Qingdao-headquartered Zhonglu Property and Casualty Insurance Company (Zhonglu Insurance) may put in place a more comprehensive reinsurance arrangement that would support its underwriting capacity, says Fitch Ratings.
In a report, the global credit rating agency suggests that this is because of the insurer's expectation of robust growth through 2026 which may expose it to larger catastrophe losses.
Zhonglu Insurance saw its combined ratio edged down to less than 100% in 2023 on a lower loss ratio, notes Fitch. The average combined ratio in 2021-2023 was 102%.
Fitch added, “We believe 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.”
Zhonglu Insurance, which has been in operation for nine years, became profitable in 2021, which has continued as its 2023 net result of CNY12.27m ($1.69m) translated to a return on equity of 1.3%, an increase from 0.6% in 2022, although with lower investment income.
Ratings affirmed
Fitch has affirmed Zhonglu Insurance’s Insurer Financial Strength (IFS) Rating at 'BBB' (Good). The outlook is ‘Stable’.
The rating affirmation reflects the insurer's strong risk-based capitalisation, improved but limited record of profitability, increased investment risk, and 'Moderate' company profile.
Apart from profitability, other major rating drivers for the insurer include:
Strong Risk-Based Capital: Zhonglu Insurance scores in the 'Strong' category of Prism Global and reported a regulatory comprehensive solvency ratio of 282% at end-2023, both of which support Fitch's view of the insurer's strong capital position. The comprehensive solvency ratio decreased to 278% by end-1Q24 on an increase in market and credit risks, as well as a delay in a capital injection that Zhonglu Insurance expected to take place in 2023, which is also unlikely to be completed in 2024. The insurer has no exposure to financial debt.
Fitch expects the insurer’s capital metrics to remain commensurate with the rating in the near term, albeit with a thinner buffer on rising asset risks from the insurer's investment portfolio and growth strategy. The insurer’s shareholders are related to the Qingdao municipal government.
Higher Investment Risk: The insurer's risky-asset exposure increased but remains commensurate with the rating. Risky assets, which include 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 end-2022. Higher exposure to equity investments leaves its earnings and capital vulnerable to a volatile equity market.
Limited Regional Footprint: Fitch assesses Zhonglu Insurance's business profile as 'Moderate' compared with that of other non-life insurers in China. The insurer is headquartered in Qingdao in coastal Shandong and has limited geographical diversity, with a market presence in Shandong and Hebei provinces.
Fitch’s assessment also reflects its smaller operating scale and less-established business lines than peers, although the insurer is continuing its effort to expand the profitable non-motor business, including accident, health, and liability insurance, and reduce the highly competitive motor insurance's share of its premium income.