AM Best has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of "bbb" (Good) of Hyundai Insurance (China) Co., Ltd. (HIC) (China). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect HIC's balance sheet strength, which AM Best assesses as very strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).
HIC's risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), remained at the strongest level as of year-end 2021. The company's capital and surplus was bolstered by capital injections when the company introduced new strategic investors in March 2020. Since then, the company has targeted to expand its underwriting portfolio proactively, mainly driven by personal line products including health, motor and accident, as well as commercial property and liability insurance. AM Best expects HIC's BCAR score to remain supportive of the very strong balance sheet strength assessment over the short to intermediate term, albeit exhibiting a downtrend as a combined result of rapid increase in underwriting leverage and capital erosion from underwriting losses. Other supportive factors of the balance sheet strength include the highly liquid and conservative investment portfolio, and lower reinsurance dependency as the underwriting book of business gradually skews toward personal line products.
The company's operating result turned into a net loss in 2021 due to enlarged underwriting loss. Loss ratios of key business lines such as health and liability worsened during the year, while the overall expense ratio remained elevated due to sizeable upfront investments associated with human resources and system expenses in tandem with the transformation of its business model. Despite benefiting from a stable stream of interest income on the investment side, the company projects material net losses over the next three years.
Despite the anticipated rapid expansion in business scale over the next few years, AM Best expects HIC to remain a small player in China's non-life market. Moreover, in view of the continued intense market competition, potential adverse deviations to the company's business plan may lead to uncertainties in the turnaround of its operating profitability.
Positive rating actions could occur if the company demonstrates successful execution of its business plan; for example, achieving faster-than-expected turnaround and sustained improvement in its operating performance, while maintaining a supportive level of risk-adjusted capitalisation. AM Best will continue to monitor HIC's business execution risk.
Negative rating actions could occur if there is significant and adverse deviation in HIC's business execution compared with its business plan, leading to material deterioration in the company's risk-adjusted capitalisation or operating performance beyond AM Best's expectations. Negative rating actions also could occur if the company experiences major failure in risk management such that it no longer supports the current ERM assessment.
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