(The following statement was released by the rating agency)
Jan 22 -
Summary analysis -- China Taiping Insurance (HK) Co. Ltd. --------- 22-Jan-2013
CREDIT RATING: Country: Hong Kong
Local currency A-/Stable/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
13-Dec-2010 A-/-- --/--
16-Oct-2008 BBB+/-- --/--
25-Sep-2008 NR/-- --/--
The rating on China Taiping Insurance (HK) Co. Ltd. (CTI HK) reflects the insurer's strong capitalization, good market position within Hong Kong's non-life insurance market, and satisfactory liquidity and investment profile. The company's modest underwriting performance and its high exposure to statutory liability classes moderate these strengths.
Our risk-based capital analysis suggests that CTI HK's capitalization will remain strong over the next two years despite the company's potentially rapid growth. Our view reflects the regulatory minimum solvency requirements for Hong Kong insurers and the company's reasonable ability to generate internal capital. By the end of 2011, the company's ratio of shareholders' equity to net premiums written had decreased to 516.4% from 746.4% (Hong Kong operations only) a year earlier, mainly because of its double-digit business expansion. This ratio could decline in coming years as the company's portfolio grows.
CTI HK has a good business position in Hong Kong's competitive insurance market due to its good relationship with intermediaries. The company is the territory's 10th largest insurer and had a 2.7% share of gross premium income for 2011. It has a diversified distribution network, characterized by agents (42%), brokers (44%), direct sales (12%), and financial institutions (2%). The company is likely to expand its business by taking inward commercial motor policies from its sister company in mainland China, Taiping General Insurance Co. Ltd. As a result, its revenue could increase significantly in coming years and its market position may strengthen.
CTI HK's significant exposure to employees' compensation liabilities in Hong Kong moderates its business profile. The liabilities are a weak-performing segment, reflecting the "long-tail" nature of claims and previous inadequate pricing. CTI HK has higher exposure than the market average. However, the company has been reducing the portfolio through tightening its underwriting and pricing. We therefore expect the performance of the business line to gradually improve. The liabilities accounted for 27.6% of CTI HK's premium income in 2011, compared with a market average of 11.7% over the same period.
CTI HK's investment portfolio is satisfactory, in our view, because most of the company's allocation is in fixed-income assets and cash. Overall asset quality has improved over the past few years because the company reduced the proportion of its equity and fund investments to 6.4% as of the end of 2011 from 14.6% as of the end of 2006. CTI HK's significant property investments could, however, expose it to possible further downturns in the market. Property accounts for 35.6% of the company's total invested assets as of the end of 2011.
CTI HK's operating performance is likely to remain moderate over the next 18 months. We anticipate that the company's operating performance will gradually strengthen as CTI HK tightens its underwriting practices. We also expect the profit contribution from the motor class will increase, due to inward business from CTI HK's sister company in China, Taiping General Insurance Co. Ltd.
CTI HK's overall performance has improved slightly in recent years with a declining combined ratio. But this ratio remains at slightly above 100%--if we consider non-technical expenses--indicating that the underwriting segment is not yet profitable. The ratio is high compared with peers'. CTI HK's loss ratio is now comparable with its peers', but its expense ratio remains high.
Enterprise risk management
We view CTI HK's enterprise risk management (ERM) as adequate. The company has a traditional approach to risk management. CTI HK's risk management framework has been developing in recent years, and is less sophisticated than international peers'. However, the company's risk controls appear sufficient for its risk profile.
CTI HK's risk management culture is adequate, in our view. The culture appears well embedded in the company's risk selections and risk controls. CTI HK has regular underwriting, claims, and investment committees, as well as internal auditing to look into individual risk areas. The reports of these committees are presented to management and the board. We expect CTI HK's ERM to evolve with guidance from its parent group.
The stable outlook reflects our expectation that CTI HK can maintain its current capitalization level and good market position in Hong Kong's general insurance market over the next 18 months.
We may lower the rating if the company's earnings and capitalization deteriorate materially or if we lower the rating on the parent group. We may raise the rating on CTI HK if the company materially improves its operating performance, strengthens its business position, and maintains strong capitalization. We would also consider an upgrade if the financial profiles of group members improve to a higher level than CTI HK's credit profile.