Published on 13 Oct 2020.
RAM Ratings has revised the outlook on Pacific & Orient Insurance Co. Berhad’s (P&O Insurance or the Insurer) A2 long-term insurer financial strength (IFS) rating to negative from stable while maintaining its ratings. The negative outlook is similarly reflected in the A3 rating of the Insurer’s RM150 million Subordinated Notes Programme (2012/2024). The Programme is rated one notch below P&O Insurance’s long-term IFS rating to reflect its status as an unsecured and subordinated obligation of the Insurer.
The revision of the rating outlook is premised on P&O Insurance’s weakening underwriting performance (on the back of declining business volume) and high operating expenses. Motor premiums written by P&O Insurer had more than halved to RM212 million in FY Sep 2019, compared to RM444 mil in FY Sep 2012. Meanwhile, its management expense ratio is at a high 40% in 9M FY Sep 2020 (industry: 25%). Relative to peers that have more diversified businesses, the Insurer’s small-scale operations and concentration in the motorcycle segment (51% of total premiums) render it more susceptible to rising competitive pressures in this segment. Reflective of this, its market share in the motorcycle segment has continued to slide.
The Movement Control Order implemented in mid-March this year in response to the Covid-19 pandemic had a moderating impact on P&O insurance’s businesses. Its gross premiums fell 6.3% y-o-y to RM205.5 mil in 9M FY Sep 2020. P&O insurance has focused on its private car and liability segments while its motorcycle segment continues to decline as part of the Insurer’s diversification strategy. Nonetheless, the Insurer suffered a net underwriting loss of RM8.9 mil for 9M FY Sep 2020 due to high marketing expenses and shrinking reserve releases. Its combined ratio was a high 107% in the same period (industry: 90% in 1H 2020). P&O Insurance’s pre-tax profit of RM1.6 mil in 9M FY Sep 2020 was largely supported by higher investment income, which may not be sustainable in the long run given the volatility of financial markets.
Notwithstanding a subdued financial performance, P&O Insurance’s liquidity and capitalisation position remained strong. Its healthy liquidity profile is backed by sizeable deposit placements (one-third of invested assets) while liquid assets amounted to 1.6 times its net insurance contract liabilities. Apart from sound risk management practices, the Insurer’s strong reserves coverage, which stood at an annualised 200% as at end-June 2020 (end-September 2019: 203%), also continues to support the ratings. Despite sizeable dividend payments, its capital adequacy ratio stayed above 200%, comfortably exceeding the capital requirement of 130%. The outlook may be revised to stable if P&O Insurance is able to arrest the decline in its market position and exhibits sustained improvement in underwriting performance.
Hafiz Abdul Aziz
(603) 3385 2534
(603) 3385 2577
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Ratings on Pacific & Orient Insurance Co. Berhad