We consider Ping An P&C to be a core member of the Ping An Group. We assess the company's credit profile together with the wider group credit profile. The group includes Ping An Life Insurance Co. Ltd. (not rated), China's second-largest life insurer based on gross premiums in 2011. The group also has a majority stake in Ping An Bank Co. Ltd. (not rated).
In our view, Ping An P&C's credit profile is stronger than that of the overall group. The ratings reflect our consideration of the company's strong stand-alone credit profile and the separate regulatory regimes for insurance companies and banks in China.
Ping An P&C's strong brand name and diversified distribution channels support its solid competitive position in the Chinese non-life insurance market. It had a market share of 17.4% in terms of total premiums in 2011 and was the second-largest non-life insurer in China. However, similar to its local peers, Ping An P&C's business is concentrated (at about 80%) in motor insurance. The company is also exposed to the risk of unexpected catastrophes and operational setbacks.
We expect Ping An P&C to maintain good operating performance over the next 12 months, due to a likelihood of underwriting results remaining good. According to the company, its combined ratio was 93.5% in 2011, compared with 93.2% in 2010. A ratio of less than 100% indicates profitability. We attribute the improvement in the ratio to Ping An P&C's effective management of its underwriting risks and claims.
We consider Ping An P&C's investment profile to be satisfactory. More than 80% of the company's investments as of Dec. 31, 2011, are in cash and deposits and fixed-income securities (of which 50% are cash and deposits). The rest mainly included equity and property investments. In our view, this conservative investment portfolio reflects the regulatory constraints on risky assets in China as well as Ping An P&C's prudent investment strategy. We note, however, that the wider group has significant exposure to risky assets.
Ping An P&C's modest capitalization remains a constraint for the rating, in our opinion. We anticipate that the company's good internal capital generation and external capital injections from the group will strengthen its capitalization over the next two years. Nevertheless, capitalization remains relatively modest compared to the ratings, given Ping An P&C's strong growth prospects. We believe the company's growth rate will slow down in the next two years, given our expectation that growth in its motor insurance business will decelerate.
Enterprise risk management
Ping An P&C's enterprise risk management is adequate, in our view. The risk management control function of the subsidiaries of Ping An Group is ultimately centralized at the holding company. Risk management of the overall Ping An Group is still relatively traditional and silo-based. The group's risk culture is adequate with a risk management committee at the board level and individual risk management control teams lead by the management in each subsidiary. The risk management is embedded in the business operation. The group also has internal auditing.
Ping An Group's risk management policy is mainly compliant with China's regulations. Similar to other big players in the market, the company is subject to operational risks due to its large size and geographical spread.
The negative outlook reflects our view that the credit profile of the wider Ping An group could deteriorate over the next two years. We attribute this to the fast growth of the group's insurance and bank businesses, the capitalization of which we view as a rating constraint. Although the wider group has raised subordinated debt as Tier 2 capital, we do not consider such debt as being equity-like. The group's capital position could weaken if potential capital market volatility persists and it rapidly expands its bank and insurance businesses.
On a stand-alone basis, Ping An P&C can maintain its strong position in the Chinese non-life insurance market, in our view.
We may lower the ratings if Ping An P&C's capitalization or operating performance deteriorates materially in the next 12-24 months because of unexpected losses or unfavorable expansion. We could also downgrade the company if we believe that the "fungibility" (or interchangeability) of capital between banks and insurance companies across the group increases or the credit profile of the overall group weakens significantly.
Conversely, we may revise the outlook to stable if the overall credit profile of the group stabilizes.
Related Criteria And Research
-- Refined Methodology And Assumptions for Analyzing Insurer Capital Adequacy using The Risk-Based Insurance Capital Model, June 7, 2010
-- Interactive Ratings Methodology, April 22, 2009
-- Summary Of Standard & Poor's Enterprise Risk Management Evaluation Process For Insurers, Nov. 26, 2007