PICC Life’s Standalone Credit Profile (SCP) has weakened, in terms of capital strength and profitability, notes Fitch Ratings based on a pro forma analysis.
However, PICC Life’s negative pressures are mitigated by potential government support given the insurer’s effective ownership by China’s Ministry of Finance (MoF). Currently, PICC Life’s IFS Rating incorporates a three-notch uplift from its SCP to reflect the insurer’s ownership linkage with the MoF. The MoF owns PICC Life through its 60.84% shareholding in The People’s Insurance Company (Group) of China (PICC Group), which has a 71.08% stake in PICC Life, while its key insurance subsidiary, PICC Property and Casualty (PICC P&C), has an 8.62% stake.
Both PICC Life and PICC P&C are PICC Group’s core insurance subsidiaries. PICC P&C, the country’s largest property and casualty insurer, has a consistent one-third share of the Chinese non-life insurance market.
Fitch believes explicit capital or policy support from the state for PICC Life, if necessary, is likely due to the state’s majority ownership and the insurer’s status as one of the major life insurers in the country.
Rating and outlook
The global credit rating agency has affirmed PICC Life’s Insurer Financial Strength (IFS) Rating of ‘A+’ (Strong). The outlook is stable.
The rating actions are based on Fitch’s current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of ratings assumptions.
Fitch expects capital-market volatility and lower investment yield from fixed-income instruments to reduce PICC Life’s investment return as the pandemic is still developing globally. The group’s pro forma operating earnings could decline materially under the rating case assumptions. Its return on assets (pretax) would drop to a level below the guideline for the ‘BBB’ IFS Rating category.
The rating affirmation reflects PICC Life’s ‘Favourable’ business profile given its large operating scale, diversified distribution platforms and solid business franchise in terms of brand name and the group’s overall operating history. The number of individual insurance agents amounted to more than 391,000 at end-2019.
Assumptions for coronavirus impact (Rating case)
Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro-forma ratings analysis discussed above:
– Decline in key stock market indices by 35% relative to 1 January 2020;
– Increase in two-year cumulative high-yield bond default rate to 16% applied to current non-investment-grade assets, as well as 12% of ‘BBB’ assets;
– Both upward and downward pressure on interest rates, with spreads widening (including high-yield by 400bp) coupled with notable declines in government rates;
– Capital markets access is limited for issuers at senior debt levels of ‘BBB’ and below;
– A COVID-19 infection rate of 5% and a mortality rate (as a percentage of infected) of 1%;
– Impairment of non-standard assets and long-term equity investment by 7.8%; and
– Decline in value of investment property by 7.8%.