AM Best has changed its outlook on Hyundai Insurance (China) Co, Ltd (HIC) from stable to negative.
The credit rating agency has also affirmed HIC’s Financial Strength Rating of B++ (Good) and its Long-Term Issuer Credit Rating of “bbb” (Good).
AM Best said these ratings are based on HIC’s robust balance sheet, marginal operating performance, limited business profile, and suitable enterprise risk management (ERM).
The negative outlook is driven by a forecasted decline in HIC’s risk-adjusted capitalisation, as per Best’s Capital Adequacy Ratio (BCAR), due to increased underwriting risk and anticipated capital erosion from ongoing operating losses.
At the end of 2023, HIC’s risk-adjusted capitalisation was strong, bolstered by a 2020 capital infusion from strategic investors, which raised its paid-in capital to RMB 1.7 billion.
The company transitioned from a wholly owned subsidiary of Hyundai Marine & Fire Insurance Co, Ltd to a joint venture with Chinese and Korean stakeholders. Using its shareholders’ customer base and technology, HIC has expanded its underwriting portfolio to include personal lines products.
HIC’s latest business plan targets growth in motor insurance premiums, particularly for ride-hailing drivers. However, the company is expected to continue facing operational losses, weakening its risk-adjusted capitalisation.
AM Best considers HIC’s operating performance marginal, highlighting steady investment income from cash and deposits, but persistent underwriting losses since 2021 have resulted in negative bottom lines. The expansion in ride-hailing motor insurance, particularly for new energy vehicles, introduces higher pricing risk and underwriting volatility.
Additionally, achieving better economies of scale and lowering the expense ratio may take longer than anticipated, with no short-term profitability expected.
Despite significant revenue growth, HIC is likely to remain a minor player in China’s non-life insurance market in the medium term.
AM Best explained that the market is highly concentrated, with major premiums and underwriting profits controlled by a few top players, creating a competitive environment for smaller entities.
Negative rating actions could occur if HIC’s business execution significantly deviates from its plan, leading to a deterioration in its risk-adjusted capitalisation or prolonged operational losses.
Conversely, positive rating actions may occur if HIC successfully executes its business plan, achieves a faster turnaround, and improves operating performance while maintaining strong capital levels.
AM Best will continue to monitor HIC’s business activities.
China’s motor insurance sector is forecast to grow at a compound annual growth rate (CAGR) of 5.4%, with gross written premiums (GWP) increasing from CNY 912.2 billion (US$127.4 billion) in 2024 to CNY 1,125.7 billion (US$158.9 billion) by 2028, according to GlobalData.
Research from the data analytics firm suggests that the sector will grow by 5.2% in 2024, driven by higher vehicle sales, a surge in demand for new energy vehicles, and positive regulatory changes.
