Fitch Ratings has revised the Outlook on Hong Kong-based ABCI Insurance Company Limited's Insurer Financial Strength (IFS) Rating to Negative from Stable. Fitch has affirmed ABCI's IFS Rating at 'A-' (Strong).

Key Rating Drivers

Outlook Revision: The Negative Outlook reflects the increasing volatility in ABCI's underwriting performance. The company's combined ratio averaged 123% in 2020-1H22, but was higher at 127% in 2021, implying a significant deterioration in 2H21 from 98% in 1H21. ABCI reported better underwriting results in 1H22 due to healthier performance from its motor-vehicle and property insurance businesses, although we expect underwriting performance to remain volatile from a varying expense ratio and an unstable business mix.

Parental Support: The rating affirmation reflects ABCI's capital strength and distribution support from its ultimate parent, Agricultural Bank of China Limited (ABC, Long-Term Issuer Default Rating: A/Stable). The IFS Rating also considers ABCI's small market presence in Hong Kong and heavy reliance on reinsurance to relieve the catastrophe exposure of its property insurance business sourced from China.

ABCI is rated one notch above its standalone basis to reflect the operational synergy with and support from ABC. Fitch believes ABC is likely to provide capital support to ABCI, its only non-life insurance subsidiary, if necessary.

Strong Capitalisation: ABCI has maintained a solid capital buffer to withstand its underwriting volatility and support its steady business growth. The company's solvency ratio stayed at 368% at end-1H22, well exceeding the 100% regulatory minimum. The company's risk-based capital ratio, measured by Fitch's Prism Model, scored in the 'Extremely Strong' category at end-2021. Fitch expects ABCI to sustain adequate capital to buffer its potential operating volatility in consideration of its reinsurance approach and investment strategy.

'Less Favourable' Company Profile: Fitch ranks ABCI's company profile as 'Less Favourable' compared with that of all other Hong Kong insurance companies. ABCI has a limited business franchise and operating scale in Hong Kong's non-life insurance sector, with a 0.4% market share in terms of gross premiums written in 2021.

Fitch considers ABCI's business mix as unstable, reflected to a great extent by the shifts between motor vehicle and property damage lines in the past few years. The portfolio has limited diversification in distribution channels as the majority of its business is sourced from ABC. ABCI also has 'Moderate/Favourable' corporate governance, in Fitch's view. The ranking results in Fitch scoring ABCI's company profile at 'bb+' under the agency's credit-factor scoring guidelines.

Dependence on Reinsurance: ABCI has large catastrophe risk exposure in China through its inward reinsurance business and is highly dependent on reinsurance to mitigate the risk. ABCI continues to cede out a significant portion of its insurance business to a panel of quality reinsurers through a combination of proportional and excess-of-loss reinsurance on a treaty and facultative basis. The company's net premium retention only averaged about 16% in 2020-1H22.

ABCI has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due to large earthquake and typhoon risk exposure in China through its inward reinsurance business, and its reliance on reinsurance arrangements to mitigate this risk, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Sustained deterioration in underwriting results with ABCI's combined ratio consistently exceeding 114% for a sustained period;

Fitch's assessment that operating or capital support from ABC has diminished;

Negative rating action on ABC;

Decline in its capital strength with the Fitch Prism Model score dropping to below the 'Strong' category;

Significant increase in catastrophe risks (net of reinsurance) relative to ABCI's capital due to a significant shift in reinsurance strategy.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Strengthening in underwriting stability, with lower reliance on reinsurance;

Improvement in its business profile in terms of diversification of distribution channels, while maintaining its capital buffer with its capital score, as measured by the Fitch Prism Model, at 'Strong' or higher.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

ABCI has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due to large earthquake and typhoon risk exposure in China through its inward reinsurance business, and its reliance on reinsurance arrangements to mitigate this risk, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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