Fitch Affirms China United Property Insurance at 'A-'; Outlook Stable.
KEY RATING DRIVERS
The rating reflects CUPI's stable solvency position, improving underwriting results and continued use of reinsurance to relieve underwriting volatility. The rating takes into consideration CUPI's ownership linkage with China Orient Asset Management Co., Ltd. (COAM, A/Stable) and its solid market presence in the agricultural insurance segment.
Fitch has applied a one-notch uplift to our standalone assessment of CUPI to take into account COAM's ownership of the insurer. COAM ultimately controls CUPI through its 51% shareholding in China United Insurance Group Company Limited (CUIG), which in turn had a 87.93% stake in CUPI at December 2017. Fitch expects COAM, a state-owned entity, to provide support via asset management and capital to CUPI as the insurer expands further.
Fitch views CUPI's capital strength as good, based on its current level of risk-based capital (RBC), measured by its statutory solvency position, and Fitch's Prism Factor-Based Capital Model (FBM) score. Ongoing surplus growth strengthened the company's comprehensive solvency ratio to 301% at end-2017 from 291% at end-2016. These are well in excess of the regulatory minimum of 100%. CUPI's capital score, measured by the Fitch Prism FBM, was in the upper range of the 'Adequate' category in 2017 while the company's net premium leverage improved to 2.5x in 2017 from 2.7x in 2016.
CUPI's overall operating performance is strong regardless of its underwriting volatility. Better claim results from several key business lines such as motor, commercial property and liability insurance led to an improvement in the company's underwriting margin in 2017. CUPI has become more selective in underwriting its motor business but ongoing pricing deregulation is likely to constrain the company's ability to improve its overall margin in the near term. CUPI's combined ratio dropped to 100.5% in 2017 from 102.8% in 2016.
Fitch sees CUPI's business profile as moderate in terms of distribution capability and market coverage. CUPI remains the fifth-largest non-life insurer in China with a 2017 market share of 3.7% by total direct written premiums. The company has actively participated in underwriting agricultural insurance since its establishment in 1986. Wide distribution networks and a long operating record offer CUPI a competitive edge in bidding for business in the policy-supported agricultural insurance market.
CUPI continues to use reinsurance to mitigate its underwriting volatility and to expand its capacity. It has ceded out business to a panel of reinsurers with sound credit quality through quota shares, surplus and excess-of-loss reinsurance treaties. Most of the reinsurers have IFS Ratings of at least 'A-'. The insurer's risk-retention ratio was about 63% for commercial property insurance and 78% for agricultural insurance in 2017.
CUPI's exposure to less-liquid alternative investments remains significant but its risky-asset exposure is manageable. Investments in trust schemes, infrastructure debt schemes, wealth-management products and funds managed by insurers' asset-management companies accounted for about 36% of its investments and 133% of its shareholders' equity at end-2017.
Upgrade rating triggers include:
- a strengthening in capitalisation, measured by the Prism FBM, to the mid-range of the 'Strong' category or higher on a sustained basis;
- improving operating stability, with a combined ratio persistently below 99%; and
- a reduction in financial leverage to consistently below 27%.
Downgrade rating triggers include:
- a material change in the ownership structure, with COAM losing its controlling stake in CUPI through CUIG;
- a decline in CUPI's capital strength, in terms of Fitch's Prism FBM, to below 'Adequate' or a comprehensive solvency ratio, computed under China's Risk Oriented Solvency System, lower than 200% for a prolonged period;
- a deterioration in underwriting profitability, with a combined ratio consistently higher than 103%, for a sustained period; or
- an increase in the company's financial leverage to consistently above 35%.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Aug 18, 2018|
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