Best Upgrades Tugu Ratings to ‘B++’

May 14, 2007

A.M. Best Co. has upgraded the financial strength rating to “B++” (Good) from “B+” (Good) and the issuer credit rating to “bbb” from “bbb-” of Hong Kong’s Tugu Insurance Company Limited, and assigned a stable outlook.

Best indicated that the upgrade is backed by the Company’s “improving operating results, strong risk-adjusted capitalization and liquid investment portfolio.” The hgher rating also takes into account the recent settlement of Tugu’s outstanding asbestos claims and the legal disputes between Pertamina (Tugu’s ultimate parent company) and Karaha Bodas Company LLC (KBC).

Tugu’s operating results have continued to improve over the past three years. It was successful in reducing its underwriting risk exposures in 2006 through the withdrawal of certain higher risk classes of business, such as semiconductor risks. Overall Best sees an “improving trend.”

The company’s liquidity is around 43 percent, which, Best notes “provided a high degree of financial flexibility and stable investment returns that support the overall earnings.” It has limited exposure to equity market fluctuations, and maintains its investment portfolio mainly in U.S. dollars, which minimizes its currency exposure.

The upgrade is further backed by the settlement of the asbestos claims in December 2006. Best explained that they had “originated from some casualty inward treaties accepted in the London market between 1970 and 1982. The recent settlement has eased the concern of the long-tail liabilities and costs with an approximately USD 4.7 million release of reserves.”

Offsetting factors include the growing employees’ compensation business, a higher expense position and the less stable development in loss reserves.

The company wrote more general liability business in Hong Kong in 2006, particularly the employees’ compensation line. The market has been soft for this line with unfavorable claims experience. The long-tail business, intense market conditions and elevated expense ratio could add further pressure to Tugu’s underwriting margin. Best stressted that further improvement in Tugu’s operating performance is crucial in maintaining its rating stability.

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