25 February 2022ILS

Shanghai Electric's captive suffers ratings downgrade as government policy undercuts core business lines

Single-parent captive insurer Shanghai Electric Insurance Ltd. suffered a downgrade in its debt ratings following a change in government policy undercutting key areas of its underwriting practice.

The unit saw its Financial Strength Rating cut to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating to “bbb+” (Good) from “a-” (Excellent), the AM Best ratings agency announced.

Shanghai Electric Insurance Ltd. is the captive unit to Shanghai Electric (Group) Corporation, a major power generation and industrial equipment manufacturer wholly owned by the Shanghai municipal government.

The rating downgrades reflect the revision of the captive's business profile assessment from 'neutral' to 'limited' following a 2021 change in government subsidy policies, AM Best said.  

Prior underwriting had focused on the specialty line of key equipment insurance, supplemented by traditional risks including property, construction and engineering, cargo and liability.

Changes in government policy for policy subsidies in 2021 led to a "sudden and significant" decline in those lines, with major knock-on effects for the topo-line, rating analysts noted.

"AM Best views the change in business strategy as a material deviation from its original business plan, and expects the captive to face an increased level of execution risk in rolling out new plans for its underwriting portfolio strategy," AM Best analysts wrote.

The captive unit now plans to grow its traditional lines of business and meanwhile underwrite risks from the group’s overseas engineering projects.

The captive insurer nonetheless has a "very strong" balance sheet plus "adequate operating performance, limited business profile and appropriate enterprise risk management."