(Re)in Summary
• Fitch downgrades China Huanong Property & Casualty Insurance Company’s IFS Rating to ‘BBB-‘ with a negative outlook.
• Downgrade predominantly due to thin regulatory capital buffers and uncertainty in capital-raising activity.
• Key indicators: ROE fell to 0.7% in 2023 with COR of 101%, while solvency ratio dropped to 192% in Q1 2024.
• ROE pressured by higher financial asset losses and declining investments amid a volatile market.
Fitch Ratings on Thursday (18 July 2024) downgraded China Huanong Property & Casualty Insurance Company Limited’s (CHIC) Insurer Financial Strength (IFS) Rating to ‘BBB-‘ (from ‘BBB’) with a negative outlook.
“The rating downgrade reflects CHIC’s sustained ‘Somewhat Weak’ Prism Global score and thin regulatory capital buffers compared to peers,” Fitch said in its rating commentary, while the negative outlook “reflects CHIC’s challenges in improving the Prism score and regulatory capital buffers.”
The rating agency added there is uncertainty around the insurer’s capital-raising activity, while investment losses have affected the insurer’s earnings.
CHIC has a ‘Less Favourable’ company and business profile compared to its domestic peers with its market share in the China market remaining at a stable 0.3% in 2023.
Fitch noted that it is experiencing continued rapid business growth, but this is happening amid declining capital buffers. Health and accident insurance, as the second-largest line of business, expanded rapidly in 2023, accounting for 29% of gross written premiums (GWP), while motor insurance remained the largest at 43%.
Rating drivers
The insurer’s return on equity (ROE) was 0.7% in 2023, down from 1.3% in 2022, and averaged 1.2% during 2021-2023. This is below Fitch’s criteria guidelines for the IFS ‘BBB’ rating category.
The fall in ROE was due to higher losses of fair value on tradable financial assets and a decline in investment returns. “We expect CHIC’s profitability to be tested amid the volatile capital market while maintaining a stable underwriting performance,” Fitch said.
The insurer’s combined ratio was 101% in 2023, compared to 100% in 2022, and averaged 102% during 2021-2023.
Fitch also expects CHIC’s risk-based capital metrics to remain under pressure in the near to medium term due to uncertainty in its capital raising activity. The company’s Prism score has been ‘Somewhat Weak’ over the past two years. An increase in fair value losses on available-for-sale financial assets further weakened the equity base at the end of 2023.
CHIC’s comprehensive solvency ratio dropped to 192% in the first quarter of 2024, from 212% at the end of 2023, which is weaker compared to the industry average.
Fitch expects CHIC to slow its rapid premium growth and not increase its asset risk significantly in 2024 to keep its solvency ratio above 180% to support its agriculture business. “CHIC tries to control its solvency adequacy through the use of reinsurance,” Fitch noted.
CHIC’s comprehensive solvency ratio dropped to 192% in the first quarter of 2024, from 212% at the end of 2023, weaker than the industry average.
This increase was due to higher equity-type investments and a lower capital base. However, the risky-assets ratio remains below the guideline for an IFS ‘BBB’ category non-life insurer. Fitch expects CHIC’s risky-asset ratio to remain in line with its rating.
Overall, Fitch’s assessment indicates that CHIC faces significant challenges in improving its financial strength and capitalisation, which could impact its overall stability and market position.