AM Best Downgrades Credit Ratings of Shanghai Electric Insurance Limited
HONG KONG–(BUSINESS WIRE)–AM Best has downgraded the Financial Strength Rating to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating to “bbb+” (Good) from “a-” (Excellent) of Shanghai Electric Insurance Limited (SEIL) (Hong Kong). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect SEIL’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The rating downgrades reflect the revision of SEIL’s business profile assessment from neutral to limited. SEIL was incorporated in Hong Kong in 2018 and is a single-parent captive of Shanghai Electric (Group) Corporation, which is wholly owned by the Shanghai municipal government and is one of the largest power generation and industrial equipment manufacturing enterprises in China. SEIL serves as the group’s risk management and insurance arm. It mainly assumes premiums from the group and affiliates through inward arrangements with onshore and offshore insurers and reinsurers.
In 2019 and 2020, SEIL’s underwriting book consisted primarily of the speciality line of key equipment insurance, supplemented by traditional risks including property, construction and engineering, cargo and liability. However, following a change in government subsidy policy for key equipment insurance in 2021, the captive has stopped writing new business for this speciality line in consideration of pricing adequacy, which led to a sudden and significant decline in its top line in 2021. Going forward, SEIL plans to grow its traditional lines of business and meanwhile underwrite risks from the group’s overseas engineering projects. AM Best views the change in business strategy as a material deviation from its original business plan, and expects the captive to face an increased level of execution risk in rolling out new plans for its underwriting portfolio strategy.
AM Best assesses SEIL’s balance sheet strength at the very strong level, supported by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). The captive’s risk-adjusted capitalisation is underpinned by its very low underwriting leverage and liquid investment portfolio. Half of SEIL’s invested assets are allocated to fixed income securities, one third are in cash and the remainder in listed stocks. While the majority of fixed income securities are investment grade, SEIL has a moderate exposure in non-investment-grade bonds, which enhance yield. In view of its low-frequency, high-severity risk profile, the captive has arranged a reinsurance programme to protect its capital in 2022. AM Best expects the captive to maintain a sufficient buffer in its risk-adjusted capitalisation to support its risk profile over the next three years.
SEIL delivered mid-to-high single digit return on equity (ROE) for 2019 and 2020, while its ROE dropped to a break-even level in 2021 as a combined result of its shrinking underwriting book and unfavourable investment result. Its operating expense ratio remained very low in 2019 and 2020 due to the minimal distribution costs from its group business. However, operating expenses increased in 2021 because of salary and office expenses, which had been fully covered by its immediate parent before but have since been assumed by SEIL. The captive has generated underwriting profits over the past three years. Nonetheless, its operating performance is exposed to potential volatility due to its small premium size and low-frequency, high-severity risk profile. In terms of investment performance, SEIL reported a net investment loss in 2021 as a result of unfavourable market conditions. The captive expects its investment return to recover gradually and stabilise going forward due to its liquid and fixed income-oriented asset portfolio.
Offsetting risk factors include the captive’s concentrated exposure to natural catastrophes and the potential risk of inadequate reserving as a start-up company due to lack of an experienced track record. Emerging risks from new markets overseas also pose a new challenge to its risk management framework.
As the first insurance licensee within Shanghai Electric (Group) Corporation, SEIL receives support in areas of inward business, operations and risk management, as well as investment and capital management. As the captive represents a fairly small business of the wider group, AM Best views the estimated loss for the group’s annual results for 2021 as having a limited negative impact to SEIL and unlikely to result in a capital repatriation; no rating drag has been applied thus far.
Negative rating actions could occur if there is significant adverse deviation in SEIL’s business plan that leads to ongoing adverse operating performance such that it no longer supports an adequate assessment. Negative rating actions may occur if its ERM fails to contain emerging risks arising from the new market. Negative rating actions also could occur if there is a material deterioration in Shanghai Electric (Group) Corporation’s credit profile.
AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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