Insurance Life and Non-Life

Fitch Ratings 2020 Outlook: China Ongoing Profit-Driven Growth Life Sector Outlook: Stable Stella Ng, Director Fitch Ratings maintains a stable sector outlook, reflecting our expectations of moderate premium “Fitch forecasts an ongoing shift in business mix for Chinese insurance growth and stable surplus generation as a result of an improving business mix and sustainable in 2020, which is credit positive. Life insurers have been repositioning margins, which leads to moderate capitalisation. Nonetheless, reinvestment rates lag investment their business to cope with low interest rates and to implement active yields, which is likely to prompt insurers to invest in more high-yielding assets – including stocks ALM. We believe scale advantage for non-life insurers will still enable and long-term equity investments. We expect insurers to exercise caution on asset allocation with larger insurers to sustain favourable underwriting margins.” respect to their liability risks under the latest asset-liability management (ALM) rules.

Non-Life Sector Outlook: Stable The sector outlook remains stable. We expect the expense ratio of motor insurance to stabilise in China Insurance Sector - Rating Changes view of regulatory initiatives to control acquisition costs under the competitive market landscape. (As of November 2019) Upgrades (LHS) Downgrades (LHS) Downgrades/upgrades (RHS) Nonetheless, smaller insurers are still under pressure to improve underwriting results, and rely on (No.) (x) to support underwriting capacity. 4 2

Rating Outlook: Stable 3 Fitch maintains a stable rating outlook for Chinese insurers over the next 12 months . This reflects the mix of Outlooks on individual rated insurers and their capital positions, resilient business profile 2 1 and financial performance. 1 Rating Distribution Weighting The Insurance Financial Strength (IFS) ratings on Chinese insurers range from ‘AA-’ to ‘BBB’, with 0 0 2014 2015 2016 2017 2018 YTD 2019 concentration in the ‘A’ to ‘A-’ levels, depending on capital strength, profitability and business Note: Based on IFS Rating profile. One life insurer was downgraded and one non-life upgraded during 2019. The downgrade Source: Fitch Ratings was driven by weakened capitalisation, increased exposure to risky assets, and challenges to sustaining value-driven business growth and margins. China Insurance Sector - Rating Distribution (As of November 2019)

(No.) 6

4

What to Watch 2

 Evolution of life insurers’ margins after business mix shift to long-term, protection products 0  ALM impact AA AA- A+ A A- BBB+ BBB BBB- BB+ BB & lower Note: Based on IFS Rating  Underwriting stability of non-life insurers amid a continued, competitive motor insurance sector Source: Fitch Ratings  Ongoing capital needs for smaller non-life insurers to maintain their financial stability against catastrophe losses

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Insurance Life and Non-Life China

