Lonpac Insurance's operating performance is deemed as strong, with the company reporting a five-year average return-on-equity ratio of 34.7% and combined ratio of 66.5% (2015-2019), notes AM Best.
The company’s property and marine classes of business, which have benefited from low net loss experience and favourable reinsurance commission income over a number of years, remain key drivers of technical profitability.
Investment returns continue to contribute positively to overall earnings, with a five-year average net investment return (including gains/losses) of 3.5% (2015-2019).
Over the medium term, AM Best expects a challenging operating environment arising from the COVID-19 pandemic and the continued phased liberalisation of motor and fire insurance pricing in Malaysia to put pressure on the company’s operating performance metrics. Nonetheless, the company continues to enhance its pricing and risk selection capabilities, as well as strengthen its distribution and product design; all aimed at maintaining strong underwriting and operating performance.
AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” of Lonpac Insurance. The outlook of these credit ratings is stable.
The ratings reflect Lonpac’s balance sheet strength, which AM Best categorises as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).
Lonpac’s balance sheet strength is underpinned by its risk-adjusted capitalisation that remains at the strongest level, as measured by Best’s Capital Adequacy Ratio. Despite a high dividend payout ratio over the past five years (2015-2019), the company has demonstrated strong capital growth from retained earnings.
The company has a typically conservative investment strategy, with a focus on cash and high-quality fixed interest securities, although there is some concentration in invested assets to an affiliated financial institution. Prospectively, AM Best expects the company to place a greater allocation of its investments in unit trust funds given the low interest rate environment.
Furthermore, AM Best views Lonpac to have a moderate dependence on third-party reinsurance to enable the underwriting of large limit risks and to manage catastrophe exposure accumulation.
AM Best views Lonpac’s business profile as neutral. The company is a mid-sized non-life insurer in Malaysia, with a market share of approximately 8%, based on 2019 gross premium written. The majority of Lonpac’s business originates from Malaysia, with approximately 6% of 2019 GPW generated from Singapore via an offshore branch. Lonpac continues to benefit from a long-standing relationship with Public Bank, which provides the company with preferential access to profitable property business through the banking channel. Despite slow premium growth in Malaysia’s non-life market over the past few years, the company has continued to grow its business while maintaining good profitability.
AM Best considers Lonpac’s ERM approach as appropriate given the size and complexity of its operations. The company has a risk management and internal control framework to identify, evaluate and manage key risks on a frequent basis.