A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit rating of "a" of China Reinsurance (Group) Corp. (China Re) (China) and its subsidiaries, China Property & Casualty Reinsurance Company Ltd. (CPCR) (China) and China Life Reinsurance Company Ltd. (CLRC) (China).
The outlook for all ratings is stable.
The rating affirmations reflect China Re's solid risk-adjusted capitalization. China Re received strong capital support from its shareholders, the Ministry of Finance of China and Central Huijin Investment Ltd (a state-owned investment company). The absolute capitalization was further strengthened gradually through the high retention of operating earnings throughout 2009 to 2011.
The ratings also consider China Re's consistently profitable operating performance and its leading position within the domestic reinsurance market. During 2011, the operating profit was primarily supported by favorable underwriting performance on domestic property and casualty (P&C) insurance and reinsurance businesses. This was driven by the improvement on industry underwriting discipline in conjunction with strong premium growth in both segments. As the only state-owned reinsurance group in China, China Re's long and good relationships with local direct insurers had contributed to the sustainable business growth over the years.
Partially offsetting these positive rating factors include the ongoing capital demand from China Re's operating subsidiaries and the heightened aggregation of worldwide catastrophe risk from its overseas reinsurance business.
Although supportive to its current ratings, China Re's risk- adjusted capitalization, as measured by Best's Capital Adequacy Ratio, weakened in 2011. This was mainly due to the significant increase in premium risk in light of strong business growth. To ensure the capital adequacy of the subsidiaries over the next three years, China Re has committed to multiple rounds of capital infusion into CPCR, CLRC and the direct P&C insurance subsidiary, China Continent Property & Casualty Insurance Company Limited, throughout 2011 to 2013. A.M. Best believes an efficient allocation of capital is essential for China Re to underpin a balanced development between the reinsurance and direct insurance segments going forward.
China Re's active expansion in overseas business for portfolio diversification has led to the accumulation of worldwide catastrophe risk over the past few years. The underwriting performance of China Re's overseas business is expected to remain unfavorable in 2012, given the expectation of a continued adverse gross loss development associated with the 2011 Thailand flood. However, A.M. Best believes the unfavorable results from the overseas business will be offset by favorable operating results from China Re's other key operating subsidiaries. Since 2011, China Re has taken initiatives to enhance its pricing capability and catastrophe risk control on overseas business, reflecting the commitment to strengthen its overall risk management capability in the long run.
The rating affirmations for CPCR and CLRC reflect the companies' continued profitable operating performance.
The combined ratio of CPCR continued to improve in 2011. The favorable underwriting result was mainly driven by the improved loss experience, although its commission cost had also increased accordingly. A.M. Best anticipates the prospective underwriting profitability of CPCR will be challenged by the increasing market competition from both the onshore and offshore reinsurers, while investment income will increase its importance in supporting CPCR's operating profitability as well as its organic shareholders' equity growth over the next three years. CPCR's shareholders' equity was further strengthened to CNY 7.9 billion as at year-end 2011 from CNY 6.0 billion as at year-end 2010, subsequent to a capital injection of CNY 1.2 billion from China Re in 2011.
CLRC successfully developed cross-border Renminbi reinsurance business mainly from Hong Kong and Macau during the year, leading to 92 percent growth in the premium income compared to the prior year. This new opportunity allowed CLRC to accumulate experience for further expansion in other Asian regions. CLRC also will benefit from the interest rate differential between onshore and offshore Renminbi markets, compensating the decreasing interest margin from the domestic life reinsurance business. For CLRC's short-term life and accident and health business, the combined ratio was maintained at a profitable level and is expected to remain at a similar level in the near future.
A.M. Best believes that China Re and its subsidiaries are well positioned at the current rating level. Factors that could trigger potential negative rating actions include experience of material catastrophe or major investment losses, and/or substantially weakened consolidated risk-adjusted capital.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include "Understanding Universal BCAR"; "Rating Members of Insurance Groups", "Evaluating Country Risk"; "Catastrophe Analysis in A.M. Best Ratings"; and "Risk Management and the Rating Process for Insurance Companies." Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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