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AM Best Affirms Credit Ratings of COSCO SHIPPING Captive Insurance Co., Ltd.

AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” (Excellent) of COSCO SHIPPING Captive Insurance Co., Ltd. (COSCO SHIPPING Captive) (China). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect COSCO SHIPPING Captive’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. The ratings also reflect the wide range of support the company receives from its parent, China COSCO SHIPPING Corporation Limited (COSCO SHIPPING), which AM Best perceives it to benefit from strong governmental support.

COSCO SHIPPING Captive’s risk-adjusted capitalisation remained at the strongest level in 2022, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s balance sheet strength is assessed as very strong, underpinned by a very low underwriting leverage and a prudent reinsurance programme. The captive insurer’s capital and surplus has consistently grown at low- to mid-single digit rates, supported by a favourable dividend retention arrangement since its inception. However, the company is expecting a higher dividend payout ratio after it achieves net profits for six consecutive years.

The captive gradually increased its exposure to fixed-income investments and equities over the last four years, with an aim to improve investment results and build a diversified portfolio. The company’s investment portfolio remains liquid with asset risk managed at an appropriate level. AM Best expects the company’s risk-adjusted capitalisation to remain sufficient to support business growth over the short to intermediate term.

COSCO SHIPPING Captive achieved a net profit each year from 2017 to 2022 and an average return on equity of 4.8% over the last five years (2018-2022). The company’s underwriting performance continues to benefit from low distribution costs for group-related business and favourable reinsurance commission income, albeit offset by marginal net loss experience due to a small net earned premium base. Due to a challenging capital market environment in 2022, the captive’s investment performance experienced some headwinds. The company will continue to focus on fixed-income oriented assets, which are expected to provide a stable stream of investment income. Based on its three-year business plan, COSCO SHIPPING Captive expects stable premium growth while continuing to deliver a favourable bottom line. Nevertheless, its high-severity, low-frequency product risk profile and small net earned premium base may subject the company’s operating performance to potential volatility risk.

COSCO SHIPPING Captive’s underwriting book primarily consists of marine hull business for the parent group and its affiliates, which is expected to be its key source of premiums over the medium term. Other business lines include liability, commercial property, cargo, motor, accident and health. As a strategically important member of COSCO SHIPPING, the captive insurer receives various implicit and explicit support from its parent in areas of business development, risk management, managerial and capital support.

COSCO SHIPPING Captive has demonstrated good execution of its business plan over the last few years. As the company was established in 2017, it faces pricing and reserving risks due to its lack of operating history. The company manages these risks through prudent underwriting practices, conservative actuarial assumptions and robust reinsurance programmes.

Negative rating actions could occur if there is a significant adverse deviation in the captive’s operating performance from its business plan. Negative rating actions could also arise if there is a reduced level of support from COSCO SHIPPING or a significant deterioration in COSCO SHIPPING’s financial strength or credit profile. Positive rating actions could occur if COSCO SHIPPING Captive demonstrates sustained and favourable results to strengthen its overall operating performance while supporting its current business profile assessment.

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