Best Assigns ‘B+’ Rating to Petrovietnam Insurance; Outlook Positive

February 3, 2010

A.M. Best Co. has assigned a financial strength rating of ‘B+’ (Good) and an issuer credit rating of “bbb-” to Vietnamese insurer Petrovietnam Insurance JSC (PVI), with a positive outlook on both ratings.

The ratings reflect PVI’s “sound capitalization, excellent operating performance and strong market position in the Vietnamese non-life market,” Best explained. The rating g agency added that it has also considered “management’s commitment to improve every aspect of the company.”

The positive outlook reflects Best’s expectation that “capitalization and operating performance will further improve in the coming years.”

Best noted that “PVI is the second-largest non-life company with a premium market share of 19 percent as of 2008. Gross premiums written (GPW) generated in 2008 were VND 2,111 billion ($124 million). The compound annual growth rate (CAGR) of PVI’s GPW over the last four years (2005-2008) was 39 percent, whereas the CAGR of the industry was 23 percent during the same period.

“PVI is also the insurance arm of Petrovietnam Group (PVN), which is the national oil and gas company of Vietnam. Due to its affiliation to PVN, PVI is the leading insurance company in the commercial insurance market in Vietnam. With increasing investment in refinery projects as well as infrastructure, PVI expects higher growth going forward.”

Best also indicated that despite signs of increasing competition in the non-life market, “PVI recorded favorable loss ratios ranging from 33 percent to 49 percent over the past five years (2004-2008). In all five years, the company recorded positive underwriting results. Investment income during this time has been stable as well. Notwithstanding the economic slowdown, PVI’s prudent investment approach has enabled it to consistently post positive investment results, producing an investment yield in a range between 4.1 percent and 8.8 percent over the past five years. In 2008, the company’s net investment yield stood at 4.1 percent, compared to 8.3 percent in 2007, due to the economic slowdown and global financial crisis. The company’s net income in 2008 was VND 172 billion ($10 million).

“PVI’s risk-based capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is strong, and further business growth in coming years will not put high strain on the current capitalization. Although GPW grew by 31 percent on a CAGR basis over the past five years (2004-2008), capital increased by 82 percent during the same period. The company’s capital in 2008 stood at VND 2,288 billion (USD 135 million), with total assets of VND 4,918 billion ($289 million). PVI also maintains sound liquidity within its invested assets to support potential claims arising from its insurance book.”

However, Best also pointed to the “relatively high sovereign risk, high inflationary environment in Vietnam and concerns regarding the company’s reserving practice,” as partially offsetting factors.

In particular Best said that due to the high inflationary pressure in Vietnam, “PVI’s expense growth rate has been high. The expense ratio stood at 41 percent in 2008, and the company expects this number to increase in the coming years. PVI has not benefited from economies of scale over the last five years. As the inflation rate in Vietnam is highly dependent on the commodity price, there is a large possibility that higher inflation could lead to a higher expense ratio.”

In addition best’s analysis on PVI’s reserves indicates “some deficiencies in the company’s outstanding reserves. Although the absolute amount is not significant as business in Vietnam is of a short-tail nature and the business written in the past is small,” best said it, is concerned, “as business is growing fast and the inflation rate is high. Although this may be an industry-wide problem, continuation of this practice may lead to more significant problems in the future. Some comfort is added as PVI’s management has told A.M. Best that the company is currently working on changing the reserving practice.”

Source: A.M. Best –

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