May 25, 2017 / 7:00 AM / in 6 months

Fitch Affirms Huatai Property & Casualty's IFS at 'A'/Stable

(The following statement was released by the rating agency) HONG KONG, May 25 (Fitch) Fitch Ratings has affirmed the Insurer Financial Strength (IFS) rating on China-based Huatai Property & Casualty Insurance Co., Ltd. (Huatai P&C) at 'A' (Strong). The Outlook is Stable. KEY RATING DRIVERS The rating affirmation reflects Huatai P&C's solid standalone capital buffer, improving underwriting profitability, utilisation of reinsurance to expand its underwriting capacity and alleviate catastrophe exposure, and sound liquidity position. Fitch views the insurer as a core subsidiary within Huatai Insurance Group Co., Ltd. (HIG). HIG's capitalisation on a consolidated basis is very strong. The capital score of HIG's Prism Factor-Based Model (FBM) stood at 'Extremely Strong' at end-2016. Fitch believes that HIG is capable of providing consistent capital support to the property and casualty subsidiary, if needed. Huatai P&C's comprehensive capital ratio at end-2016, as measured by the China's Risk Oriented Solvency System (C-ROSS) framework, was 351%, well in excess of the 100% regulatory minimum. Fitch views Huatai P&C's financial performance and earnings as strong. The improvement in the loss ratio from certain business lines, such as compulsory motor insurance and liability insurance, strengthened the company's overall underwriting profitability in 2016. A lower loss ratio along with a reduction in the expense ratio, which was mainly due to a decrease in administrative expenses, enabled the company to reduce its combined ratio from 101% in 2015 to 97% in 2016. Huatai P&C's gross premiums rose 10% in 2016, which was in line with the market's growth average. However, investment volatility moderated the company's return on equity to 8.5% in 2016 from 16.5% in 2015. The company's investment yield was reduced to 4.4% in 2016 from 8.9% a year earlier due to equity market volatility and interest-rate movements. Given its current capital base, Huatai P&C has continued to rely on reinsurance to shield itself from extreme underwriting volatility or potential claims from catastrophes. The insurer has ceded about 13% of its premiums written in 2016 through several reinsurance treaties to a portfolio of reinsurers with sound credit quality. Most of its key reinsurers have an IFS rating of 'A' (Strong) or above. The insurer's liquidity position remains healthy as the company's liquid assets accounted for about 2.9x of its net claim reserves at end-2016, well above the median score for an 'A' IFS rating. Given the short-tailed nature of its insurance claims liability, Fitch believes that the company will continue to keep sound adequate liquidity to support cash outflows. Key rating constraints for the company's IFS rating include its limited operating scale and keen market competition. Fitch expects the company's capability to enhance its underwriting margin to be limited if there's further deregulation in commercial motor insurance pricing in China and if the weak pricing condition in the commercial property insurance segment persists. Limited operating scale has hindered the company's ability to further reduce its expense ratio despite a drop in 2016. With an operating history of more than two decades in China's property and casualty insurance market, Huatai P&C's total gross premiums amounted to CNY7.2 billion in 2016, accounting for about 0.8% of the Chinese non-life market in 2016. RATING SENSITIVITIES Downgrade rating triggers include: - a sustained deterioration in HIG's capital strength with its capital score dropping below 'Strong', as computed by Fitch's Prism Factor-Based Model, - a weakening in Huatai P&C's underwriting margin with its combined ratio consistently higher than 105%, or - a reduction in HIG's pretax operating return on assets on a consolidated basis to below 1% for a prolonged period (2016: 2.7%). An upgrade of the rating is unlikely in the near term due to Huatai P&C's current credit fundamentals and business profile. Over the medium term, upgrade rating triggers include: - an improvement in Huatai P&C's underwriting earnings with a combined ratio below 95%, - a strengthening in HIG's distribution and business franchise in China that will enhance its overall operating stability, and - HIG's capitalisation score at 'Very Strong' or higher, as measured by Fitch's Prism Factor-Based Model Contact: Primary Analyst Terrence Wong Director +852 2263 9920 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central, Hong Kong Secondary Analyst Joyce Huang Director +852 2263 9595 Committee Chairperson Siew Wai Wan Senior Director +65 6796 7217 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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