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

Reuters

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Oct 17 (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 adequate capital position, stable underwriting margin and solid distribution coverage in the Malaysian motorcycle insurance market. The rating also considers the company's conservative investment approach and strong liquidity.

Notwithstanding a mild decline in gross premiums, POI has maintained favourable underwriting performance during the nine-month period ended 30 June 2013. Based on the unaudited figures for the nine months ended H113, the company's combined ratio was consistently below 90%. Overall claim experience after reinsurance remained stable, reflecting the good quality of the company's insurance portfolio.

Underpinned by its conservative investment allocation and slower business growth, POI's risk-based capitalization (RBC) at end of H113, as measured by Fitch's internal model, remained adequate and supportive to its rating. Its statutory RBC ratio at end of H113 was above 200%, well in excess of the statutory minimum requirement of 130%.

POI maintains strong liquidity to meet cash outflows from potential insurance claims. Cash and deposits accounted for approximately 95% of POI's invested funds at the end of H113 and amounted to 191% of its net claims reserves.

POI's rating is partially constrained by its significant business concentration risk in motorcycle insurance and on-going market-wide underwriting losses of third-party motor liabilities within the insurance industry in Malaysia.

RATING SENSITIVITIES

Further upgrade of POI in the near term is unlikely, in Fitch's view, unless the company is able to sustain its combined ratio below 90% and further strengthen its market coverage and risk-based capitalization as measured by Fitch's internal model. In view of the company's business concentration in the motorcycle insurance segment, Fitch expects POI to maintain adequate capital buffers to support potential underwriting volatility.

Key triggers for negative rating action include an escalation in net premium leverage to consistently higher than 2x (FY12: 1.36x), a weakening in underwriting margin (with combined ratio consistently exceeding 97%), an increase in financial leverage to a level higher than 35% (end of H113: 23%) on a sustained basis, or a dramatic change in its investment approach.

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