(The following statement was released by the rating agency)
Jan 22 -
Summary analysis -- Falcon Insurance Co. (Hong Kong) Ltd. --------- 22-Jan-2013
CREDIT RATING: None. Please see issue list. Country: Hong Kong
Primary SIC: Fire, marine, and
Financial Strength Rating History:
The rating on Falcon Insurance Co. (Hong Kong) Ltd. (Falcon HK) reflects explicit support provided in the form of a guarantee by Odyssey Reinsurance Co. (Odyssey Re; local currency A-/Positive/--), a subsidiary of Falcon HK’s ultimate parent, Fairfax Financial Holdings Ltd. (BBB-/Positive/--).
Falcon HK’s stand-alone credit profile is still weak, even though it has improved over the past year. The stand-alone credit profile reflects the company’s marginal market position in Hong Kong’s general insurance market, its less favorable capitalization, and high equity investments. Offsetting factors are the company’s satisfactory operating performance, which has improved over the past year, and its adequate liquidity.
We attribute Falcon HK’s significant growth in terms of gross premiums in the past two years to a revision in strategy. Since 2009, the company has realigned its strategy to target mainly marine hull, regional property, and other commercial lines, with help from regional group companies in terms of knowledge sharing. However, we expect Falcon HK’s top-line growth to slow over the next two years to reflect the company’s realigned strategy. Falcon HK receives significant inward reinsurance business from Singapore-based First Capital Insurance Ltd. We consider this business to be profitable although it carries significant risk. Nevertheless, Falcon HK still needs time to prove that its strategy has been successful in Hong Kong. The company still has a marginal business position in the competitive Hong Kong general insurance market. It had a market share of 2% in terms of gross premiums in 2011. Falcon HK continues to operate its Hong Kong personal and commercial business through its agency force and broker network.
Falcon HK’s product mix changed slightly in line with the new business strategy. The largest contributor to the gross premiums written was the motor business (23.9%), while the contribution from the marine business reduced (23.2%) because the company focused less on unprofitable segments within the marine lines business. The rest of Falcon HK’s portfolio includes employees’ compensation (24%), property damage (12.1%), and others (16.8%) segments.
We expect Falcon HK’s underwriting performance to continue to improve over the next 18 months due to tightened underwriting control in its HK business and higher premiums in the compulsory liabilities business. The combined ratio fell to 99.2% in 2011 from 113.7% in 2010. This was primarily due to an improved loss ratio of 69.9% in 2011 (80.8% in 2010) as a result of the company’s new strategy.
We consider Falcon HK’s investment profile as satisfactory, but its equity investment exposure remains significant. At the end of 2011, 25.9% of its assets were invested in stocks and mutual funds. The rest included fixed-income securities (42.2%) and cash (31.8%). Falcon benefits from the investment expertise of Hamblin Watsa Investment Counsel Ltd., a 100%-owned subsidiary of Fairfax.
While Falcon HK’s capitalization is commensurate with the stand-alone credit profile, based on our capital model analysis, it is weak reflecting the company’s small size and risky assets exposure. The company’s ratio of shareholders’ funds to net premium income is about 108% as of the end of 2011.
Enterprise risk management
Falcon HK’s enterprise risk management (ERM) framework is integrated with that of the wider group. We assess the company’s parent, Fairfax, as having adequate ERM. Our belief that adequate risk controls are in place for the majority of the group’s risks is the primary factor supporting our overall risk assessment. The recent formalization of the organization’s ERM efforts, combined with partially centralized risk aggregation and control, currently limits a stronger assessment.
The positive outlook reflects the outlook on Odyssey Re based on explicit support in the form of a guarantee. We will upgrade Falcon HK if we raise the rating on Fairfax’s guaranteeing entity. Conversely, we will revise the outlook on Falcon HK to stable if we revise the outlook of the guarantor to stable.