Fitch Ratings has affirmed China Taiping Insurance (UK) Co Ltd's (TPUK) Insurer Financial Strength (IFS) Rating at 'A-' (Strong).

The Outlook is Stable.

The ratings reflect the insurer's 'Very Important' strategic role for its owner China Taiping Insurance Group Ltd (TPG) and Fitch's view that the parent would support TPUK. The rating also reflects TPUK's 'Least Favourable' business profile in the UK insurance market, weak financial performance and strong capitalisation.

Key Rating Drivers

'Very Important' to Chinese Parent: TPUK's rating reflects its ownership by TPG, a state-owned Chinese insurance group via China Taiping Insurance Holdings Company Limited (Long-Term Issuer Default Rating: A/Stable; core operating subsidiary Taiping Life Insurance Company Limited's IFS: A+/Stable).

Fitch views TPUK as 'Very Important' to TPG under its group rating methodology, which leads to a three-notch uplift to TPUK's standalone credit quality of 'bbb-'. TPUK is key to TPG's internationalisation strategy as the UK market represents the cornerstone of growth for the parent. TPG provides capital, risk management, IT and human resources support. TPUK also benefits from its strong connections to the Chinese community in the UK.

Underwriting Loss in 2022: Fitch assesses TPUK's financial performance as weak. In 2022, TPUK reported an underwriting loss of GBP5.6 million (2021: profit of GBP3.9 million). The 2022 loss was primarily driven by higher expenses (in particular from one-off change projects within the company), adverse claims experience and reserves held for Covid-19 related business interruption claims.

Fitch expects the ongoing restructuring of its business lines to reduce volatility in TPUK's overall net income and marginally improve underwriting results in the short-to-medium term. However, uncertainty around underwriting performance remains, in our view, given TPUK's planned shift in focus from growth to profitability.

'Least Favourable' Business Profile: Fitch views TPUK's business profile as 'Least Favourable' compared with other UK insurers', driven by its small operating scale and limited competitive positioning. The insurer's gross written premiums fell to GBP76.5 million in 2022 from GBP78.8 million in 2021. This was due to the company's decision to place its EU business lines into run-off in 2020, and to restructure its business by discontinuing other unprofitable lines.

Strong Capitalisation: Fitch's assessment of TPUK's capital strength is driven by its Solvency II (S2) ratio of 151.3% at end-2022 (end-2021: 164.5%). Despite reporting a significant loss of GBP11.2 million at end-2022, TPUK benefitted from capital injections from TPG, which helped maintain its S2 solvency capital requirement (SCR) coverage above its target minimum of 150%. Our assessment also reflects a Prism Factor-Based Model (Prism FBM) score of 'Extremely Strong', which TPUK has maintained since end-2020. The score reflects the high quality of TPUK's available capital.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

TPUK becoming 'Core' to TPG. However, this is unlikely in the medium term due to financial performance not being in line with TPG's expectations

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A reduction of TPUK's strategic importance to TPG. This could result from failure to maintain TPUK's SCR S2 coverage above 150%

A sustained weakening in the combined ratio, excluding pandemic-related losses, to above 120%, leading to a downward revision of TPUK's standalone credit quality

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

RATING ACTIONS

Entity / Debt

Rating

Prior

China Taiping Insurance (UK) Co Ltd

LT IFS

A-

Affirmed

A-

Page

of 1

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Additional information is available on www.fitchratings.com

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