OREANDA-NEWS. Fitch Ratings has upgraded the Insurer Financial Strength Rating (IFS) of China-based Huatai Property & Casualty Insurance Co., Ltd (Huatai P&C) to 'A' from 'A-'. The Outlook is Stable.

KEY RATING DRIVERS

The rating upgrade reflects Huatai P&C's strong capitalisation, improving claim ratio, sound liquidity, and manageable exposure to risky assets. The rating also recognises the company's track record of operating in China and its status as a Core subsidiary of its immediate parent, Huatai Insurance Group Co., Ltd (HIG).

Under Fitch's insurance rating methodology, Huatai P&C is considered a Core subsidiary within the group. HIG's risk-adjusted capitalisation on a consolidated basis was Extremely Strong at end-2014, as measured by Fitch's Prism Factor-Based Model (FBM). Fitch believes that HIG is capable of providing capital support to facilitate the business growth of its insurance subsidiaries, if needed. The infusion of CNY1bn in new capital into Huatai P&C in 2014 further demonstrated HIG's commitment to fund the subsidiary's business expansion.

Surplus growth and the fresh equity injection strengthened the company's solvency ratio to 392.4% at end-2014 from 216% at end-2013. The company's disciplined underwriting approach underpins its capital buffer, which Fitch believes is sufficient to withstand potential underwriting volatility and to support its planned growth in the coming one to two years.

Huatai P&C's combined ratio improved to about 99.9% in 2014 from 100.7% in 2013, mainly due to the better claims experience from the motor, commercial property, credit and surety insurance lines. The company continued to report a better loss ratio than its major Chinese peers. Its loss ratio averaged 52.5% over the past five years. Based on Huatai P&C's preliminary claim statistics, Fitch believes that the company's net exposure to claims from blasts at a chemical warehouse in Tianjin in August 2015 should be manageable relative to its capitalisation.

Fitch believes Huatai P&C has sound liquidity to support potential cash outflows from its short-tailed insurance liabilities. Its liquid assets continued to account for about 2.8x of its net claim reserves and 1.2x of its net technical reserves at end-2014 despite an increase in investment in illiquid infrastructure-related loans and trust products after 2012.

Key rating constraints include a higher expense ratio relative to its major peers due to its moderate operating scale, the consistently soft pricing environment in certain business lines, such as property insurance, and intense market competition. While Huatai P&C has further widened its distribution coverage by expanding its exclusive agency force and e-commerce channel over the last few years, its market share remained small in the Chinese non-life market. Its limited operating scale could consistently undermine the company's expense ratio.

The trial deregulation of commercial motor insurance pricing in China is unlikely to lead to irrational price cuts in the near term. However, Fitch remains cautious about the impact of the deregulation on motor insurer's underwriting profitability.

RATING SENSITIVITIES

Downgrade rating triggers include:
- a sustained decline in capital strength with HIG's solvency ratio below 250% or its score computed by Fitch Prism FBM at below 'Strong',
- deterioration in Huatai P&C's combined ratio to consistently higher than 105%,
- a reduction in HIG's pre-tax return on assets on a consolidated basis to below 1% for a prolonged period (2014: 3.1%).

Given Huatai P&C's market profile, an upgrade of the rating is unlikely in the near term. Over the medium term, upgrade rating triggers include Huatai P&C's ability to further improve its combined ratio to below 95% and HIG's ability to strengthen its business profile, in terms of distribution network, brand name, and business franchise, to improve its overall operating stability, and to maintain its Prism FBM score at 'Very Strong'.