SHKPI's capital buffer expected to rise in extreme scenarios – S&P

The insurer’s modest capital size presents vulnerabilities, assessed S&P Global.

S&P Global Ratings projects Sun Hung Kai Properties Insurance (SHKPI) to increase the diversification of its investments, which in turn, could enhance earnings stability.

“Our view is underpinned by the insurer's insights and expertise in underwriting property and employee compensation risks, as well as effective reinsurance arrangements,” S&P Global Ratings said in a note.

“SHKPI reported a solid combined ratio of 70% as of 30 June 30 2023, compared with the five-year average of 72%. Competitive profit commission and operating expenses associated with upcoming regulatory and accounting developments could narrow the insurer's underwriting profit,” it added.

SHKPI's capital and earnings have benefited from lower premium and reserve risk charges, although its modest capital size presents vulnerabilities. The insurer's reliance on Sun Hung Kai Properties  (SHKP) for business referrals and limited business diversity is reflected in its one-notch above SACP rating.

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SHKPI is expected to maintain its profit-generating business and continue distributing the majority of its earnings to its parent company. Plans to diversify investments away from real estate, along with effective risk controls, could enhance earnings stability.

The insurer has improved capital adequacy under the revised capital model criteria, with SHKPI's capital buffer expected to increase to a 99.99% confidence level in extreme stress scenarios over the next 24 months.

Factors contributing to improved capital adequacy include lower non-life premium and reserve risk charges and better recognition of diversification benefits, although these are somewhat offset by recalibrated capital charges.

Despite the positive outlook, SHKPI's modest capital size could expose it to higher vulnerability and single large-event risks. The insurer's reliance on business referrals from its parent company, Sun Hung Kai Properties Ltd. (SHKP), with limited business diversity, remains a consideration.