China/Life Original Premium Growth Trend Product Mix by Original Premium Full year (LHS) 1Q (LHS) Moderate Headline Growth Amid Lower Economic Dynamism Personal accident Health 2Q (LHS) 3Q (LHS) Fitch expects life premium growth to remain resilient – stemming from structural changes and aging Life Health growth demography – despite continuing US-China trade disputes and lower anticipated economic metrics YoY growth (RHS) (CNYbn) (%) 4% 3% 3% 4% 4% in China that could weaken growth in new business. Statistics and a broader assessment of activity 3,000 40 100% 15% 18% 16% 20% 22% indicators support our view that GDP growth will fall below 6.0% in 2020. Growth slowed to 6.2% in 2,500 36.5 30 80% 2Q19, down from 6.4% in 1Q19. 2,000 68% 25.0 20 60% 1,500 52% 20.3 10 Deepened business transformation towards more long-term regular premiums supports sustainable 1,000 14.1 40% 81% 78% 80% 76% 74% premium growth. This development is more evident for the six listed life insurers , which collectively 500 0 31% 1.9 -2.4 20% 24% accounted for an approximately 57% market share by original premium in 1H19. We expect the 0 -10 9% industry to have a double-digit premium growth in the next 12 months. Original premium grew by 2015 2016 2017 2018 3Q18 3Q19 0% 2015 2016 2017 2018 3Q19 14% in 3Q19 from a low base a year earlier, resulting from regulatory constraint on the sales of Source: Fitch Ratings, China Banking and Insurance Regulatory Commission (CBIRC) Source: Fitch Ratings, CBIRC short-term saving products. Resilient Health Insurance Growth Prospect Premium Structure of Listed Life Insurersa We expect health insurance to become a larger contributor to the industry’s premiums, in view of Renewal premiums FYP - regular FYP - single rising health awareness and an aging population. The growing demand for a longer and healthier life, 100% coupled with regulatory initiatives, leads us to view health insurance as a significant opportunity for 75% growth. Health insurance generated 22% of total original premiums in 3Q19 – up from 15% in 2015 50% – with a yoy growth of 31%, compared with 20% and 24%, respectively, in 2018. 25% On 12 November 2019, the China Banking and Insurance Regulatory Commission (CBIRC) released 0% new guidelines on sales, management services and product development and differentiation for 2017 2018 1H19 2017 2018 1H19 2017 2018 1H19 2017 2018 1H19 2017 2018 1H19 2017 2018 1H19 health insurance products, including medical, critical illness, disability, accident and health, and long- China Life Ping An Lifeᵇ China Pacific Life ͨ Taiping Life New China Life PICC Life term care products. The new rules, effective 1 December, promote broader product diversification a Premium refers to original premium inocme and excludes group insurance. Figues for Ping An Life and Taping Life are based for life insurers and allow a premium adjustment in their long-term care contracts, susceptible to on gross written premium. Single premium includes premiums from short-term accident and health insurance b Ping An Life's figures refer to Ping An Group's life and health insurance segment regulatory approval. This will boost margins amid rising medical costs. c China Pacific Life's figures include premiums from agency channel only Source: Fitch Ratings, Company data Profitability Commensurate with Improving Business Mix Fitch sees evident progress in larger life insurers’ business shift to long-term products and regular- premium and higher-margin products with higher protection components. This will alleviate their Profitability of Listed Life Insurers interest-rates risk, and propel mortality and morbidity gains. We view sustainable product (%) VNB marginᵇ (LHS) Pre-tax ROA (RHS) (%) strategies and productive distribution capabilities as reinforcing long-term profitability. 60 6 40 4 20 2 We expect investment returns for life insurers to remain under pressure over the intermediate term 0 0

as high-yield alternative investments are maturing and proceeds are reinvested at lower yields,

2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018

which are partially offset through active management of ‘crediting rates’ (rate declared to 2017

1H19ª 1H19ª 1H19ª 1H19ª 1H19ª policyholders, which is generally higher than minimum guarantee rate). 1H19ª China Life Ping An Lifeᵈ China Pacific Lifeᵉ Taiping Life New China Life PICC Life a 1H19 Pre-tax ROA on an annualized basis The revised tax rule, effective 1 January 2019, with the tax deductible of commission and expenses b VNB margin = Value of new business/first-year premiums (FYP) FYP on original premium, while Ping An Life's and Taiping Life's FYP on gross increased to 18% from 10%, will benefit life insurers’ bottom lines. In addition, we anticipate the written premium c Pre-tax ROA = Pre-tax operating earnings/average total assets net of reinsurance assets implementation of IFRS 17 in 2022 to have less of an impact on capitalisation than that of insurers in d Ping An Life's figures refer to Ping An Group's life and health insurance segment and Taiwan. This is because Chinese life insurers have used market rates instead of e China Pacific Life's FYP Includes premiums from agency channel and renewal premiums from group insurance as no detailed split f Taiping Life's FYP includes renewal premium from group insurance historical rates in discounting insurance liabilities. Source: Fitch Ratings, Company data

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Insurance Life and Non-Life China

