019) average return-on-equity ratio was 7.5%. Notwithstanding, the underwriting margins across the group’s key business segments remained subdued due to the continued intense market competition. While the COVID-19 pandemic has had limited impact to the group’s domestic businesses, results in its overseas P/C reinsurance segment were negatively impacted during the first half of 2020. Nonetheless, the group generated profit for the period.

The ratings also recognise the strategic role China Re has in supporting the continuous development of China’s insurance and reinsurance industries, and the high likelihood of governmental support given its status as the sole state-owned reinsurance group in the country, through the 11.45% stake owned directly by the Ministry of Finance of the People’s Republic of China (PRC) and the 71.56% stake owned by Central Hujin Investment Ltd., a wholly owned subsidiary of the PRC’s sovereign wealth fund, the China Investment Corporation.

Established in December 2019 to capture overseas life reinsurance opportunities, China Re HK is a wholly owned subsidiary of China Re Life, the domestic and international life and health reinsurance arm of China Re.

The ratings of China Re HK reflect its balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, limited business profile and appropriate ERM. The ratings also reflect the company’s important strategic position to the overall China Re group as its overseas life reinsurance subsidiary, as well as the implicit and explicit support from China Re Life, including capital, brand recognition, business development, investment, risk management and operational support.

China Re HK’s balance sheet strength assessment has been revised to strong from very strong. While AM Best expects the company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), to remain at a robust level at year-end 2020, it is projected to exhibit a steeply declining trend over the next five years, mainly attributed to the increasing investment risk exposure in tandem with the rapid business expansion. Notwithstanding, the company’s investment portfolio mainly consists of high quality fixed-income investments, and the company’s capital and surplus should grow organically through full profit retention.

China Re HK’s business has recorded robust expansion at a faster-than-projected growth rate in the first half of 2020, with gross premiums written during the six-month period exceeding the projected amount for the full year by more than 100%. According to the company’s business plan, operating results in 2020 are expected to be negative mainly due to new business strain. Going forward, AM Best will continue to monitor the company’s premium growth and operating results closely in comparison to its business plan and capital plan.

China Re HK’s underwriting portfolio mainly consists of reinsurance treaties of short-term savings-type endowment products denominated in Hong Kong dollars and U.S. dollars. The company’s product risk is considered low, albeit margins remain thin.

Positive rating actions could occur for China Re if it further enhances its global footprint toward achieving a more globally diversified underwriting portfolio without unfavourable divergence from its risk appetite, or if China Re demonstrates sustained improvement in its underwriting profitability.

Conversely, negative rating actions could occur if there is a material decline in the company’s risk-adjusted capitalisation or if its leverage ratio increases significantly. Negative rating actions could also occur if the company exhibits a sustained deteriorating trend in its operating performance.

Negative rating actions may occur for China Re HK if the company reports ongoing operating losses, or the company’s risk-adjusted capitalization declines to a level that no longer support the current balance sheet strength assessment, due to higher-than-expected business expansion without capital injection for supporting the growing risks. A material decline in the company’s strategic importance to the parent group or a significant decline in the level of parental support may result in a negative impact on the ratings of China Re HK.

The FSR of A (Excellent) and the Long-Term ICR’s of “a” have been affirmed, with the Long-Term ICR outlook revised to positive from stable and the FSR outlook at stable for the following subsidiaries of China Reinsurance (Group) Corporation:

• China Property & Casualty Reinsurance Company Ltd.
• China Life Reinsurance Company Ltd.
• China Continent Property & Casualty Insurance Company Ltd.
• Chaucer Insurance Company Designated Activity Company

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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