A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of South China Insurance Co., Ltd. (South China Insurance) (Taiwan). The outlook for both ratings is stable.
The ratings and outlook reflect South China Insurance’s solid risk-adjusted capitalization and continued strong operating performance. The company also moderately improved its market presence in Taiwan in 2011 through the continued enhancement of a multi-channel distribution strategy. As a wholly owned insurance non-life arm of Hua Nan Financial Holdings Co. Ltd., South China Insurance benefits in the areas of risk management and product distribution through affiliated entities.
South China Insurance’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, remains sound and supportive of its current ratings. A.M. Best believes South China Insurance will continue to sustain its capitalization through retention of favorable net earnings at a minimum regulatory level, in addition to a stable underwriting and investment risk profile anticipated over the short to medium term.
South China Insurance achieved favorable operating results in 2010, which were primarily supported by profitable underwriting results and positive investment income during the year. A.M. Best expects the company’s loss ratio to improve modestly for 2011, largely due to the release of redundant reserves on prior year fire-related claims. In addition, interest income from bonds and cash deposits, which represented over 80% of the company’s invested assets as at September 30, 2011, is expected to partially alleviate the potential earnings volatility associated with the financial markets in 2011.
Offsetting rating factors include the effect of soft market conditions on South China Insurance’s core motor business and the challenge of sustaining business growth in a continuing competitive market in Taiwan. In light of the significance of the motor business relative to the company’s underwriting portfolio, (which accounted for over 50% of total gross premiums written over the past few years), prospective underwriting profitability could be pressured by further deterioration in motor loss experience under the prevailing soft pricing trend and rising claims cost.
Future positive rating actions could occur if South China Insurance can demonstrate notable improvement in its underwriting profitability, especially in the company’s key motor portfolio over the medium to long term. Alternatively, downward rating actions could occur if the company’s risk-adjusted capitalization materially deteriorates or there is a downward trend in underwriting or operating profitability.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding Universal BCAR”; “Catastrophe Analysis in A.M. Best Ratings”; and “Risk Management and the Rating Process for Insurance Companies.” Best’s Credit Rating Methodology can be found at http://www.ambest.com/ratings/methodology.