S&P Raises Taiwan Fire & Marine Ratings to ‘BBB+’

July 6, 2007

Standard & Poor’s Ratings Services has raised its counterparty credit and insurer financial strength ratings on Taiwan Fire & Marine Insurance Co. Ltd. (TFMI) to “BBB+” from “BBB” and assigned a stable outlook.

S&P said the “upgrade reflects TFMI’s consistent and satisfactory operating performance, including the likelihood that the company will maintain its satisfactory operating performance while gradually adjusting its business mix and investment mix. The ratings continue to reflect TFMI’s strong capitalization and good liquidity. Moderating factors include the company’s sensitivity to market risks due to its aggressive investment allocation.”

S&P credit analyst Connie Wong noted that “TFMI’s satisfactory operating performance is a reflection of its prudent underwriting policy and risk selections. The company’s five-year return on revenue averaged 20.5 percent for 2002-2006, and its combined ratio was 90 percent in 2006 and averaged 94 percent in 2002-2006, compared with the industry average of 99.9 percent and 96 percent, respectively.

“Although the company has a modest market share of about 4 percent in terms of total direct premium, this has not created a significant disadvantage to TFMI in managing underwriting risks over the years,” she added.

S&P also noted that “TFMI is sensitive to Taiwan’s equity and real estate market cycles, which will continue to affect the company’s investment performance. Equity related securities and real estate accounted for about 38 percent and 20 percent, respectively, of the company’s total investments at the end of 2006.”

TFMI’s capitalization remains strong relative to its risks written, including underwriting risk and investment risk. The company’s solvency ratio (shareholders’ funds over net premiums) was 230 percent at the end of 2006 (or 314 percent if its special loss reserves were included). TFMI has good liquidity, supported by its stable operating cash flow generation and satisfactory cash position. At the end of 2006, cash and deposits represented 33 percent of its total invested assets.”

The rating agency said the stable outlook “reflects the likelihood that TFMI will maintain its satisfactory operating performance and strong capitalization over the medium term. Nevertheless, while TFMI seeks to adjust its business mix, the company’s overall business growth is likely to remain mediocre given its focus on commercial lines, which face more challenges from soft market conditions.

“A significant deterioration in TFMI’s operating performance due to rate competition, failure to identify new business opportunities, or an increase in the insurer’s investment risk appetite that damages TFMI’s operating performance or capitalization, could result in negative rating implications.”

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