(The following statement was released by the rating agency)
May 30 -
Summary analysis -- Tokio Marine & Nichido Fire Insurance Co. (Chin 30-May-2012
CREDIT RATING: Country: China
Local currency A/Stable/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
09-Dec-2008 A/-- --/--
The rating on Tokio Marine & Nichido Fire Insurance Co. (China) Ltd. (TMN CH) reflects the company's strong strategic importance to its parent, Japan-based Tokio Marine & Nichido Fire Insurance Co. Ltd. (TMNF; local currency AA-/Negative/A-1+). The rating also reflects TMN CH's strong stand-alone capitalization, good profitability, and conservative investment. The company's small scale compared with other domestic players' and some regulatory restrictions on overseas players in China's insurance market partly offsets the above strengths.
We view TMN CH as a strategically important subsidiary of TMNF and expect the company to receive financial support from the parent when needed. TMN CH fits in closely with the wider group's Asian expansion strategy. The majority of its business (about 80%) relates to Japanese interests sourced from the wider group's referrals, and direct sales to Japanese clients in China. TMN CH also benefits from the operational support of TMNF, including underwriting, risk management, human resources, and reinsurance.
TMN CH's capitalization is strong compared to its simple risk profile. Its good operating performance and conservative investments support our view. We believe the company's capitalization will remain strong, but at a lower level, over the next two to three years while it grows.
We attribute TMN CH's good operating performance to the high quality of its Japanese businesses. The company's combined ratios were favorable at 76.8% in 2011 and 73.8% in 2010. Its underwriting results experienced some volatility when it was a branch. Nevertheless, the underwriting performance has stabilized gradually since TMN CH set up an independent reinsurance program in November 2008, when it became a subsidiary of TMNF. Meanwhile, the company is gradually expanding into local risks. Although local businesses are not as profitable as their Japanese counterparts, we expect the impact of these businesses on TMN CH's underwriting performance to be manageable.
TMN CH has a conservative investment portfolio, with the majority of its assets in cash and deposits. Local regulatory restrictions and the limitations of Chinese capital markets constrain the company's investment, similar to its foreign peers.
TMN CH's small scale in the China insurance market constrains its competitive position and credit profile. The company's market share was 0.1% in terms of direct premiums in 2011. The regulatory approval process in China constrains TMN CH's geographic expansion, just like it does for other foreign players (except cargo and large commercial businesses). However, the company has a good niche position in servicing Japanese clients, thanks to the good support from its parent company. Property and marine businesses accounted for around 70.4% of TMN CH's portfolio in 2011. The rest of the portfolio mainly included local motor insurance business.
TMN CH is looking to actively expand its local business in the coming years. However, we expect the process to be gradual because the company's approach is cautious in this regard. In the next two years, we expect the company to remain a small player in the Chinese nonlife insurance market, even though it has good growth prospects.
Enterprise risk management
TMN CH's enterprise risk management (ERM) is adequate on a stand-alone basis, in our view. The company's risk management policy is compliant with the wider group's guidelines and China's regulations. TMN CH performs a standard ERM review process introduced from its parent, with a holistic evaluation of capital requirements. It uses quantitative models and has clear guidelines covering risk management procedures, risk classification, and authorization. The company also set up a risk management committee since 2010 to review major risk factors. However, TMN CH's risk management is still at an early stage; it is relatively simple and traditional, reflecting the company's small size and simple business structure.
The stable outlook reflects our expectation that TMN CH will retain its strong strategic importance to the TMNF group as part of the parent's expansion strategy in Asia. We expect the company's capitalization to remain strong and its operating performance to be good over the next two to three years while the company continues to grow.
We may raise the rating on TMN CH if the company strengthens its market position materially while its capitalization and underwriting performance remain strong. We may lower the rating if: (1) the company's operating performance deteriorates significantly during rapid expansion and affects the overall financial profile; or (2) support from the parent group wanes.