Fitch Rates Yingda Taihe Property Insurance at 'A-'; Outlook Stable
KEY RATING DRIVERS
The rating reflects that YDPIC has been consistently profitable on an operating basis, it relies on reinsurance coverage and it has manageable exposure to equities. The rating benefits from a one-notch uplift above its standalone assessment because the company is ultimately 99.4% owned by State Grid Corporation of China (SGCC, A+/Stable) and generates a significant amount of business from its shareholders.
Fitch expects SGCC, a state-owned electricity utility, will continue to provide support in terms of distribution and capital to YDPIC. SGCC owns YDPIC through a portfolio of its wholly owned subsidiaries, including Yingda International Holdings Group Limited. A substantial portion of SGCC's insurance business has been placed with YDPIC in 2015.
YDPIC has been consistently profitable on an operating basis despite its short history. Fitch expects the good quality of business from its parents to underpin YDPIC's underwriting performance. The company originated a considerable amount of its business from operating units within SGCC in 2014. The loss ratio of its insurance book of business compares favourably with that of its major Chinese peers.
Fitch expects YDPIC to continue to depend on reinsurance to mitigate its catastrophe exposure given its moderate capital base. The company increased its catastrophe excess of loss reinsurance protection limit in 1H15 to guard against major catastrophe losses and to enhance its capital ratio calculated under China's new regulatory risk-based capital framework. The company's risk retention ratio averaged about 86% over the past five years.
Key rating constraints include a moderate capital buffer in terms of the score calculated under Fitch's Prism factor-based capital model (Prism FBM), weak underwriting profitability of its motor insurance line, and low liquidity. The motor insurance portfolio's underwriting profitability has been narrowed by keen market competition and a higher expense ratio due to limited operating scale. YDPIC's overall combined ratio was 100.9% in 2014.
Recent volatility in the equity markets has put pressure on the company's capitalisation on a risk-adjusted basis. Equities and mutual funds with equity exposure amounted to about 18.6% of the company's invested assets at end-1H15, accounting for about 58% of its shareholders' equity. However, the company's local solvency ratio was 271% at end-1H15, well in excess of the 150% regulatory preferred benchmark.
In light of its business composition, Fitch expects YDPIC to accumulate a larger capital buffer to withstand potential underwriting volatility. The company's capital score as measured by Prism FBM is only 'Adequate' although the company's regulatory solvency ratio is significantly higher the regulatory minimum.
YDPIC's liquidity position has declined, in part due to increased investments in less-liquid infrastructure debt and trust products. The ratio of liquid assets to net technical reserves dropped to about 0.80x at end-1H15 from 1.68x at end-2011.
Downgrade rating triggers include:
- Significant change in the ownership structure with SGCC losing its controlling stake in YDPIC,
- Sustained deterioration in YDPIC's combined ratio to above 105%,
- Dramatic increase in catastrophe risk exposure due to insufficient reinsurance protection, or
- Decline in its capital score as measured by Prism FBM to consistently below 'Adequate'.
Upgrade rating triggers include YDPIC's ability to:
- Strengthen risk-based capitalisation reflected in a Prism FBM score of 'Strong' or higher,
- Improve underwriting stability with combined ratio consistently below 95%, and
- Widen its distribution coverage.