AM Best upgrades outlook to positive due to strong risk management and performance

AM Best has revised the rating outlook to positive from stable for Central Re of Taiwan. At the same time, AM Best has affirmed Central Re’s financial strength rating of A- (Excellent) and issuer credit rating (ICR) of “a-”.

The ratings reflect Central Re’s strengthened risk-based capitalisation, continuous improvement in risk management and stable operating performance. The ratings also recognise the company’s continued efforts in strengthening its overseas market presence in recent years.

Central Re’s net premium leverage ratio (net premium written over adjusted capital and surplus) improved to 1.08 times due to higher retained earnings and an increase in equalisation reserve in 2007. The company’s adjusted capital and surplus (including equalisation reserve) increased to TWD 12,055m ($370m) as at year-end 2007. In AM Best’s view, the company’s risk-adjusted capitalisation is sufficient to support its current ratings as demonstrated by Best’s Capital Adequacy Ratio (BCAR).

Central Re launched its enterprise risk management (ERM) program in 2004. AM Best noted that Central Re has incorporated the results of its risk management model in its strategic decision-making process. AM Best believes that a sound risk management program would help the company to better manage its risk exposure, leading to higher efficiency in capital management.

Central Re has maintained profitable and stable underwriting results with a combined ratio falling within the 90%-97% level in the past five years. Given that Taiwan is a catastrophe-prone country, Central Re’s stable and consistent operating performance has demonstrated its prudent underwriting control and risk management practice.

Offsetting factors are the competitive market condition and limited reinsurance business growth in Taiwan.

Central Re has expanded its business to overseas reinsurance markets in recent years. Given the competitive environment in the reinsurance market in Asia, AM Best believes that it will be a challenge for Central Re to develop its market presence with meaningful scale and profitability in overseas markets. Nonetheless, AM Best will continue to monitor the progress of the company’s overseas expansion plan.

Central Re focused mainly on the domestic reinsurance market, with 94.6% and 93.5% of its gross premiums written generated from Taiwan in 2006 and 2007, respectively. Due to the market consolidation and higher premium retention in Taiwan’s direct insurance market, the size of the reinsurance market in Taiwan has been shrinking in the past four years. Central Re’s business growth is limited by the domestic reinsurance market.