Best Rates Luen Fung Hang ‘A-‘

A.M. Best Co. has affirmed the financial strength rating of “A-” (Excellent) and assigned the issuer credit rating (ICR) of “a-” to Macao-based Luen Fung Hang Insurance Company Limited (LFH) with a stable outlook.

“The ratings reflect LFH’s consistent operating performance, strong domestic market presence and distribution support from its key shareholders,” said Best. The rating agency added that they also reflect its “view of the favorable economic environment in Macao that contributes to the growth dynamic of the industry.”

LFH, the third largest non-life insurer in Macao, captured about 17 percent of the non-life market share in 2005. “The company, primarily owned by four major banks in Macao, is capable of leveraging the extensive branch networks of its parents to tap into the market,” Best explained. “The favorable market presence and distribution support have provided a solid foundation for the consistent and stable operating performance of the company.

“For the past five years, LFH has been maintaining a consistent profitable operating performance, with the combined ratio falling below 90 percent.” Best said it “expects the company will continue to generate profitable results and maintain rate level adequacy.”

However, Best also noted that “these positive rating factors are partially offset by the operating performance of LFH’s life subsidiary and the company’s high expense ratio coupled with soft market conditions. With the injection of MOP 22.5 million (USD 2.8 million) in 2005 to support the business expansion of its life subsidiary, the company’s liquidity position and risk-adjusted capitalization has been lowered.

“The overall risk-adjusted capitalization of LFH is going to be weakened further if the life subsidiary requires additional capital support, presenting a challenge to LFH’s financial flexibility. Although recognizing the current adequate risk-adjusted capitalization of LFH, A.M. Best remains cautious to the downward trend of LFH’s risk-adjusted capitalization level and anticipates a further strengthening of LFH’s capitalization to face the challenges ahead.

“The company’s expense ratio remains high as compared to that of its peers. Going forward, the continued softening in premium rates and intense market competition may exert pressure on the company’s underwriting margin given its relatively high cost structure.”