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RAM Ratings reaffirms P&O Insurance
Published on 28 Aug 2017.
RAM Ratings has reaffirmed Pacific & Orient Insurance Co Berhad’s (P&O Insurance or the Insurer) insurer financial strength ratings of A2/Stable/P1. Concurrently, the rating of its RM150 million Subordinated Notes Programme (2012/2024) has been reaffirmed at A3/Stable. The Subordinated Notes are rated 1 notch below P&O Insurance’s long-term insurer financial strength rating, reflecting its status as an unsecured and subordinated obligation of the Insurer.
The ratings take into account P&O Insurance’s strong capitalisation and reserves coverage, as well as prudent underwriting strategies that have kept its claims experience favourable in the high-claims motorcycle segment. P&O Insurance has maintained its leading position in motorcycle insurance, although competitive pressures have caused significant downward shifts in its market share. While the Insurer’s efforts to diversify into other lines have gained some traction, motorcycle insurance remains its niche, contributing to 60% of its gross premiums in FY Sep 2016. All said, P&O Insurance remains a small general insurer in a highly competitive market with fewer resources for cross- or upselling; its ratings therefore also reflect this stature.
The Insurer accounted for about a quarter of the sector’s motorcycle premiums in 2016, a fraction of its 50% market share in 2013. The entry of larger insurers into the motorcycle segment and subdued motorcycle sales had caused the Insurer’s gross premiums to slip 16% to RM303 million in FY Sep 2016. While a rebound in premiums to previous levels is not expected over the near to medium term, comfort is derived from the Insurer’s practice of preserving underwriting profitability, at the expense of defending market share. The Insurer’s focus on writing comprehensive policies and imputing heftier loadings results in higher margins that buffer against the segment’s historically higher claims experience. P&O Insurance’s competitive edge is supported by strong relationships with a widespread network of motorcycle dealers, cultivated over the years.
The Insurer recorded a better claims ratio of 48% in FY Sep 2016 (FY Sep 2015: 74%) as the more conservative assumptions applied the year before were reversed by a newly appointed actuary. Reserve releases of this quantum are not anticipated going forward and the Insurer’s current-year claims experience is expected to revert to normal levels; its claims ratio for 1H FY Sep 2017 stood at 56%.
Elsewhere, P&O Insurance’s portfolio remains well-reserved, with net technical reserves to net earned premiums ratio of 232% as at end-March 2017. Its capitalisation stayed strong with a capital adequacy ratio of 298% as at the same date. While the Insurer’s outstanding RM70 million of Subordinated Notes have become callable as of 28 June 2017, a proposed refinancing of these securities supports its capital position over the medium term. RAM Ratings has been informed of proposed amendments to the terms of the Insurer’s Subordinated Notes Programme, which are intended to facilitate the refinancing exercise. These have no impact on the rating of the Programme.
P&O Insurance’s ratings may improve in the event of significant and sustained growth in its portfolio, as well as meaningful diversification that does not compromise its underwriting margin. Conversely, the ratings may be pressured should there be a continued decline in the Insurer’s motorcycle insurance market share without sufficient replenishment from other business lines. Other rating concerns include a sustained deterioration in capitalisation and reserves coverage.
Analytical contact
Joanne Kek
(603) 7628 1163
joanne@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2017 by RAM Rating Services Berhad
