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

KEY RATING DRIVERS

The rating continues to reflect POI's solid capitalisation, stable financial fundamentals, prudent investment strategy and efficient distribution capability in the motorcycle insurance industry. However, its rating remained constrained by its niche business focus and an industry-wide underwriting deficit from third-party motor insurance business in Malaysia.

POI's capitalisation measured by the regulatory capital ratio remained above 200% at end-March 2015, well beyond the regulatory minimum of 130%. From a Prism Factor-Based Capital Model (Prism FBM) perspective, POI scored 'Strong' based on results for the year ended 30 September 2014 (FY14). This is mainly attributable to steady surplus growth and minimal exposure to natural catastrophes, given its business concentration in the relatively catastrophe-free Malaysia.

Lower claims frequency and good expense management continued to underpin its underwriting performance in FY14, with a combined ratio reported at below 90%. POI adopts a risk-selective underwriting approach, with high emphasis on bottom-line profitability rather than top-line growth. However, its combined ratio increased to 119.7% in 1H15, as a result of a substantial MYR48.8m increase in net claims liability. According to management, this arose from a more conservative method employed by the new external actuary, who was appointed in March 2015 and approved by the regulator. Nevertheless, POI expects its combined ratio for FY15 will improve to below 100%.

Measured by Fitch's reserving guidelines, POI's reserve profile was High and growth was Neutral for FY14. Its reserve experience in the last five years has been volatile due to an industry push in prior years to close out older claims. Fitch will continue to monitor POI's reserving ratios cautiously, in view of the potential underwriting volatility in its niche motor business.

POI's investment approach remained conservative and highly liquid, with more than 90% of the invested assets placed in cash and deposits at end-March 2015. Cash and deposits accounted for approximately 121% of its net technical reserves at end-March 2015.

RATING SENSITIVITIES

Key rating triggers for a downgrade include a deterioration in underwriting performance with combined ratio above 97% (FY14: 88.2%) persistently, a sustained increase in financial leverage to a level higher than 35% (FY14: 20.9%) or a weakening in capitalisation with net premiums to adjusted equity above 2x (FY14: 1.3x) consistently. Deterioration under the Prism FBM measure of capital could be a catalyst for negative rating pressure.

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