Lower Rates Push Equity Assets, Albeit Manageable China Interest Rate Trend Assets Growth by Class Fitch believes life insurance investments are trending more toward risky assets – namely, stocks and Yield of 1-year government bill Stocks and funds Other investments funds as well as alternative investments (including debt schemes, trust products and long-term Yield of 10-year government bond Bonds Cash and deposits equity investments), which generate higher yields than traditional fixed-income securities while (%) (%) interest rates are low. 4.5 4.0 80 Apart from higher investment returns, we expect life insurers to increase long-term equity 3.5 60 investments to match their lengthening liabilities duration resulting from a shift in business focus. 3.0 40 The risk profiles of some of the non-standard assets, such as debt schemes and trust plans, are 2.5 20 2.0 0 opaque because of less-transparent and illiquid underlying assets. 1.5 -20

We expect life insurers will continue to invest in more stocks and funds, and alternative assets, -40

Jan16 Jan17 Jan18 Jan19

Sep19 Sep16 Sep17 Sep18

May 19 May May17 May18 which had grown by 8.6% and 14.5%, respectively, by end-3Q19 from end-2018, yet the pace is May16 2015 2016 2017 2018 3Q19 unlikely to escalate significantly under tightening ALM requirements. Source: Fitch Ratings, China Money Source: Fitch Ratings, CBIRC Improving ALM to Oversee Insurers’ Risk Profiles Fitch expects the appetite for investment risk to remain moderate because of the new regulatory Chinese Insurance Sector's Investment Mix ALM requirements, which were announced in March 2018 and fully implemented in July 2019. The Cash and deposits Bonds Stocks and funds Other investmentsᵃ rules introduced quantitative risk-adjusted measurements to help insurers capture the risks of 100% duration mismatch, negative spreads and liquidity strain more accurately. The CBIRC evaluates and 29% 36% 39% 39% ranks the competence of insurers’ ALM against peers on a regular basis. 75% 40% 15% 13% Consequently, we anticipate life insurers to be cautious about asset allocation, despite a series of 50% 12% 12% 13% regulatory initiatives to encourage them to invest in alternative assets over the past 12 months. 34% 32% 34% 35% 25% 35% Capital Buffer to Remain Adequate 22% 19% 13% 15% 14% Fitch believes the solvency position of life insurers will remain moderate, supported by surplus 0% generation from a value-focused business shift that eases their exposure to potential volatility in 2015 2016 2017 2018 3Q19 a Other Investments include long-term equity investment, project-based debt schemes, trust plans, asset management capital markets. We expect the average comprehensive solvency ratio of life industry under C-ROSS products and investment properties to remain above 200%, which is well above the “Adequate II” level of 150%. The ratio stood at 240% Source: Fitch Ratings, CBIRC as of end-June 2019, compared with 235% as of end-December 2018.

The adoption of C-ROSS Phase II will improve the industry’s capital management, which applies a Alternative Investments Mix Life Industry Average Comprehensive wider scope to identify and evaluate insurance, market and credit risks more accurately, hence Inner ring: 2015 Solvency Ratio improving capital standards. The exact timing of C-ROSS Phase II remains uncertain, but most of the Outer ring: 2018 Project-based debt (%) updated quantitative requirements are likely to be released before end-2019. schemes 270 247 21% 245 243 241 240 We see some insurers preparing for the coming modified capital regime, and have strengthened Long-term equity 250 230 their capital positions through debt issuance. For instance, PICC Life and China Life issued capital 22% 40% investments 230 240 supplemental bonds of CNY12 billion and CNY35 billion in 2018 and 2019, respectively. The 8% 43% 235 238 12% Asset management 210 229 financial leverage of most major life insurers remains moderate, at below 30% at end-1H19. 28% products 190 Othersᵃ 170

27% 150

ᵃ Others include investment properties

4Q18 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q19 2Q19 Source: Fitch Ratings, Insurance Asset Management 1Q17 Association of China Source: Fitch Ratings, CBIRC

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Insurance Life and Non-Life China

