A.M. Best Affirms Ratings of National Reinsurance Corp. of the Philippines

A.M. Best Co. has affirmed the financial strength rating of B++ (Good) and issuer credit rating of "bbb" of National Reinsurance Corp. of the Philippines (PhilNaRe) (Philippines).

The outlook for both ratings is stable.

The ratings reflect PhilNaRe's solid risk-based capitalization, established market presence in the Philippines as well as its stable investment results.

PhilNaRe's risk-adjusted capitalization level, as measured by Best's Capital Adequacy Ratio (BCAR), remained strong in 2010, despite the decline in its capital and surplus. The company's capitalization level is expected to be adequate to support its projected premium growth in the next three years.

As the sole professional reinsurer in the Philippines, PhilNaRe enjoys a compulsory cession as all direct insurance companies are required to offer PhilNaRe at least 10 percent of their foreign outward reinsurance. With over 30 years of operating in the Philippines, the company has established a strong market presence in that domestic market.

PhilNaRe has a conservative investment portfolio, which has enabled it to post stable investment results in the past five years. Historically, the company has relied on its favorable investment performance to generate a satisfactory bottom line. Going forward, A.M. Best expects that investment income will continue to be a crucial source of income for PhilNaRe.

Offsetting rating factors include PhilNaRe's deteriorating underwriting performance in recent years as well as its relatively weak presence in the overseas market. PhilNaRe has been recording an underwriting deficit every year since 2008. Its underwriting performance further deteriorated in 2010, with a loss ratio of 113.7 percent mainly due to late claims reporting from Typhoon Ondoy in 2009. Having learned from the past three years, PhilNaRe has tightened its underwriting guidelines. For the nine months ending September 30, 2011, the company's gross premiums declined by 18.8 percent relative to the same period in 2010, while its loss ratio improved significantly by 48 percent. However, given the volatility in PhilNaRe's underwriting results during the past five years, A.M. Best will closely monitor the company's underwriting performance going forward.

Future positive rating actions could occur if PhilNaRe can demonstrate notable improvement in its underwriting profitability. Alternatively, downward rating actions could occur if the company's underwriting performance further deteriorates or there is a material decline in its risk-based capitalization level.

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"; "Assessing Country Risk"; and "Risk Management and the Rating Process for Insurance Companies." Best's Credit Rating Methodology can be found at ambest.com/ratings/ methodology.

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