Best’s News & Research Service - December 09, 2021 09:54 AM (EST)
AM Best Affirms Credit Ratings of China Taiping Insurance (HK) Company Limited
- December 09, 2021 09:54 AM (EST)
Hong Kong //BestWire// - AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” (Excellent) of China Taiping Insurance (HK) Company Limited [CTPI(HK)] (Hong Kong). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect CTPI(HK)’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM). It also incorporates the rating enhancement that CTPI(HK) receives from its parent, China Taiping Insurance Holdings Company Limited (CTIH).
CTPI(HK)’s very strong balance sheet strength is supported by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Its capital and surplus (C&S) dropped by 3.8% to HKD 5 billion (USD 649 million) in 2020 mainly driven by asset impairment losses. CTPI(HK)’s investment portfolio consists mostly of income-generating assets including investment property, bonds and unlisted fixed-rate funds. The unlisted fund investments comprise two large funds and accounted for approximately 40% of the company’s 2019 year-end C&S (before impairment), which represented a high level of asset concentration risk. In 2020, sizable impairment losses occurred related to the concentrated funds due to the company’s diminished credit profile that dragged on its C&S. There is still an uncertainty about future potential impairment, which exposes the company’s capital to additional volatility. In the meantime, CTPI(HK) continued to improve asset quality by lowering its holding of non-investment-grade bonds over the past few years. The company arranged a comprehensive reinsurance programme to protect its capital and its net underwriting leverage is considered relatively low. AM Best considers the company to have an adequate buffer in its risk-adjusted capitalisation to support its risk profile over the short to intermediate term.
CTPI(HK) reported a net loss in its bottom line in 2020 due to the aforementioned impairment losses, despite a track record of net profits over the past decade. The company’s adjusted return-on-equity ratio was -3.9% for 2020, compared with a five-year average of 3.7% (2016-2020). The company’s underwriting performance has been stable although its profit margin was thin. CTPI(HK)’s net investment yield excluding capital gains or losses has been stable over the past few years. However, asset impairment dragged on the company’s investment results in 2020. Going forward, AM Best expects the company’s operating performance to remain highly dependent on its investment performance, while uncertainty around the performance of the unlisted funds will add volatility to its profitability.
CTPI(HK) ranked third in Hong Kong’s non-life insurance market based on gross written premium in 2020, and its product lines consisted mainly of motor, accident and health (A&H), fire and general liability. The company’s direct written premiums expanded in 2020, primarily driven by the growth from domestic motor and A&H business. Concurrently, CTPI(HK) continued to reduce its reliance on inward reinsurance business from its affiliates. The company expects to maintain its market position with a balanced underwriting portfolio over the short to medium term.
CTPI(HK) is a critical overseas operating subsidiary established by the China Taiping Insurance Group Ltd. (TPG) and plays a strategically important role in executing its international strategy. The company receives implicit support from the group in areas of capital, reinsurance and investments, and is well-integrated into the group’s management and operations. AM Best believes its strategic importance, as well as support from the group, will remain unchanged over the intermediate term.
Negative rating actions could occur if there is a material decline in CTPI(HK)’s risk-adjusted capitalisation or in absolute capital size, or if there is a sustained deterioration in its operating performance.
Negative rating actions may also result if there is a change in the credit profile of CTIH or TPG, or from a reduced level of support from either or a reduction in CTPI(HK)’s strategic importance and integration to CTIH or TPG.
Negative rating actions could also arise if the company’s ERM framework fails to enable effective risk oversight, particularly in relation to investment concentration risk or emerging risks from the portfolio rebalancing.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.