HONG KONG--(BUSINESS WIRE)--AM Best has assigned a Financial Strength Rating of B++ (Good) and a Long-Term Issuer Credit Rating of “bbb+” (Good) to Zhongyuan Agricultural Insurance Co., Ltd. (ZYIC) (China). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect ZYIC’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
Incorporated in 2015, ZYIC is the first insurance company established in the Henan province, and is one of a few professional agricultural insurers in China. The company is owned by multiple government-backed shareholders, and aims to support local agricultural production and protect farmers against catastrophe events. Its underwriting book contains over 60% crop and livestock insurance, whilst other lines of business include motor, property, liability, accident and health. Since its establishment, ZYIC has expanded its agricultural premiums quickly over the past five years and has gained a dominant position in Henan’s agricultural insurance market. Nonetheless, the company remains a regional player with an approximate 2% share of China’s agricultural insurance market.
ZYIC’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 has grown its capital through the full retention of profits over the past five years, and a capital injection in 2019. Investments remain highly liquid, with a majority of the portfolio invested in cash and fixed-income securities. The company has arranged quota share and excess of loss reinsurance programmes that are placed with high-quality counterparties. Though per risk net probable maximum loss is kept low, its modelled net retained catastrophe losses on an annual aggregate basis account for a significant portion of its capital and surplus (C&S).
ZYIC has reported net profits consistently over the past five years, with an adjusted average return on C&S of 2.5% (2016-2020). Whilst crop insurance has contributed stable profits since its operation, the company’s overall underwriting profit remains thin, in particular during 2019 and 2020 when premium receivable impairment losses placed a drag on its performance. Investment returns remained stable yet low, but the company targets to achieve a mid-single digit investment yield over the next three years due to its enlarged risk appetite. Prospectively, AM Best expects the company’s bottom line to be derived largely from investment performance, whilst underwriting profit margin remains thin.
Offsetting rating factors include ZYIC’s concentrated net exposure to natural catastrophe risk in Henan, mainly floods and droughts, which AM Best views as material relative to the company’s C&S and may trigger a capital event if a severe catastrophe loss occurs.
Positive rating actions may arise if ZYIC’s balance sheet strength improves significantly that it demonstrates stronger resilience against the catastrophe exposure. Negative rating actions may arise if there is significant adverse deviation from the company’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 operating performance demonstrates a deteriorating trend.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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