OREANDA-NEWS. Fitch Ratings has affirmed Pacific & Orient Insurance Co. Berhad's (POI) Insurer Financial Strength (IFS) Rating at 'BBB+' with Stable Outlook.

KEY RATING DRIVERS
The rating affirmation reflects POI's strong capitalisation and overall stable financial fundamentals, underpinned by a disciplined underwriting approach and efficient distribution in the motorcycle insurance industry. However, its rating is constrained by its focus on the small niche market and its volatile reserving experience amid the industry-wide underwriting deficit for third-party motor insurance in Malaysia.

POI maintained its regulatory capital ratio above 200% at end-September 2015 (end-FY15), well beyond the regulatory minimum of 130%. Its capitalisation as measured by Fitch's Prism Factor-Based Capital Model remained in the 'Strong' category for FY15. This was largely due to lower premium risk charges and minimal catastrophe risk exposure, given its business concentration in the relatively catastrophe-free Malaysia.

POI's underwriting performance deteriorated in FY15 due to lower gross premiums from stiff market competition and a substantial MYR35m increase in net claims liability during the year. This arose from a more conservative method used by the newly appointed actuary and as a result, POI's combined ratio increased to 103% in FY15 from 88% in FY14. The company regarded this increase in reserving as one-off and plans to boost future top-line growth by offering more comprehensive private-car policies and expanding its non-motor segment through the brokering channel. Fitch expects these initiatives to improve POI's underwriting performance in FY16.

More than 80% of POI's gross premiums are derived from the motor class and the company's overall non-life market share in Malaysia measured by gross premiums was 2.7% in 2014. Its reserving experience was volatile in the last five years due to an industry push in prior years to close out older claims. In view of the potential underwriting volatility in its niche motor business, Fitch will continue to monitor POI's reserving practices closely.

The company's investment mix remained prudent and highly liquid, with more than 80% of the invested assets placed in cash and deposits in FY15. POI's exposure to risky assets, such as equity securities, is limited due to the perceived volatility and we do not envisage its investment strategy to deviate significantly in the near term.

RATING SENSITIVITIES
Key rating triggers for a downgrade include deterioration in underwriting performance with combined ratio persistently above 97%, a sustained increase in financial leverage to a level higher than 35% or a weakening in capitalisation with net premiums to adjusted equity above 2x consistently. Deterioration under Fitch's Prism Factor-Based Capital Model measure of capital could be a catalyst for negative rating pressure.

An upgrade for POI is unlikely in the near term. However, the rating could be upgraded over the medium term if the company manages to broaden its market presence and improve its business diversification, while maintaining its combined ratio at below 90%.