HONG KONG –(BUSINESS WIRE) —Best in the morning The negative impact review has been lifted, and the financial strength rating (FSR) of Hotai Insurance Co., Ltd. has been confirmed as B++ (good), and the long-term issuer credit rating (long-term ICR) is “bbb” (good). (Hotai Insurance) (Taiwan). The outlook for the FSR is stable, while the outlook for the long-term ICR is positive.
The credit rating (Rating) reflects Hotai Insurance’s balance sheet strength, which AM Best assesses as weak, as well as its strong operating performance, neutral business profile and marginal enterprise risk management (ERM). The rating also reflects the support the company receives from its ultimate parent Hotai Automobile Co., Ltd. (Hotai Automobile).
The removal of under review status and the change of the long-term ICR outlook from negative to positive connotations reflect uncertainty about the company’s balance sheet strength, which has been significantly reduced (due to pandemic insurance losses). The successful execution of the mitigation plan improved reported shareholder equity from negative NT$4.4 billion at the end of 2022 to NT$1.8 billion as of June 2023. The improvement was based on a capital injection of NT$4.5 billion into Hotai Auto, which mainly released reserves related to epidemic insurance products, as well as a recovery in earnings and investment asset valuations during the same period. In addition, capital gains realized from property sales completed in August 2023 further strengthened the company’s capital position to over NT$850 million. Additionally, AM Best expects Hotai Insurance’s capital position to continue to strengthen over the remainder of 2023, supported by the release of pandemic insurance reserves and an unlikely adverse deterioration in final claims amounts as policies mature, and expected favorable operating performance across traditional insurance categories and investment returns. AM Best expects the company, as measured by Best’s capital adequacy ratio (BCAR), to improve from very weak levels at the end of 2022 to weak levels at the end of 2023, before strengthening further over the next two years; although capital and earnings are unlikely to be at the same level period to return to pre-COVID-19 levels. AM Best expects that gradual improvement in Hotai Insurance’s risk-adjusted capital in the short to medium term may support a stronger balance sheet strength assessment, while the company’s operating profitability levels will return to and be maintained at pre-pandemic levels.
As the final claim amount related to epidemic insurance products stabilized at a lower-than-expected level, Hotai Insurance released some reserves in the first half of 2023, partially supporting a net profit of NT$1.2 billion in the same period. AM Best views the pandemic insurance losses recorded in fiscal 2022 as a one-off event and expects the company to deliver good operating earnings going forward, supported by profitable underwriting and investment performance.
Good growth in the voluntary auto business, supported by Hotai Auto’s extensive car dealer network, supports Hotai Insurance’s premium income to continue to grow at an above-average rate in 2022, while shrinking some unprofitable businesses. The company will remain the sixth-largest non-life insurance company in terms of direct premiums written in 2022. However, Hotai Insurance’s ERM assessment remains marginal, reflecting that the company suffered losses higher than the industry average, which exposed the company’s shortcomings in corporate governance in terms of product risk and cumulative risk control.
AM Best continues to view Hotai Insurance as a strategic entity within Hotai Automotive’s business ecosystem and the group’s fundamentals will remain strong, providing explicit and implicit support to Hotai Insurance, as evidenced by this capital injection.
Positive rating action could result if Hotai Insurance’s risk-adjusted capital continues to improve due to a strengthened capital base from earnings retention or a reduction in underwriting and asset risks. Negative rating action could occur if the company experiences a material and sustained deterioration in its operating results, particularly its non-pandemic traditional underwriting portfolio and investment performance. A deterioration in Hotai Auto’s credit profile or the extent of its support to Hotai Insurance could also have a negative impact on Hotai Insurance’s ratings.
Ratings are communicated to the rating entity prior to issuance. Unless otherwise noted, ratings have not been modified following this communication.
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