The ratings reflect CTPI(HK)’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. It also incorporates the rating enhancement that CTPI(HK) receives from its parent, China Taiping Insurance Holdings Company Limited (CTIH).
CTPI(HK)’s very strong balance sheet strength is underpinned by its strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s capital and surplus (C&S) including minority interests increased by 1.2% to HKD 5.09 billion (USD 653 million) in 2021, mainly attributed to positive net investment returns. CTPI(HK)’s investment portfolio consists mostly of income-generating assets including investment property, bonds, and unlisted fixed-rate funds. The unlisted fund investments accounted for 28% of the company’s C&S in 2021, representing a high level of asset concentration risk. Following sizable impairment losses recognised in 2020 and 2021, the company liquidated two major unlisted funds with about half of the proceeds booked as receivables. As of the end of June 2022, the company’s investment portfolio is made up of bonds (43%), investment property (38%), and cash (15%), while unlisted fixed-rate funds account for just 2%, and the remainder are listed equities and funds.
Going forward, AM Best expects the company to adopt a prudent investment strategy, and to exercise increased scrutiny in its risk selection, particularly for high-risk illiquid investments. CTPI(HK) also continued to improve asset quality by lowering its non-investment-grade bond holdings over the past few years. The company has comprehensive proportional and excess-of-loss reinsurance arrangements to protect its capital, and its net underwriting leverage is considered relatively low. In AM Best’s view, the company has an adequate buffer in its risk-adjusted capitalisation to support its risk profile over the short to intermediate term.
In terms of operating performance, CTPI(HK) reported a net profit in 2021, mostly driven by its net investment returns. Over the past decade, the company has demonstrated a track record of positive operating earnings, with the exception of 2020 during which its performance was dragged down by impairment losses from the unlisted fixed-rate funds. The company’s five-year average adjusted return on equity (ROE) was 2.8% (2017-2021), while its adjusted ROE in 2021 was 1.9%, due to unrealised capital losses. The company’s underwriting performance has been improving since 2019, with lower expense ratio and lower combined ratio, although its combined ratio remained above 100%. CTPI(HK) has produced a mid-single-digit net investment yield (excluding capital gains or losses) over the past few years because of its stable income-generating asset portfolio. However, total investment returns were reduced by the asset impairment losses in 2021. Going forward, AM Best expects the company’s operating performance to remain highly dependent on its investment performance, while the underwriting margin remains thin.
The company ranked fourth in Hong Kong’s non-life insurance segment in terms of gross premium written in 2021, with a market share of 4.3%. Its product lines consisted mainly of health (A&H), fire, motor, and general liability. The company’s direct premiums rose in 2021, largely driven by growth from employees’ compensation (in general liability), motor, and A&H business. CTPI(HK) also continued to reduce its reliance on inward reinsurance business from its affiliates and stopped assuming motor reinsurance risks from its affiliates in mainland China since 2021. The company expects to maintain its market position with a balanced underwriting portfolio over the short to medium term.
CTPI(HK) is a critical overseas operating subsidiary established by China Taiping Insurance Group Ltd. (TPG) and plays a strategically important role in executing its international strategy abroad and in the Greater Bay Area. The company receives implicit support from the group in areas of capital, reinsurance, and investments, and is well-integrated into the group’s management and operations. AM Best believes its strategic importance, as well as support from the group, will remain unchanged over the intermediate term.
Negative rating actions could occur if there is a material decline in CTPI(HK)’s risk-adjusted capitalisation or in absolute capital size, or if there is a sustained deterioration in its operating performance.
Negative rating actions also may result if there is a change in the credit profile of CTIH or TPG, or from a reduced level of support from either or a reduction in CTPI(HK)’s strategic importance and integration to CTIH or TPG.
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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