HONG KONG--(BUSINESS WIRE)--AM Best has assigned a Financial Strength Rating of A- (Excellent) and a Long-Term Issuer Credit Rating of “a-” (Excellent) to ZhongAn Online P&C Insurance Co., Ltd. (ZhongAn) (China). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect ZhongAn’s balance sheet strength, which AM Best assesses as very strong, as well as its marginal operating performance, favourable business profile and appropriate enterprise risk management.
Incorporated in 2013, ZhongAn is the first online-only insurance company in China and was established by three key shareholders: Ant Group Co., Ltd., Shenzhen Tencent Computer Systems Company Limited and Ping An Insurance (Group) Company of China Ltd. Since its inception, the company has reported robust business growth and established its market presence among the top 10 companies in China’s non-life insurance segment as the youngest player with a market share of 1.2%, based on 2020 direct written premium. Although ZhongAn’s underwriting book was skewed largely toward shipping return insurance in the early years, it expanded into the health insurance market in 2016 and its premiums have increased quickly. In 2020, its product mix grew more diversified with health and accident coverage accounting for approximately half its business, followed by property (mostly shipping return insurance), credit and guarantee, and auto comprising the other key lines of business. The majority of ZhongAn’s business involves personal line products with a high frequency, low severity risk profile and limited exposure to catastrophe risk. The company’s underwriting leverage is considered low relative to its peers.
ZhongAn’s very strong balance sheet strength is supported by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). The company boosted its capital base through an initial public offering on the Hong Kong Stock Exchange in 2017; its capital and surplus reached RMB 18.5 billion (USD 2.8 billion) as of June 2021. The company has also demonstrated good access to the debt capital market with an issuance of USD 1 billion senior unsecured notes in 2020, which supports its financial flexibility. In terms of investments, about half of ZhongAn’s financial assets are invested in fixed-income securities, while cash and deposits account for approximately one quarter. Its investment portfolio is considered diversified with a good level of liquidity.
ZhongAn reported net losses during 2017 to 2019, but its performance turned around in 2020 with a net profit of RMB 254.4 million and an adjusted return-on-equity ratio of 1.5%, compared with its five year average of -4.6% (2016-2020), as calculated by AM Best. The company’s underwriting performance was marginal, while its bottom line was predominantly driven by investment returns. Its combined ratio improved to 102.5% in 2020 from 133.1% in 2017, and dropped to 99.4% for the first six months of 2021, primarily driven by a downward trend in its expense ratio that resulted from a larger premium base. AM Best expects that investment income will continue to be the main driver of the company’s bottom line over the next one to two years.
ZhongAn has leveraged its technology capability to provide insurance solutions and business model services to its domestic and overseas clients, which has resulted in revenue growth and an expanded customer base. AM Best views ZhongAn’s innovativeness as a supportive factor to its business profile, which will provide a long-term financial enhancement. In addition, the company invested in Hong Kong’s virtual banking business in 2020 to achieve greater synergy with its technological capabilities. Nonetheless, as ZhongAn’s banking and technology business segments remain in start-up phases, AM Best expects that these areas will continue to exert pressure on the company’s overall profitability over the short to intermediate term.
Positive rating actions are unlikely over the near term and AM Best will continue to monitor ZhongAn’s business execution risk amid the highly competitive operating environment. Negative rating actions could occur if there is significant adverse deviation from the company’s business plan, or if there is a material decline in its risk-adjusted capitalisation due to faster-than-expected growth in underwriting or asset risks. Negative rating actions may arise if its partnerships with key shareholders weaken such that it no longer supports a favourable business profile assessment.
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