Best Lowers Macau Insurance Ratings; Outlook Revised to Stable

September 15, 2010

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘A-‘ (Excellent) from ‘A’ (Excellent) and the issuer credit rating (ICR) to “a-” from “a” of Macau Insurance Company Limited (MIC). Best also affirmed the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of Macau Life Insurance Company Limited (MLIC), and has revised its outlook on all of the ratings to stable from negative.

The rating actions for MIC “reflect weaker underwriting profitability compared to its historical track record and contraction of the business profile in terms of a negatively impacted customer base,” Best explained.

In its analysis Best pointed out that “MIC’s underwriting profitability declined as evidenced by its underwriting margin of 1.6 percent in 2009 compared to 6 percent in 2008. In addition to its elevated operating expenses, the company’s loss ratio continued to increase for the six-month period ended June 30, 2010, primarily driven by unfavorable claims experience in motor and employees’ compensation portfolios. Thus, the overall combined ratio deteriorated in the first half of 2010. MIC’s ability to improve underwriting profitability to its historically strong levels during 2004-07 will be challenged through 2010, as a result of ongoing competitive market conditions.

“MIC’s market share (measured by gross premiums written) reduced to 19.2 percent for 2009 (20.8 percent for 2008), and the company remained the third-largest insurer in the local market. In 2010, MIC lost some corporate accounts to another local company operated by former management members who had left MIC in 2009. As the company follows a strategy to tighten underwriting, its premium portfolio is anticipated to remain flat through 2012, relative to the 2009 level, although gross premiums grew by 38 percent in the first half of 2010 from the same period last year.”

As partially mitigating the negative factors, Best noted the company’s “sound consolidated risk-based capitalization and comprehensive enterprise risk management framework.” It added that “MIC’s consolidated risk-adjusted capitalization remains solid relative to its current underwriting and investment risks. The company has consistently maintained a conservative investment portfolio, with 52 percent of invested assets allocated to bonds, cash and bank deposits at year-end 2009. Aside from an increase in the affiliated investments (28 percent of invested assets) following a capital injection to MLIC, the proportion of equities investments remained low at a level of 10 percent of total invested assets.

“The rating actions for MLIC reflect stronger capitalization, improved pension fund income and modifications to the company’s product offerings. Following the capital contribution of MOP 42 million (approximately US$ 5 million) made by the parent in 2009 to rectify a shortfall of its local solvency requirement due to the poor investment result of the guaranteed saving products (GSP) portfolio in 2008, MLIC’s absolute and risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), improved notably for the year under its current operation scale. A.M. Best anticipates that MLIC’s capitalization will be able to support its prospective business growth through 2010, while anticipated growth of its investment earnings remains moderate.”

In addition Best said that “while MLIC has been winding up its GSP portfolio (which has been the predominant premium driver over the past five years) after significant investment losses in this portfolio in 2008, the company is rebuilding its portfolio, supported by its affiliate company, Dah Sing Life Assurance (DSLA), through product development. Given the feasibility of efficient implementation and suitability for its existing bancassurance distribution, MLIC started adapting product offerings from DSLA since late 2009. Going forward, A.M. Best believes that MLIC could stabilize its product mix.

“The company’s fee income from its pension business improved since 2010, partly due to an increase in assets under management. The pension fund income may somewhat aid in maintaining a stable stream of operating income prospectively.

“Offsetting factors are significant contraction in business volume and unfavorable profitability. MLIC’s premium volume dropped considerably to MOP 58 million (US$ 7 million) in 2009, from MOP 474 million (US$ 58 million) in 2008. The company’s market presence in turn declined, representing a market share of 2.5 percent for the year (18.6 percent for 2008). Operating profitability remains relatively weak to June 2010, due partly to the lower-than-expected premiums of the adapted product with high related operating costs.”

Source: A.M. Best

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