The global credit rating agency says that the A3 IFSR reflects the insurer’s strong underwriting profitability and capitalisation, along with its prudent investment allocation. These strengths are offset by its exposure to significant catastrophe risk and its moderate market position in Macau. Its financial flexibility is also constrained by the weak credit profile of its ultimate major shareholder, Fosun International
Moody’s notes that Fidelidade Macau has reported strong underwriting profit with its combined ratio below 80% since 2017. The insurer benefits from its bancassurance partnership which helps it distribute profitable lines of business, including fire insurance. On the other hand, tariffs and intermediary commission expenses have helped preserve underwriting margins in the insurer’s motor third party liability and employees’ compensation lines.
The insurer’s capital buffer is strong relative to its risks underwritten, primarily reflecting its solid share capital and retained earnings. Its local solvency ratio is high when compared to its domestic peers at 558% as of the end of June 2020. Moody’s expects the insurer will maintain strong capitalisation to support business growth and buffer against potential large commercial claims.
The insurer has a conservative investment portfolio that primarily comprises cash, bonds and deposits, with low asset risks. While the insurer plans to invest in equities for yield enhancement, Moody’s expects its asset risk to remain low in the next 12-18 months.
However, the insurer’s geographic concentration in Macau and its growing large commercial risks expose it to significant catastrophe risk, mainly from typhoons, which could increase the volatility in its profitability. The risk is partly mitigated by its reinsurance programs that greatly reduce potential losses to a low level relative to its capital.
Fidelidade Macau is the sixth largest property & casualty insurer in Macau, which is a small insurance market by premiums. Its market share by premiums is moderate at 4.6% in 1H2020. In addition, its modest operating scale results in a high underwriting expense ratio when compared with similarly-sized peers.
The assignment of new ratings on Fidelidade Macau also takes into account its governance as part of Moody’s environmental, social and governance (ESG) considerations.
Considering its ownership by Fosun and governance, Fidelidade Macau’s financial flexibility is somewhat constrained by the high debt leverage and weak liquidity of Fosun. Fosun has a complicated organisational structure and is exposed to credit contagion risk from its subsidiaries. This contagion risk, and in particular reputational damage, could strain the insurer’s business growth and future potential capital market access.
Nonetheless, the insurer is subject to the strong regulatory oversight of the Monetary Authority of Macao. In addition, Fosun does not have majority control on the board of directors of Fidelidade Macau, allowing the insurer to operate quite independently from Fosun. Fidelidade Macau also abides by a stringent related party transaction policy. Moody’s believes these measures should support the insurer’s financial position despite its majority ownership by Fosun whose credit profile is much weaker.
The outlook is stable, reflecting Moody’s expectation that the insurer will maintain its strong underwriting profitability and capitalisation in the next 12-18 months.