Best Assigns FSR to Luen Fung Hang Insurance Co.

August 16, 2005

A.M. Best Co. has assigned a financial strength rating of A- (Excellent) to Luen Fung Hang Insurance Company Limited (LFH) (Macau). The rating outlook is stable.

The rating reflects LFH’s stable and profitable operating performance, adequate capitalization, prudent investment portfolio, well-established local presence and strong distribution support from its bank parents, Bank of China (Macau branch), Tai Fung Bank, Weng Hang Bank and Hang Seng Bank.

With more than 20 years of operating history, LFH has established a favorable market position in the local non-life market. Its strong market presence is underpinned by its bancassurance relationship with its parent banks’ extensive distribution network and customer base in Macau. LFH is the third largest non-life insurer in Macau, capturing about 18% of the non-life market share in 2004. The bancassurance channel produced approximately 47% of its gross premiums written.

Despite continued softening rates in the non-life market in Macau, LFH achieved persistent operating profitability. For the past five years, the company’s loss ratio has been maintained at a level lower than 35%, further demonstrating its prudent underwriting practices and the good quality of business. Both favorable underwriting experience and consistent investment yield contributed favorably to LFH’s operating results.

LFH recorded consistent growth in capitalization through retention of earnings. The company’s capitalization grew at an average rate of 7.9% over the past five years. The Best’s Capital Adequacy Ratio, which measures capitalization on a risk-adjusted basis, illustrates that LFH is adequately capitalized. Additionally, the company has a highly liquid investment portfolio, with cash and fixed deposits accounting for more than 48% of its total assets in 2004.

Offsetting factors include the capital requirement to support the rapid expansion of LFH’s life subsidiary, relatively high expense ratio and the intense competition in Macau’s insurance market.

LFH experienced higher acquisition costs than its peers. The company’s expense ratio stood at 50% in 2004, although it has trended downward over the last five years. Going forward, further reduction in the expense ratio could strengthen the company’s underwriting margin.

LFH infused capital of MOP 22.5 million in Luen Fung Hang Life Limited (LFHL), a 75% owned life subsidiary, to facilitate the rapid expansion of the life operation in 2005. Ongoing capital support coupled with uncertainties relative to the future operating performance of its life subsidiary, however, could challenge LFH’s financial flexibility in the future.

Regardless of the increasing demand for general insurance products due to the dynamic economic growth in Macau, fiercer market competition as a result of an increase in the number of market participants such as international brokers could undermine LFH’s capability to secure a stronger market profile in the local non-life sector in the mid- to long-term.

Was this article valuable?

Here are more articles you may enjoy.