SINGAPORE--(BUSINESS WIRE)--A.M. Best has removed from under review with negative implications and affirmed the Financial Strength Rating (FSR) of C++ (Marginal) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “b+” of Capital General Insurance Company Limited (CGI). Concurrently, A.M. Best has removed from under review with negative implications and affirmed the FSR of C- (Weak) and Long-Term ICR of “cc” of Capital Life Insurance Company Limited (CLI). The outlook assigned to CLI’s Credit Ratings (ratings) is negative. The outlook assigned to the ratings of CGI is stable. Both CGI and CLI are subsidiaries of Capital Insurance Group Limited (CIGL) and domiciled in Papua New Guinea.
The latest rating actions follow the conclusion of A.M. Best’s full assessment of the rating fundamentals of CLI and CGI, which had been placed under review as part of rating actions taken on June 22, 2018.
The ratings of CLI reflect its balance sheet strength, which A.M. Best categorizes as weak, as well as its adequate operating performance, limited business profile and weak enterprise risk management (ERM). The ratings of CGI reflect its balance sheet strength, which is categorized as strong, as well as its strong operating performance, limited business profile and weak ERM. No rating lift or drag has been applied to either CLI’s or CGI’s ratings in respect of their 100% ownership by CIGL.
CLI’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), has deteriorated to a very weak level following an internal control failure relating to the processing of medical claims. While preparing its full-year 2017 financial statements, CLI’s management team became aware that a large volume of medical claims had not been appropriately processed through its internal systems, which led to notable reserve strengthening and to a change in the view of this portfolio’s performance. While the extent of the issue was fully understood and accounted for, the company delayed finalizing its full-year financial statements.
CLI’s year-end accounts have now been filed, with gross outstanding claim provisions having increased to PGK 12.6 million (USD 4.0 million) at the end of 2017 as compared with PGK 3.9 million in 2016, and the pre-tax operating result falling to a loss of PGK 6.7 million in 2017 (2016: profit of PGK 2.5 million). The company’s shareholders’ equity also deteriorated to PGK 11.5 million at year-end 2017 from PGK 19.3 million in 2016. Additionally, based on unaudited financials for the first six months of 2018, the company recorded a pre-tax loss of PGK 2.6 million, driven by the continued under-performance of the company’s medical portfolio.
Since the incident at CLI, the CIGL group has made key management and personnel changes, sought to rapidly re-price and adjust the scope of cover afforded by its core medical portfolio, as well as strengthen its approach to governance and risk management with the support of third-party consultants. Whilst A.M. Best views these steps favorably, a time lag is expected between these actions being implemented and notable improvements in earnings and balance sheet strength fundamentals arising.
The negative outlook assigned to the ratings of CLI reflects the company’s very small absolute capital base, which is viewed to be highly sensitive to any further deterioration in earnings, reserves or other balance sheet items. In addition, while recent events have not resulted in any regulatory action to-date, any change in this position could further impede the rating fundamentals of CLI.
CGI’s strong balance sheet strength assessment is underpinned by its very strong level of risk-adjusted capitalization. The company continues to report strong operating performance, as evidenced by a five-year average return on equity of 30% (2013-2017). Despite CGI being a leader in the Papua New Guinea non-life market, it remains small when compared internationally. Whilst no contagion of the recent issues at CLI is expected at CGI, both companies operate under a common risk management framework, which is currently considered under-developed.
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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