HONG KONG--(BUSINESS WIRE)--AM Best has removed from under review with positive implications and upgraded the Financial Strength Rating to A (Excellent) from A- (Excellent) and the Long-Term Issuer Credit Rating to “a” (Excellent) from “a-” (Excellent) of CMB Wing Lung Insurance Company Limited (CMBWLI) (Hong Kong). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings of CMBWLI were placed under review with positive implications in October 2022, following an announcement on 28 Sept. 2022, by China Merchants Bank Co., Ltd. (CMB) that CMBWLI would acquire the general insurance business of China Merchants Insurance Company Limited (CMI). According to the business transfer agreement, CMI would transfer its general insurance business (including assets and liabilities related to the business) to CMBWLI, which would then issue 9,856,066 of its shares to CMI. As a result, CMI would directly own 25.37% of CMBWLI’s enlarged share capital, and CMB would indirectly hold 74.63% of the shares of CMBWLI. The business transfer completed on 30 Dec. 2022. Subsequently, CMI will distribute all of its shares in CMBWLI to China Merchants Insurance Holdings (CMIH) and apply to the Hong Kong Insurance Authority (IA) to withdraw its authorisation to carry on general insurance business.
In addition, CMIH entered into a share subscription agreement with CMBWLI on 28 Sept. 2022, to acquire 25,590,806 of CMBWLI’s new shares at a cash amount of HKD 1,171 million. Upon completion of the above transactions, CMIH will become the majority shareholder of CMBWLI by directly holding 55% of its enlarged share capital, while CMB will indirectly own the remaining 45% of the shares. The ultimate parent of CMBWLI will change to China Merchants Group Limited (CMG) from CMB. The aforementioned change in shareholders has been approved by IA and the capital injection will take place in the foreseeable future.
The ratings reflect CMBWLI’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The rating upgrades also reflect improvement in CMBWLI’s ERM framework. The company has continued to strengthen its risk management over the last few years, including investment risk controls, risk identification and monitoring tools and risk governance. For example, the company refined its investment policy to mitigate undue investment and concentration risks in bond and equity investments. CMBWLI also demonstrates strong underwriting know-how and effective management of underwriting risk, as evidenced by consistently favourable underwriting results. Going forward, following the completion of the transactions, AM Best views CMBWLI’s ERM program as benefiting from additional risk management resources, best practices and risk oversight from the company that will become its new ultimate parent, CMG.
CMBWLI’s very strong balance sheet strength assessment is underpinned by its robust risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s capital base continued to grow organically in 2021, supported by its positive operating results and full profit retention. During 2022, cash and cash equivalents remained as the company’s largest asset type, while there was a significant decrease in real estate due to a one-off dividend in specie to CMB Wing Lung Bank Limited. The capital and surplus remained at a stable level following the dividend payout and continued to support the balance sheet strength. The insurer also continues to enhance the credit quality of its bond investments, which remain as its largest investment asset type other than cash. Based on the business and capital plans provided by CMBWLI, AM Best expects the company to maintain a robust level of risk-adjusted capitalization over the short to intermediate term.
CMBWLI’s overall operating performance has been consistently strong and better than average. Its five-year average return on equity was 7.6% (2017–2021). Net earnings remained favourable in 2022, supported by decent growth in premium volume and an outstanding underwriting result, particularly from the general liabilities business. CMBWLI’s investment performance continues to be supported by a stream of interest, dividend and rental incomes. However, this was partially offset by some capital losses since third-quarter 2021.
CMBWLI is a medium-size, non-life insurer in Hong Kong, and one of the major market players in its domestic market’s employees’ compensation segment. The company continues to demonstrate its capability to acquire insurance business with better-than-average loss experience. The company has maintained a relatively stable mix of business over the last few years; general liability and motor continue to be its largest lines of business. CMBWLI’s business mix poses moderate concentration risk in terms of product offerings and geography. Notwithstanding, with the business transferal to CMBWLI from CMI, AM Best expects the company’s market share to increase, particularly with a stronger presence in the marine line of business, while general liability, motor and property damage will continue to be the key business focus of the company.
Further positive rating actions are unlikely over the short to intermediate term. Negative rating actions could occur if the company’s operating performance deteriorates materially due to adverse underwriting results or investment losses, or adverse deviation in executing the business plan following the business transferal transaction. Negative rating actions also could arise if there is significant deterioration in the company’s risk-adjusted capitalisation, for example, due to material investment losses or any change or delay in capital injections by the company that will become its new intermediate parent, CMIH.
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