(The following statement was released by the rating agency)
Jan 10 - Fitch Ratings has upgraded Malaysia-based Pacific & Orient Insurance’s (POI) Insurer Financial Strength (IFS) rating to ‘BBB+’ from ‘BBB’. The Outlook is Stable.
The upgrade reflects POI’s improving capitalisation and continued favourable underwriting result after the realignment of business composition within the automobile sector. Based on the unaudited figures for the financial year ended September 2012, the company’s combined ratio remains healthy at below 90%, despite higher claims experience.
The rating reflects POI’s solid distribution coverage in motor insurance, its stable cost structure, and its disciplined underwriting strategy. Fitch believes POI’s business strategy and capital management policy will remain unchanged despite the divestment in Q412 of a 49% stake by its immediate parent, Pacific & Orient Berhad, to a South African financial services group, Sanlam Limited (IDR ‘AA-(zaf)'/Stable).
A conservative investment strategy has allowed POI to consistently maintain excellent liquidity to meet its insurance claim payments. Cash and deposits amounted to approximately 93% of POI’s invested funds at FYE12 and more than 203% of its net claims reserves.
As its operating surplus continues to grow, POI is likely to further enhance its risk-based capitalisation (RBC) as calculated by Fitch’s internal capital model. Net premium leverage (as measured by net premium written to shareholders’ equity) further trended down to 1.36x in FY12 from 1.49x in FY11. Its regulatory RBC ratio at FYE12 was above 200%, well in excess of the statutory minimum requirement of 130%.
While POI has obtained approval from Bank Negara Malaysia to issue bonds up to MYR150m, it has no plans to increase leverage in the near term. It had interest coverage of about 11.8x at FYE12, which provides sufficient financial flexibility to service its MYR70m 10-year term loans.
Partially offsetting these positive attributes are POI’s significant business concentration risk in motorcycle insurance and ongoing underwriting deficits of third-party motor liabilities within the insurance industry in Malaysia. Further upgrade of POI in the near term is unlikely, in Fitch’s view. Fitch expects POI to retain adequate surplus to support premium growth and potential underwriting volatility.
Key triggers for negative rating action include an increase in net premium leverage consistently higher than 2x, a deterioration in combined ratio to a level consistently higher than 97%, an escalation in financial leverage to a level exceeding 35% (FY12: 22%) on a sustained basis, or a dramatic shift in its investment strategy.
Key triggers for a positive rating action are maintaining its combined ratio below 90% and further improvement in capital strength as measured by Fitch’s internal capital model.