HONG KONG--(BUSINESS WIRE)--A.M. Best has removed from under review with negative implications and affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” of Luen Fung Hang Insurance Company Limited (LFH) (Macau). The outlook assigned to these Credit Ratings (ratings) is stable.
On March 29, 2018, A.M. Best placed LFH’s ratings under review with negative implications. A.M. Best’s major concern at that time was uncertainty over whether the company could comply with local regulations regarding technical reserves. Due primarily to the open claims in relation to Typhoon Hato, LFH’s technical reserves (including the ceded portion) were elevated as of Dec. 31, 2017. Based on Macau regulations, the company would be required to pledge significantly more admitted assets to the Monetary Authority of Macao (AMCM) by April 2018.
The removal of the under review status follows AMCM’s recent formal approval to waive some of these requirements. For the ceded portion of technical reserves arising from Typhoon Hato, which amounted to almost MOP 400 million, LFH is no longer required to pledge assets to guarantee those reserves, provided that the reinsurance counterparties have satisfactory credit profiles.
The ratings reflect LFH’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.
LFH’s balance sheet strength is supported by its risk-adjusted capitalization being at the strongest level, as measured by Best's Capital Adequacy Ratio (BCAR). This result mainly reflects its low underwriting leverage, prudent reinsurance program and conservative investment allocation.
Operating performance also has been strong and consistent, with key operating metrics generally outperforming its peer averages. Over a five-year period, LFH’s underwriting and investment results have been consistently positive, contributing to an average combined ratio of under 75% and an average operating ratio of below 65%. While underwriting results for fiscal year 2018 may be affected by the potential losses in relation to Typhoon Mangkhut, A.M. Best believes that LFH’s operating results will remain at a strong level, underpinned mainly by a portfolio of less volatile product offerings, and a stable stream of interest and dividend income from its investment portfolio.
LFH continues to maintain a market leading position in Macau, capturing more than 25% of total domestic market share while demonstrating stable operating trends. Its major products are fire, medical, other accidents, with the remainder from motor, employee compensation, and marine. Given its business mix, LFH’s underwriting performance may be subject to volatility due to the exposure to catastrophe risk. Nevertheless, the company has managed its exposure carefully through prudent underwriting and a robust reinsurance program with conservative retention levels and limits.
The stable outlooks reflect A.M. Best’s expectation that LFH’s operating performance will remain at a strong level, underpinned mainly by modest premium growth, continued favorable claims experience, and an expense ratio that should remain stable over time.
Negative rating actions could occur if LFH’s risk-adjusted capitalization deteriorates significantly as a result of adverse operating performance, or if there is significant deterioration in the company’s business profile, for example, a sharp market share drop due to weaker distribution support from its bank shareholders.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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