TEXT-S&P summary: Bank of China Group Insurance Co. Ltd.
(The following statement was released by the rating agency)
Dec 18 -
Summary analysis -- Bank of China Group Insurance Co. Ltd. -------- 18-Dec-2012
CREDIT RATING: Country: Hong Kong
Local currency A-/Stable/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
19-Dec-2007 A-/-- --/--
11-Jul-2006 NR/-- --/--
The rating on Bank of China Group Insurance Co. Ltd. (BOCG Insurance) reflects the Hong Kong-based insurer's sound capitalization, prudent investment profile, and solid market position. BOCG Insurance's high--albeit reducing--exposure to the poor-performing employee compensation (EC) insurance business in relation to its peers moderates these strengths.
We consider BOCG Insurance to be strategically important to its parent, Bank of China Ltd. (BOC; A/Stable/A-1; cnAA+/cnA-1). We believe there is a "very high" likelihood that the Chinese government would provide timely and sufficient extraordinary support to BOC if the bank comes under financial distress. We believe BOCG Insurance would indirectly benefit from government support to the parent.
BOCG Insurance's competitive position remains strong, in our view. It is the fourth-largest insurer in Hong Kong, with a 4.6% share of non-life insurance premiums as of Dec. 31, 2011, down from 5.0% in the previous year. The insurer benefits from the parent's sound branding.
BOCG Insurance benefits from its close relationship with sister company, Bank of China (Hong Kong) Ltd. (BOC HK; A+/Stable/A-1; cnAAA/cnA-1+), Hong Kong's second-largest bank in terms of assets. Bancassurance accounts for about 40% of the insurer's premiums. BOCG Insurance offers property and personal lines insurance to retail customers. We expect the company to increase its penetration of BOC HK's client base in the next two-three years. BOCG Insurance distributes its non-bank businesses mainly through agents and brokers.
We assess BOCG Insurance's capitalization as strong, on the basis of our risk-based capital analysis. The company's ratio of shareholders' funds to net premiums written in 2011 was 276.2%, down from 364.6% in the previous year. The reduction was mainly due to its disposal of shares in Bank of China Insurance in the course of the year. We expect the company and its subsidiaries to receive firm support from the wider bank group when needed to fund expansion.
We consider BOCG Insurance's investment policy to remain prudent and focus on good liquidity. More than 96% of the company's investments as of Dec. 31, 2011, were in good-quality bonds (50.6% of total investments) and in cash or cash equivalents (45.6%).
BOCG Insurance's exposure to EC lines remains high, and accounted for about 28% of the insurer's gross premiums written in 2011, higher than the industry average of 16%. Although BOCG Insurance is reducing its exposure to the EC business, especially in the restaurant and transportation sectors, the business' poor underwriting performance offsets the better performance of other profitable lines.
BOCG Insurance's operating performance is considered moderate for the rating, even though it is satisfactory, and is weaker than that of the insurer's peers. The company's return on revenue (including capital gains) was 5.5% in 2011 (7.1% in 2010) compared with more than 10% for its peers. The combined ratio improved to 95.7% for the first five months of 2012, compared with 98.7% in 2011 and 106.2% in 2010.
The underwriting performance of BOCG Insurance's motor insurance portfolio, like that of its peers, has improved due to hardening of prices in the industry. The combined ratio of the motor insurance policy has remained below 100% since 2009 (except in 2011). The insurer continues to benefit from its very profitable property insurance portfolio, distributed primarily by the bank channel.
Enterprise risk management
BOCG Insurance's enterprise risk management is adequate, in our view, given the insurer's simple risk profile. BOCG Insurance's risk management is governed by the parent's risk management framework, especially in terms of committees and reporting requirements. The risk management committee, which consists mostly of senior directors, discusses strategic risk management and operational risk issues (identified by middle management).
The insurer benefits from risk management guidelines introduced by the parent with necessary adjustments. The parent conducts regular audits to ensure that the insurance operations are aligned with the bank's practices.
The stable outlook reflects our expectation that BOCG Insurance's strong capitalization and competitive position will continue to support its stand-alone credit profile. We expect the insurer to reduce its concentration on the EC business, while expanding the personal lines insurance portfolio and increasing the level of bancassurance distribution.
We could lower the rating if the credit profile of the parent is lowered. We could raise the rating if the credit profile of the parent is raised or BOCG Insurance's stand-alone credit profile is raised.
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