Fitch Rates Pacific & Orient Insurance IFS 'BBB'; Outlook Stable

(The following was released by the rating agency)

(Reuters) - Fitch Ratings has assigned Pacific & Orient Insurance Co. Berhad (POI), Malaysia an Insurer Financial Strength (IFS) rating of 'BBB' with Stable Outlook.

The rating reflects POI's long operating history, secured distribution network, favorable cost structure and strong liquidity. The rating also acknowledges the company's continued efforts to realign its business composition towards higher-margin products within the automobile sector.

With more than three decades of operating history, POI, as a niche player in the motor sector, has been able to source business through 1,500 agents and dealers across Malaysia. It has a dominant position in the motorcycle segment, capturing around 6.6% of the overall automobile insurance market in Malaysia. POI has improved operating efficiency by using its IT system to disseminate products and process claims, leading to a lower cost structure than the industry average.

POI maintains strong liquidity to support the cash outflows arising from its insurance liabilities with more than 83% of its invested assets allocated to cash and deposits. Over the past three years, the company has improved underwriting performance with a strategic shift in its premium mix, a reduction in claims frequency, lower theft incidence as well as by increasing premium loadings, emphasising the sales of all rider coverage for motorcyclists and cross-selling personal accident products. Planned gradual revision of tariff rates in the coming years will further enhance POI's underwriting margin although market competition is expected to remain keen when the government abolishes the tariff system in the motor insurance market in 2016.

Partially offsetting these positive rating factors include a high reliance on reinsurance in relieving its capital strain, and unfavourable claim experience of third party motor liability for the market as a whole. The rating also considers POI's business concentration risk and ongoing intense market competition in motor insurance.

Reinsurance coverage and the RM70m subordinated loans granted in the last quarter of 2010 greatly increased POI's statutory risk-based capital to above 195% as of end-December 2010, far exceeding the regulatory minimum requirement of 130%. Nonetheless, given POI's plans to grow premiums in a highly competitive niche business, Fitch remains cautious on the sustainability of its operating profitability and its impact on capital adequacy.

An increase of risk appetite leading to significant change in POI's investment strategy, deterioration in net premium leverage (consistently higher than 2.1x) and significant increase in net debt leverage beyond 40% may lead to a downgrade. Conversely, the rating may be upgraded if POI is able to maintain its prevailing underwriting margin while enhancing its risk-based capitalization (as measured by Fitch's internal capital adequacy ratio).

Contact: Primary Analyst Terrence Wong Director +852 2263 9920 Fitch (Hong Kong) Limited 28th Floor, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Jeffrey Liew Senior Director +852 2263 9939 Committee Chairperson Chris Waterman Managing Director +44 20 74176328

Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: shivani.sundralingam@fitchratings.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.