November 3, 2011 / 11:42 AM / in 6 years

TEXT-S&P revises Thai non-life insurers outlook to negative

(The following statement was released by the rating agency)

Nov 03- Significant flood-related losses could weaken the performance of Thailand’s non-life insurers in 2011. Standard & Poor’s Ratings Services has revised its outlook on the Thai non-life insurance sector to negative from stable. We now consider the sector susceptible to natural catastrophe risks, a change from our previous view.

The financial profile of some non-life insurers in Thailand will likely deteriorate significantly in 2011. A potential decline in underwriting profits stemming from flood-related claims and investment earnings because of equity market-related losses will contribute to the deterioration.

The Thai insurance regulator initially estimated insurance losses stemming from the recent large-scale flooding in the country at US$3.3 billion (Thai baht 100 billion); however, Thailand’s Permanent Secretary of Finance reportedly expects the figure to rise to about US$6 billion. We consider the estimated losses as excessive given the Thai non-life insurance market’s expected gross premiums of about US$4.7 billion (THB140 billion) in 2011. Standard & Poor’s has received some loss estimates from rated insurers but the assessment of ultimate losses will be possible only after the water has receded. The key known losses currently relate to the seven industrial parks outside Thailand’s capital Bangkok.

“Foreign insurers, especially the Japanese insurers, and foreign reinsurers currently appear to have to bear the bulk of the known losses in the industrial parks. But local insurers and reinsurers will be affected as well, despite bearing a smaller share of the losses. Their smaller size also makes these companies more vulnerable to accumulated losses than the larger international insurers,” said Standard & Poor’s credit analyst Connie Wong. “Local insurers are exposed to commercial lines and some personal lines with flood coverage, and the accumulated exposure is still unclear. Although the portfolio of policies with flood coverage is relatively small given the size of the total industry portfolio, ultimate accumulated losses could be significant.”

Standard & Poor’s rates two non-life insurers, Bangkok Insurance Public Co. Ltd. (local currency A-/Stable/--; axAA/--) and Dhipaya Insurance Public Co. Ltd. (local currency A-/Stable/--; axAA/--), and one reinsurer, Thai Reinsurance Public Co. Ltd. (local currency A-/Stable/--; axAA/--), in Thailand. At the time of writing, the reported losses from these companies appear to have adequate reinsurance coverage, although we expect the reinsurer to have a higher proportion of the estimated losses. However, since our estimation of losses is still evolving as new information comes in, our assessment of companies’ credit profiles could change.

The gross and net combined ratio for the Thai non-life insurance market was about 91% and 97%, respectively, in 2010. Based on the market estimated losses of US$6 billion, the gross combined ratio could go up to 250% for full-year 2011. Without clear details about the adequacy of reinsurance, we expect the sector’s net combined ratio to be much higher than in 2010.

Standard & Poor’s will review the ratings on Japanese non-life insurers that insure industrial all-risk policies for Japanese corporations in the affected areas because they are likely to post significant flood-related losses once more information is available. Most Japanese insurers’ financial profiles are currently strong, even though they have been negatively affected by the major Japan earthquake earlier this year.

“We believe some international reinsurers will also be negatively affected by the reinsurance losses in Thailand, we but expect the losses to be manageable. However, we anticipate that the underwriting performance of these reinsurers’ Asia-Pacific portfolio will deteriorate significantly compared with 2010, given the accumulated impact of the earthquakes in Japan and New Zealand and the floods in Australia earlier in this year,” said Ms. Wong.

With little certainty over when the water will recede, Standard & Poor’s believes that losses may affect the credit profiles of some local insurers. Also, the catastrophe models that insurance companies use are likely to have underestimated flood risks, given the lack of historical flood loss data of a similar scale. Therefore, the possibility that some insurers or reinsurers may not have adequate reinsurance or retrocession protection exists.

We believe the floods will have a profound impact on the Thai non-life insurance industry’s catastrophe risks assessment and could alter the industry’s risk profile.

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