(Re)in Summary
• Fitch Ratings affirms Zhonglu P&C’s IFS Rating at ‘BBB’ with a Stable Outlook, noting its strong risk-based capitalisation and ‘Moderate’ business profile.
• Insurer aims to expand non-motor business and reduce motor insurance share.
• Improved combined ratio to below 100% in 2023; net result of CNY12.27m.
• Growth strategy may increase exposure to catastrophe losses and risky assets.
Fitch Ratings has affirmed Zhonglu Property and Casualty Insurance’s (Zhonglu P&C) Insurer Financial Strength (IFS) Rating at ‘BBB’ (Good) while maintaining a Stable Outlook for the Chinese firm.
The insurer, headquartered in Qingdao, has a market presence primarily in Shandong and Hebei provinces, reflecting limited geographical diversity.
Zhonglu P&C’s operating scale is smaller and it has less-established business lines compared to its peers. The insurer is working to expand its non-motor business, including accident, health, and liability insurance, while reducing the share of motor insurance in its premium income.
Fitch assesses Zhonglu P&C’s business profile as ‘Moderate’ compared to other non-life insurers in China.
Key Rating Drivers
Zhonglu’s average combined ratio (COR) for 2021-2023 was 102%. However, thanks to a lower loss ratio, the insurer managed to improve its COR to beneath 100% in 2023.
The insurer has shown overall profitability since 2021. In 2023, the insurer reported a net result of CNY12.27m (US$1.68m), translating to a return on equity of 1.3%, up from 0.6% in 2022, despite lower investment income.
The insurer is aiming for robust growth through 2026, which may expose it to more significant catastrophe losses, though a comprehensive reinsurance arrangement could help to mitigate this.
“The sustainability of the insurer’s cautious risk selection in underwriting and reduction in acquisition costs remain to be tested amid a strategic expansion in the non-motor business,” Fitch said.
Zhonglu P&C scores in the ‘Strong’ category of Prism Global and reported a regulatory comprehensive solvency ratio of 282% at the end of 2023. This supports Fitch’s view of the insurer’s strong capital position.
Its solvency ratio decreased to 278% by the end of the first quarter of 2024 due to increased market and credit risks and a delayed capital injection expected in 2023, which is unlikely to be completed in 2024.
The insurer has no exposure to financial debt and Fitch expects capital metrics to remain in line with its rating in the near term, albeit with a thinner buffer due to rising asset risks from the insurer’s investment portfolio and growth strategy.
The insurer’s exposure to risky assets increased but remains within the rating’s scope. Risky assets, including equity funds, equity-type assets, and Fitch-adjusted non-investment-grade fixed income investments, were equivalent to 59% of its total equity at the end of 2023, up from 53% at the end of 2022.
“Higher exposure to equity investments leaves its earnings and capital vulnerable to a volatile equity market,” Fitch notes.
Overall, the insurer’s rating affirmation reflects a combination of Zhonglu P&C’s strong risk-based capitalisation, improved but limited record of profitability, increased investment risk, and ‘Moderate’ company profile.