SINGAPORE--(BUSINESS WIRE)--AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” of Pacific International Insurance Pty Limited (Pacific) (Australia).
The Credit Ratings (ratings) reflect Pacific’s balance sheet strength, which AM Best categorises as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM). These ratings also factor in a neutral holding company impact from Pacific’s ultimate ownership by Badger International (Pty) Ltd (Badger), an insurance group domiciled in the Republic of South Africa.
The negative outlooks reflect the heightened sensitivity of Pacific’s balance sheet strength and operating performance assessments to execution of the company’s growth plan. AM Best considers the company’s latest business plan to present high levels of execution risk, and failure to successfully achieve it could weaken Pacific’s operating performance and risk-adjusted capitalisation materially.
Since the acquisition by Badger in May 2018, Pacific has received a series of capital injections totalling AUD 13.5 million to support the company’s material change in operational scope, as it acquired the renewal rights to a sizeable portfolio of existing motor business in Australia and the associated increased capital requirements. Pacific’s balance sheet strength assessment factors in its current risk-adjusted capitalisation, which is assessed at the strongest level as at fiscal year-end 2020, as measured by Best’s Capital Adequacy Ratio (BCAR). However, AM Best expects Pacific’s prospective risk-adjusted capitalisation to deteriorate notably in the coming years as a result of the further substantial premium growth targeted by the company. AM Best also anticipates capital adequacy to remain highly sensitive to the successful execution of the company’s business plan, and to the achievement of performance targets and projected capital generation over the medium term.
Pacific reported an operating loss of AUD 3.7 million and a return-on-equity ratio of -19.8% in fiscal-year 2020, driven by elevated transitional expenses as the company brought on board at renewal a sizeable motor portfolio previously underwritten by a third-party insurer to its own platform and made significant investment to support its prospective market positioning. Whilst AM Best expects the company’s increased operational scale in the coming years to serve to rationalise its expense ratio, prospective underwriting and operating profitability remains contingent upon the company’s ability to meet performance targets for core insurance products.
AM Best views Pacific’s business profile as limited. Following the aforementioned motor portfolio acquisition, the company has undergone a material transformation from a small niche liability insurer to a more diversified general insurer in Australia and New Zealand, with a focus on motor and motor-related products. Whilst the scale of operational change is significant, AM Best expects Pacific to remain a modest-sized player with a market share below 1% in the Australia general insurance market over the medium term.
AM Best considers Pacific’s approach to ERM to be appropriate given the size and complexity of its current operations. However, AM Best views ongoing strengthening of the company’s ERM capabilities as necessary, in order to support its increasing operational scale and widened product offering in the near term.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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