AM Best Affirms Credit Ratings of Lonpac Insurance Bhd

AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of "a" (Excellent) of Lonpac Insurance Bhd (Lonpac) (Malaysia). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect Lonpac's balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

Lonpac's risk-adjusted capitalisation is at the strongest level at year-end 2022, as measured by Best's Capital Adequacy Ratio (BCAR), and is expected to remain at this level over the near to medium term. Despite a high dividend payout ratio over the past five years (2018-2022), the company has demonstrated strong capital growth from retained earnings over this period. In addition, the company has a generally conservative investment portfolio comprising cash, bonds and debt-focused unit trust funds. However, Lonpac is viewed 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 the company's operating performance as strong, as evidenced by its five-year average return-on-equity ratio of 28.3% and combined ratio of 67.5% (2018-2022). The company observed an uptick in claims activity in 2022 and the first 10 months of 2023 mainly due to easing of COVID-19-related movement restrictions in Malaysia. Underwriting margins for property and bond classes of business have benefited from low net loss experience and favourable reinsurance commission income over a number of years, which remain the key drivers of technical profitability. Investment returns continue to be a stable contributor to overall earnings. As of 31 October 2023, Lonpac's operating performance remains favourable, driven by stable underwriting profit and investment performance. Whilst AM Best expects Lonpac to maintain its strong operating performance over the medium term, claims normalisation and reinsurance market hardening, as well as the ongoing phased liberalisation of motor and fire insurance pricing in Malaysia may constrain underwriting margins over the near to medium term.

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 2022 gross direct premium. The company's underwriting portfolio is diversified moderately by line of business, albeit with majority of business originating from Malaysia. Lonpac benefits from a long-standing relationship with Public Bank Berhad, which provides the company with preferential access to profitable property business through the banking channel.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

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