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

The Outlook is Stable.

The ratings reflect the insurer's 'very important' strategic importance to the owner China Taiping Insurance Group Ltd., weak company profile, volatile financial performance, and strong capitalisation.

Key Rating Drivers

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

Fitch views TPUK as 'Very Important' to TPG under its group rating methodology. TPUK is key to TPG's internationalisation strategy as the group's central point for growth in the UK market. TPG provides capital, risk management, IT and human resources support. TPUK also benefits from its strong connections to the Chinese community in the UK.

The ownership benefits are reflected in a three-notch uplift to TPUK's standalone credit quality of 'bbb-'. The standalone credit quality reflects TPUK's least favourable company profile in the UK insurance market, volatile financial performance and strong capitalisation.

Least Favourable Company Profile: Fitch views TPUK's company profile as least favourable compared with other UK insurers, driven by its small operating scale and limited competitive positioning. In 2021 the insurer had GBP78.8 million gross written premiums (2020: GBP86.7 million), with the drop reflecting TPUK's decision to place its EU business lines in Ireland, Italy, Belgium, Netherlands and Denmark into run-off in 2020.

Volatile Underwriting Profitability: TPUK's reported underwriting result was GBP3.9 million in 2021, returning to underwriting profitability from a significant loss of GBP22.8 million at end-2020. The improvement was due to the stabilisation of net claims and improvements in underwriting profitability following premium rate increases, and TPUK's decision to place its European business lines into run-off. The 2020 loss was driven by pandemic-related business interruption claims and one-off adverse reserve development.

The profitable underwriting result has enabled TPUK to deliver a modest net income result, despite the negative impact of unrealised capital losses on its fixed income investments and an increased expense ratio. In 2021 TPUK also finalised a loss portfolio transfer and part VII transfer for its European business. We expect the transfers to reduce earnings volatility in 2022 and 2023.

Strong Capitalisation: Fitch's assessment of TPUK's capital strength is driven by its Solvency II (S2) coverage ratio of 164.5% improving considerably from 117.8% in 2020. In 2021, TPUK benefitted from capital injections made by its parent, which maintains its S2 Solvency Capital Requirement (SCR) coverage at minimum of 150%. Our assessment also reflects a Prism Factor-Based Model (Prism) score of 'Extremely Strong', which TPUK has maintained since end-2020. The elevated score reflects high quality of 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 TPUK's 'least favourable' company profile. Nonetheless, in the long term, profitable growth could lead to an upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A reduction in our view of TPUK's strategic importance to TPG. This could result from TPUK failing to continue growing its business or from the group not maintaining TPUK's SCR S2 coverage ratio above 150%.

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

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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