China / Non-Life Underwriting Results of Motor Class Change in Tax Rules to Lift Non-Life Insurers’ Earnings (Based on PRC GAAP) Fitch expects non-life insurers to benefit from the change in tax regulation associated with the (CNYm) 2016 2017 2018 effect from an increase in the tax deductibility of commissions. The tax rule change will boost non- 10,000 life insurers’ after-tax earnings as most auto insurers raised commissions in the last few years when 8,000 they competed for motor policies. 6,000 The China’s Ministry of Finance and State Administration of Taxation announced a change in the 4,000 policy for the pre-tax deduction of handling charge and commission expenditures by insurance 2,000 companies in May 2019. The pre-tax deduction limit of non-life insurers’ commissions and handling 0 fees has been revised to 18% of gross written premiums from the original 15%. The new deduction -2,000 policy was effective from 1 January 2019. PICC Ping An China China China Life Sunshine China United Taiping Pacific Continent P&C General Underwriting Margin of Smaller Motor Insurers to Remain Weak Source: Fitch Ratings, the companies Ongoing market competition will consistently constrain motor insurers’ ability to improve their underwriting margins. Fitch expects the claims ratio to remain volatile after the third round of auto- Non-Life Sector’s Premium Income and Average Growth Rate of Top 3 Non- pricing reform in March 2018. Motor insurers with limited operating scale will still face challenges in Growth Life Insurersa: Automobile vs. achieving break-even in their underwriting results. Non Automobile Premium income (LHS) Growth rate (RHS) (CNYbn) (%) Automobile Non-automobile However, the imposition of regulatory controls on the acquisition expense associated with motor (%) insurance since August 2018 has somehow curbed the escalation in motor-acquisition costs. Major 1,400 40 50 40 listed non-life insurers reported a reduction in the expense ratio in 1H19. Fitch expects that the top 1,200 30 30 three players will be still the key earnings contributors to the motor line. 1,000 800 20 20 Increasing Focus on Non-Motor Insurance Business 600 10 400 10 0

Fitch expects non-life insurers to steadily shift its product focus to non-motor insurance, given low 200

2010 2011 2012 2013 2014 2015 2016 2017 2018

insurance penetration and ongoing regulatory initiatives. Major insurers are likely to continue to 0 0 2009 1H19 report higher premium growth in non-motor insurance business such as liabilities, credit and surety, a Top 3 non-life insurers include: PICC, Ping An and China

Pacific

2014 2015 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2017 2018 3Q19 as well as accident and health insurance. Motor premium growth will remain stagnant as the 3Q18 Source: Fitch Ratings, CBIRC Source: Fitch Ratings, the companies slowdown in new auto sales will exacerbate the demand for motor insurance policies. Underwriting results, however, could be volatile for smaller insurers as many are still in a stage of building up the scale of their non-motor book. Fitch believes that competition in non-motor Solvency Position of 8 Major Insurers in China insurance is likely to intensify if the motor segment slows further. The portion of non-motor Core Comprehensive business to total non-life business has risen to 39% by 3Q19 from 28% in 2017. (%) 500 Ongoing Capital Infusion Inevitable for Non-life Insurers 400 Fitch believes that it is inevitable for non-life insurers, especially smaller insurers, to depend on 300 fresh equity to support their ongoing premium growth and to st rengthen their solvency adequacy. 200 Business expansion is likely to consistently outpace the velocity of insurers’ surplus generation , 100 given thin underwriting margins. Fitch does not expect non-life insurers to increase their 0 dependence on capital supplementary bonds to support their solvency stability as the potential 2018 3Q19 2018 3Q19 2018 3Q19 2018 3Q19 2018 3Q19 2018 3Q19 2018 3Q19 2018 3Q19 underwriting volatility could hinder insurers’ debt-servicing capability. PICC Ping An China Pacific China China Life Sunshine P&C China United Taiping Continent P&C General The solvency position of the non-life sector remains healthy, while the net premium leverage of Source: Fitch Ratings, the companies major insurers rose in 2018. High growth has undermined smaller insurers' solvency stability. Based

