AM Best maintains negative outlook for China's non-life sector

Written by Adam Cadle

10/09/2019

AM Best is maintaining its negative outlook on the China non-life sector, owing to persistent pressure on the motor business, execution risks as the market turns toward a non-motor-focused business model and the industry’s dependence on investment returns to support earnings.

The ratings agency said that the ongoing US-china trade war inadvertently has lowered consumer and business sentiment on the mainland. For the second quarter of 2019, China reported its weakest quarter-on-quarter GDP growth in decades, registering just 6.2%.

China’s top four non-life insurance companies account for about two-thirds of the market. AM Best noted that the top four companies’ overall combined ratio deteriorated slightly to 98.1% in 2018. In 2018, the weighted net profit of these insurers declined by 15% year-on-year, while the weighted average return-on-equity dipped by 3.3 percentage points. Overall, the profit margins of the Chinese non-life insurers are likely to remain under pressure in 2019.

Notwithstanding the economic headwinds, China’s non-life insurance segment expanded by 12% in 2018 and by 11.1% year-on-year for the first half of 2019.

China’s non-life market in 2018 also saw a rise in bond defaults, widened credit spreads and a volatile equity environment that were significant drivers of non-life insurers’ plunging net profits. Despite some first-half 2019 improvement, the results of China’s non-life insurers likely are to remain relatively volatile given that earnings are highly correlated to the domestic investment market’s performance.

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