A.M. 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), based in Hong Kong. The outlook assigned to these credit ratings is stable. SEIL is a single-parent captive of Shanghai Electric Corporation (SEC) that was incorporated in 2018 in Hong Kong. SEC is one of the largest power generation and industrial equipment manufacturing enterprises in China and is wholly-owned by the Shanghai municipal government. A.M. Best explains its underwriting book of business consists of the specialty 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 A.M. Best assessed 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. A.M. 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 SEC 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. However, the rating firm notes that 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. A.M. Best expects SEIL’s investment performance to be stable, driven by a liquid and fixed income-oriented asset portfolio and going forward suggests the captive will continue generating net profits over the next three years based on its business plan. 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 SEC’s global expansion may lead to a higher risk profile. Positive rating actions are unlikely over the near term. A.M. Best explains: “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 SEC’s credit profile,” A.M. Best adds.
