AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” (Good) of Hotai Insurance Co., Ltd. (Hotai Insurance) (Taiwan). The outlook assigned to the FSR is stable, while the outlook assigned to the Long-Term ICR is positive.
The Credit Ratings (ratings) reflect Hotai Insurance’s balance sheet strength, which AM Best assesses as weak, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM). The ratings also reflect the support that the company receives from its ultimate parent, Ho Tai Motor Co., Ltd. (Ho Tai Motor).
The removal of the under review status and the assignment of the Long-Term ICR outlook of positive from a negative implication reflects the uncertainties on the company’s balance sheet strength, which (due to pandemic insurance losses) has largely reduced. The successful execution of the mitigation plan has improved the reported shareholders’ equity from a negative amount of TWD 4.4 billion as of year-end 2022, to TWD 1.8 billion as of the end of June 2023. The improvement is underpinned by a capital injection worth TWD 4.5 billion from Ho Tai Motor, major reserve release pertaining to pandemic insurance products and recovery in earnings and invested asset valuations during the same period. In addition, the company’s capital position has been further enhanced by more than TWD 850 million from realized capital gains from property sales completed in August 2023. Furthermore, AM Best expects Hotai Insurance’s capital position will continue to strengthen for the remainder of 2023, supported by the release of pandemic insurance reserves as the policies reach maturity and the ultimate claims amounts are unlikely to adversely deteriorate, as well as the expected favourable operating performance from traditional insurance classes and investments return. AM Best projects the company to improve from the very weak level as of year-end 2022, to the weak level as of year-end 2023, as measured by Best’s Capital Adequacy Ratio (BCAR) before further strengthening in the next two years; although the capital and surplus is unlikely to return to pre-COVID-19 levels over the same time period. AM Best expects that the gradual improvement in Hotai Insurance's risk-adjusted capitalisation over the short to intermediate term may support a stronger balance sheet strength assessment, while the company returns and maintains its operating profitability level to a pre-pandemic level.
As the ultimate claims amounts related to pandemic insurance products stabilized at a lower-than-expected level, Hotai Insurance released some reserves during the first half of 2023, which partially supported the reported net profit of TWD 1.2 billion for the same six-month period. AM Best views the pandemic insurance losses recorded in fiscal-year 2022 as a one-off event and expects the company to deliver favourable operating earnings going forward, supported by profitable underwriting and investment results.
Hotai Insurance continued to grow its premium revenue at faster-than-average pace in 2022, underpinned by good growth in the voluntary motor business with the support of Ho Tai Motor’s extensive network of car dealers, while scaling back some unprofitable businesses. The company remained as the sixth largest non-life insurer in terms of direct premiums written in 2022. Nevertheless, Hotai Insurance’s ERM assessment remained marginal to reflect the larger-than-industry average losses experienced by the company, which exposed its shortcomings in corporate governance in product risk and accumulation risk control.
AM Best continues to view Hotai Insurance as a strategic entity in Ho Tai Motor’s business ecosystem and the group’s fundamentals will remain strong to provide explicit and implicit support to Hotai Insurance, as demonstrated by the capital injections.
Positive rating actions could occur if there is a sustained improvement in Hotai Insurance’s risk-adjusted capitalisation, due to a strengthened capital base from earnings retention or a reduction in underwriting and asset risks. Negative rating actions could occur if the company exhibits material and sustained deterioration in its operating performance, specifically in its non-pandemic traditional underwriting portfolio and investment results. A deterioration in the credit profile of Ho Tai Motor or its level of support to Hotai Insurance may also pose a negative impact on Hotai Insurance’s ratings.
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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