OREANDA-NEWS. Fitch Ratings has assigned China United Property Insurance Company Limited (CUPI) an Insurer Financial Strength Rating (IFS) of 'A-'. The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects CUPI's profitable operating margin, manageable exposure to equities and its ownership linkage with China Orient Asset Management Corporation (COAMC, A/Stable). The rating also considers the company's operating track record with competitive edge in agricultural insurance.

The rating benefits from a one-notch uplift above its standalone assessment as the insurer is ultimately owned by COAMC, which primarily controls CUPI through its 51% shareholding interest in China United Insurance Holdings Company Limited (CUIH). Fitch believes that CUPI will continue to be the core component in COAMC's expansion strategy. Fitch expects COAMC, a state-owned entity, to provide support in terms of asset management, product development, and capital to CUPI as the insurer further expands.

CUPI has been able to maintain profitable operating results over the last three years. The company's combined ratio averaged 97% over the last three years despite intensifying market competition. Fitch expects the insurer's wide geographical coverage with good spread of risks to sustain its earning in agricultural insurance. While commercial motor insurance is likely to remain as one of the core earnings sources for CUPI, pricing competition, as a consequence of a commercial motor pricing deregulation trial, could reduce CUPI's ability to enhance underwriting results in this area.

The company's IFS rating is primarily constrained by its thin capital buffer in terms of net premium leverage and the capital score calculated under Fitch's Prism factor-based capital model (FBM). Its net premium leverage remained high, although the ratio dropped slightly to around 2.8x in 2015 from 2.9x in 2014. The company's FBM capital score is in the 'Adequate' category.

The company's statutory capital ratio at end-1Q16 calculated under the China's Risk Oriented Solvency System (C-ROSS) framework stood at 219%, which was higher than the 100% regulatory minimum. Fitch expects CUPI to further strengthen its risk-adjusted capitalisation to provide a buffer against underwriting volatility from potential claims associated with extreme weather-related catastrophe events.

CUPI has increased its allocation in less-liquid alternative investments. Investments in trust schemes, infrastructure debt schemes, wealth management products and funds managed by insurers' asset management companies accounted for about 29% of its investments and 96% of its shareholders' equity at end-2015.

CUPI consistently relies on excess-of-loss reinsurance treaties to alleviate its catastrophe exposure, given its current business composition and capital position. The company's overall risk retention ratio averaged about 90% over the past five years.

The company is the fifth-largest non-life insurer in China, capturing a market share of 4.7% in terms of total direct written premiums in 2015. It has actively participated in underwriting policy-supported agricultural insurance since its establishment in 1986. While CUIH officially launched a life insurance subsidiary in 2015, Fitch believes CUPI is likely to remain the key source of earnings for CUIH in the coming one to two years. CUIH held 94.8% of CUPI at end-2015.

RATING SENSITIVITIES

Downgrade rating triggers include:

- Significant change in the ownership structure with COAMC losing its controlling stake in CUPI through CUIH,

- A reduction in its capital score as measured by Fitch FBM to below 'Adequate' or solvency ratio computed under C-ROSS framework lower than 200% for a prolonged period,

- Sustained decline in its underwriting profitability with a combined ratio of above 103%, or

- An increase in the company's financial leverage to more than 35%.

An upgrade is unlikely in the near term given CUPI's thin capital buffer and current credit metrics. Over the medium term, upgrade rating triggers include CUPI's ability to:

- Raise the score of Fitch Prism FBM to 'Strong' or higher,

- Improve the stability of its operating results with combined ratio persistently below 97%, and

- Maintain its financial leverage at less than 25%.