China:Motor-dominant insurer's profits expected to be challenged in next 2 years

Urtrust Insurance's profitability is expected to be challenged in the next two years by the expansion of non-motor business, and the ongoing comprehensive reform of motor insurance business, which will continue to put pressure on premium growth and the loss ratio, says Fitch Ratings.

The insurer, which is dependent on motor insurance business, continued to report unprofitable underwriting results, with its combined ratio increasing to 111% in 3Q20 and averaging 108% during 2018-3Q20, due mainly to increased reserves for potential losses caused by summer rainstorms in China. However, improving investment earnings contributed to Urtrust's overall financial profitability, offsetting the losses from underwriting activities.

Fitch has affirmed Urtrust's Insurer Financial Strength (IFS) Rating of 'BBB' (Good). The outlook is stable. The international credit rating agency says that the rating affirmation reflects Urtrust's 'Strong' capitalisation, which supports its business growth and 'Good' financial performance, and is balanced by a 'Less Favourable' business profile.

Urtrust's capitalisation remained 'Strong' by end-3Q20 from end-2019. Its capital score on Fitch's Prism Model remained at the 'Extremely Strong' level, although the absolute size of the capital base remained small against peers. The comprehensive solvency ratio under China's Risk-Oriented Solvency System (C-ROSS) dropped to 563% by end-3Q20, from 683% at end-2019.

Business profile

The rating affirmation also considers Fitch's ranking of Urtrust's business profile as 'Less Favourable' compared with that of all other China non-life insurance companies. Fitch scores Urtrust's business profile at 'bb+' under the agency's credit factor scoring guidelines. The ranking is due to Urtrust's moderate operating scale, limited product and geographical diversification and a market share of 0.1% by direct premiums in China's non-life insurance market in 3Q20.

Urtrust has been increasing non-motor insurance but its reliance on motor insurance remains high, as the segment accounted for 82% of gross premiums written in 3Q20 (3Q19: 83%) on a standalone basis.

However, Fitch expects the insurer will continue to benefit from the affiliation with Guangzhou Automobile Group Co., Ltd (GAC), which has a strong distribution network with car dealers and 4S (sales, service, spare parts and survey) shops in Guangdong province. GAC is one of China's largest motor manufacturers and owns about 54% of Urtrust.

The agency assesses Urtrust's investment risk as limited, despite rising exposure to risky assets, including stocks, equity-type funds and alternative investments. The risky assets ratio rose to 37% by end-3Q20, from 28% at end-2019, as the insurer pursued yield enhancement. The risky assets ratio remains well below the level for IFS 'BBB' rated non-life insurers, which makes Urtrust less vulnerable to equity market movements.

Source: Asia Insurance Review