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Insurance Life and Non-Life China

on the latest statistics from the Chinese regulator, the comprehensive solvency ratios of the non-life Selected Major Natural Disasters in China insurance sector at end-1H19 amounted to 279%, still well in excess of the regulatory 100% minimum. Event Date Affected area Insured or economic loss a Catastrophe Loss to Hurt Insurers’ Financial Stability Typhoon Mitag Oct 19 China, Taiwan, Korea Above USD816m Peninsula Catastrophe losses are likely to remain a key element that could jeopardise the soundness of non- a life insurers’ solvency adequacy. The insured losses associated with in August 2019 Sep 19 China, Japan, Korea Above USD165m could cost at least CNY6 billion, according to AIR Worldwide. Typhoon Lekima Aug 19 China Above CNY6bnb Typhoon Mangkhut Sep 18 China, , Hong USD1bn to USD2bnb Insurers will continue to manage the catastrophe risk through active monitoring and modelling of Kong, Taiwan and Macao catastrophe exposure. In consideration of the requirement to include catastrophe in insurers’ Typhoon Rumbia Aug 18 China Above USD5.4bnc solvency adequacy calculation, non-life insurers with limited underwriting capacity will need to rely c on reinsurance to mitigate the exposure to extreme catastrophe risks. Tropical Storm Bebinca Aug 18 China, Vietnam Above USD236m a Based on economic losses from Benfield’s Global Catastrophe Recap . b Based on insured losses from AIR Worldwide c Based on economic losses from Aon Benfield’s Weather, Climate Catastrophe Insight – 2018 Annual Report Source: Fitch Ratings

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Insurance Life and Non-Life China

Optional: Appendix

Fitch-Rated Insurers in China

Company name Sector IFSR/L-T IDR Outlook -COFCO Life Insurance Company Limited Life A-/- Stable BoCommLife Insurance Company Limited Life A/- Stable China Life Insurance Company Limited Life A+/A Stable China Taiping Insurance Group Ltd. Composite -/A Stable China United Property Insurance Company Limited Non-life A-/- Stable Huatai Property & Casualty Insurance Co., Ltd. Non-life A/- Stable Lloyd's Insurance Company (China) Limited Non-life AA-/- Negative Company Limited Life A/- Stable PICC Life Insurance Company Ltd. Life A+/- Stable Sunshine Life Insurance Corporation Limited Life A-/BBB+ Stable Sunshine Property and Casualty Insurance Company Limited Non-life A-/- Stable Taiping Life Insurance Company Limited Life A+/- Stable Co., Ltd. Life A/- Stable Taikang Insurance Group Inc. Life -/A- Stable Taishan Property & Casualty Insurance Co., Ltd Non-life BBB+/- Stable Urtrust Insurance Co., Ltd. Non-life BBB/- Stable Yingda Taihe Property Insurance Co. Ltd Non-life A/- Stable Note: As of 29 November 2019 IFSR is Insurance Financial Strength Rating and Long-Term IDR is Long-Term Issuer Default Rating Source: Fitch Ratings

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Insurance Life and Non-Life China

Outlooks and Related Research

Credit Outlooks 2020 Global Economic Outlook (September 2019) Hong Kong-Listed Chinese Life Insurers' 1H19 Profit Rises; Solvency Resilient (September 2019) China Life Insurance: 2018 Results Dashboard (May 2019) China Non-life Insurance: 2019 Dashboard (June 2019) China's New Rules Unlikely to Increase Insurers' Appetite for Trust Products (July 2019) Lifting of Foreign-Ownership Cap to Have Little Impact on China Life Insurers (July 2019)

Analysts

Stella Ng +852 2263 9615 [email protected]

Terrence Wong +852 2263 9920 [email protected]

Outlook │ 29 November 2019 Fitchratings.com/Outlooks 7

Insurance Life and Non-Life China

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