Investment volatility will limit China Re’s profits: S&P

S&P Global Ratings analysts have warned that investment market volatility will limit China Reinsurance (Group) Corp.’s earnings, potentially eroding its capital reserve and potentially overshadowing progress in overhauling its underwriting.

The rating agency notes that China Re is more sensitive to credit and market risk than its international peers due to its larger allocation to high-risk assets, reflecting its large life reinsurance portfolio.

It also reflects China Re’s continued efforts to strengthen investment income to offset pressure on technical margins.

China Re’s net profit fell 58.8% year-on-year to RMB 1.6 billion in the first half of 2022 due to lower investment income.

And S&P believes that capital market volatility, rising counterparty risk and low interest rates will continue to weigh on Chia Re’s investment returns and pose challenges to the reinsurer’s investment strategy.

Nevertheless, China Re is likely to further tighten investment guidelines and risk control at the group and subsidiary level, while the group’s initiative to reduce reliance on savings-type life reinsurance policies is expected to mitigate the pressure on the hunt for yield.

Analysts expect the reinsurer to benefit from strong growth in the non-auto segment of the primary insurance market, particularly agricultural insurance, which has supported the growth of domestic P&C insurance segments in both reinsurance and in primary.

Meanwhile, the group is also playing an important role in expanding catastrophe coverage in China, while premium rate hikes in international markets are also supporting China Re’s international expansion.

China Re had a largely stable combined ratio of 99.6% for its domestic P&C reinsurance business at the end of the first half, and the reinsurer reduced underwriting losses for its core P&C business with a combined ratio of 103.0%.

Its P&C overseas segment recorded a combined ratio of 96.5% compared to 92.3% in the first half of 2021, due to the Russian-Ukrainian conflict and natural disasters.