A.M. Best Co. has assigned a financial strength rating of “B++” (Very Good) and an issuer credit rating of “bbb+” to India’s Oriental Insurance Company Limited with a stable outlook.
“The rating reflects the company’s excellent business profile, good operating performance and solid risk-adjusted capitalization,” said Best; “however, these factors are partially offset by the pressure exerted by Oriental’s high exposure to the Indian equity market and the insufficient analysis conducted by the company with regards to its catastrophe probable maximum loss (PML) exposure.”
Best also indicated that it “believes that Oriental’s business profile is excellent as the second-largest non-life insurer in India with an estimated market share of approximately 17 percent in 2006. Approximately 40 percent-45 percent of Oriental’s business portfolio is focused on motor segments (third party liability and own damage); however, the remainder of the portfolio is well diversified.”
In Best’s opinion, “Oriental’s current and prospective operating performance is likely to remain good, though it is entirely reliant upon strong projected investment returns of approximately 8 percent (including gains) over the next two years. Underwriting performance is forecast to remain poor, with a combined ratio of approximately 120 percent. The main contributor of Oriental’s very high loss ratio of approximately 90 percent-95 percent over the next two years will likely remain the motor third party liability segment. Pre-tax profits are expected to be within the range of INR 2-3 billion ($ 45-67 million) in 2007 and 2008, compared to an estimated INR 3.3 billion ($ 74 million) by year-end 2006.”
The rating agency, however, reiterated its concerns that “Oriental’s risk-adjusted capitalization, however solid, is under pressure due to the company’s high exposure to the Indian equity market. Approximately 50 percent of the company’s invested assets are at market value in domestic equities and, in A.M. Best’s view, expose Oriental to a high level of credit risk and the inherent volatility associated with stock markets in spite of the company’s compliance with the regulatory investment guidelines.” Best added that in its opinion “Oriental has conducted an insufficient analysis with regards to its catastrophe probable maximum loss (PML) exposure.”
In conclusion, Best said it “believes that Oriental’s absolute level of capital is likely to grow by approximately 4 percent over the next two years compared to an estimated INR 53 billion ($ 1.2 billion) by year-end 2006.”
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