14 November 2016Asia analysis

Moody’s assigns negative outlook to China Railway Captive Insurance

Moody's Investors Service has assigned an A2 insurance financial strength rating to China Railway Captive Insurance, a wholly-owned subsidiary of China Railway Corporation (CRC), the state-owned railway operator of China.

CRC, the former Ministry of Railway, was incorporated in March 2013, and is the central government's unique platform for railway ownership and operations across the country. It is wholly owned by the State Council through the Ministry of Finance, and administered by the Ministry of Transportation and National Railway Administration.

The negative outlook is in line with the negative outlook on China's sovereign Aa3 rating. This is the first time that Moody's has assigned a rating to China Railway Captive Insurance.

The A2 rating reflects Moody's view that China Railway Captive Insurance's credit profile is closely aligned to that of CRC, as well as its assessment of a high level of support from CRC because of its captive status. Moody's expects the parent will provide operational and timely capital support for China Railway Captive Insurance's business growth.

Moody's assessment of support also considers the requirement of the China Insurance Regulatory Commission that a parent company inject capital into their captive insurance subsidiaries when they fail to meet the regulatory solvency requirement.

China Railway Captive Insurance maintains a short-tail focused business profile with low reserving risk. It mainly covers engineering (54.7 percent in the first half of 2016), corporate motor (30.8 percent), and personal accident (13.6 percent) risks. Being a captive insurer, the company also underwrites third-party risk, mainly for railway-related companies such as China Railway Group Limited (A3 stable) and China Railway Construction Corporation Limited (A3 stable).

The insurer's capitalization was Rmb2.05 billion at end-June 2016, which is considered strong relative to the risks taken, and will support its planned business growth. It had a very strong local solvency ratio at end-September 2016 under China's Risk-Oriented Solvency System (C-ROSS), the new regulatory capital regime that was implemented in January.

Moody's expects its gross underwriting leverage, as measured by gross premiums and reserves relative to adjusted shareholders' equity for asset risk, will remain modest in the coming two years.