RPT-Fitch Affirms Pacific & Orient Insurance at IFS 'BBB+'; Outlook Stable

Fri Jun 20, 2014 3:18am EDT

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June 20 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Malaysia-based Pacific & Orient Insurance Co. Berhad's (POI) Insurer Financial Strength Rating (IFS) at 'BBB+'. The Outlook is Stable.

KEY RATING DRIVERS

The rating affirmation reflects POI's consistently favourable underwriting result, adequate capital buffer, prudent investment strategy and sound distribution capability in the motorcycle insurance market. However, POI's niche business focus and Malaysia's industry-wide underwriting deficit for third party motor insurance business will continue to constrain the company's rating.

Underwriting performance of POI has remained favourable in FY13. The company has been able to maintain its combined ratio below 90% over the past three financial years although the company mainly focuses on the motorcycle insurance segment. Its motor insurance business accounted for 86% of the company's gross written premiums in FY13.

Given POI's disciplined underwriting approach, POI's claim experience from the motor portfolio is likely to remain stable in the near term. Based on unaudited figures for the six months to end-March 2014, the company's loss ratio further improved to 63.0% (FY13: 65.4%).

In view of POI's significant business concentration risk in motorcycle insurance, the agency expects POI to maintain sound capital cushion to support risks underwritten. Internal surplus generation and steady net premium growth have allowed the company to strengthen its regulatory capital ratio to above 230% at end-1Q14, which is significantly higher than the statutory minimum requirement of 130%.

Fitch views POI's investment strategy as conservative as cash and deposits represented about 95% of POI's invested funds at end-1Q14. POI has strong liquidity to meet cash outflows from motor insurance claims. Cash and deposits accounted for approximately 194% of its net claims reserves at end-1Q14.

RATING SENSITIVITIES

Negative rating triggers include:

- weakening in capitalisation with the ratio net written premiums to shareholders' equity consistently higher than 2x (FYE13: 1.40x),

- a deterioration in underwriting result with combined ratio persistently exceeding 97% (FY13: 87.2%), and

- an escalation in financial leverage to a level higher than 35% (FYE13: 21%) on a sustained basis.

An upgrade for POI is unlikely in the near term. However, over the medium term, the rating could be upgraded if the company manages to broaden its market presence and to improve diversification of its business portfolio while maintaining a combined ratio below 90%.

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