HONG KONG–(BUSINESS WIRE)–AM Best has assigned a Financial Strength Rating of A- (Excellent) and a Long-Term Issuer Credit Rating of “a-” to Shanghai Electric Insurance Limited (SEIL) (Hong Kong). The outlook assigned to these Credit Ratings (ratings) is stable.
Incorporated in 2018 in Hong Kong, SEIL is a single-parent captive of Shanghai Electric (Group) Corporation, which is one of the largest power generation and industrial equipment manufacturing enterprises in China and is wholly owned by the Shanghai municipal government. SEIL serves as the group’s risk management and insurance arm. It mainly assumes premiums from the group and affiliates through inward arrangements with onshore and offshore insurers and reinsurers. Its underwriting book of business consists of the speciality line of major equipment insurance, and other traditional lines including property, construction and engineering, cargo and liability.
The ratings reflect SEIL’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 (ERM).
AM Best assesses SEIL’s balance sheet strength at the very strong level, supported by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). The captive mainly underwrites large commercial accounts and has arranged an appropriate reinsurance programme with highly rated reinsurers in view of its low-frequency, high-severity risk profile. The majority of its premiums are retained, and underwriting leverage remains low. Half of its assets are invested in bonds, with one quarter in stocks and the remainder in cash. AM Best expects the company to strengthen its capital gradually through full retention of profits and maintain a sufficient capital buffer to support its risk profile over the short to intermediate term.
SEIL delivered operating and net profits in 2019 and 2020. Its operating expense ratio remains low thanks to the minimal distribution costs from its group business, as well as the financial support from its parent in terms of salary and office leasing expenses for SEIL’s initial five years of establishment. Nonetheless, the captive is exposed to potential volatility in its loss performance as a combined result of its small premium size and low-frequency, high-severity risk profile. AM Best expects SEIL’s investment performance to be stable, driven by a liquid and fixed income-oriented asset portfolio. Going forward, AM Best expects the captive to continue generating net profits over the next three years based on its business plan.
As the first insurance licensee within the group, SEIL receives support in areas of inward business with good claims experience, operations and risk management, as well as investment and capital management. AM Best is of the view that the captive will remain an integral part of the group.
Offsetting rating factors include SEIL’s exposure to natural catastrophe risk, mainly typhoons. Moreover, as a start-up company, SEIL faces execution risk in achieving its business plan, and reserving risk due to a lack of operating history. While a majority of its risks are sourced from onshore business, emerging risks from new markets along with the group’s global expansion may lead to a higher risk profile.
Positive rating actions are unlikely over the near term. Negative rating actions may arise if there is significant adverse deviation from SEIL’s business plan, or if there is a material decline in its risk-adjusted capitalisation or absolute capital size due to large losses. Negative rating actions could occur if the company’s ERM fails to contain emerging risks from the expansion into new markets. Negative rating actions also could occur if there is a material deterioration in Shanghai Electric (Group) Company’s credit profile.
AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.
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