Ratings Cut on Universal Re

August 5, 2002

Standard & Poor’s Ratings Services lowered its public information (pi) rating on the largest Philippine reinsurer, Universal Reinsurance Corp. Ltd. (Universal Re) to single-“Bpi” from double-“Bpi”.

The downgrade reflects the company’s diminished financial profile against the backdrop of a tougher global reinsurance market and difficult regional operating environment. Universal Re’s profile has been impacted by poorer underwriting results and profitability, the latter evident from a significantly lower return on equity in 2000. The company’s high reliance on retrocession also exposes it to potential counterparty risk, whose quality is uncertain, based on public information. Universal Re’s reserving and solvency are adequate.

S&P noted that despite premium growth in 2000 after two years of decline, Universal Re’s underwriting performance deteriorated significantly. Its combined ratio (expense ratio plus loss ratio) rose to 137.6 percent from 106.6 percent in 1999, attributed to a substantial increase in the loss ratio after the severity and frequency of claims rose in both its life and nonlife businesses. The company’s operating profitability also weakened, with return on equity declining to 3.6 percent in 2000 from 17.4 percent in 1999.

The company’s capitalization remains satisfactory, demonstrated by a solvency ratio (net premiums/net worth) of 35 percent. Nevertheless, the company remains constrained by its small capital base of US$15.3 million.

Universal Re’s reserving is adequate, with a ratio of technical reserves over net premiums written of about 143 percent in 2000. Over the past five years, the company has increased its loss reserves, in line with the higher claims experience in the markets of Southeast Asia.

Universal Re is the largest reinsurer in the Philippines by assets, at Philippine peso 1.4 billion (US$28.1 million). In April 2000, Universal Re became a subsidiary of The Bank of Philippine Islands (BPI) following the merger of BPI with Ayala Insurance Holdings Inc.

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