Best Affirms FSR for Central Reinsurance; Outlook is Stable

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and the issuer credit rating (ICR) of “a-” of Central Reinsurance Corporation (Central Re) (Taiwan). The outlook for both ratings is stable.

The ratings reflect Central Re’s improvement in capitalization, consistent operating performance and well-established presence in Taiwan.

Central Re’s capital and surplus increased to TWD 5.3 billion (USD 165 million) in 2004 from TWD 4.5 billion (USD 140 million) in 2003. This was mainly supported by a capital injection of TWD 0.6 billion (USD 19 million). The most recent capital injection occurred in August of 2005 and increased paid up capital by TWD 0.8 billion (USD 25 million). Adjusted net underwriting leverage has significantly improved from 1.7 times in 2003 to 1.5 times in 2004. These capital injections have demonstrated that shareholders of Central Re are committed to supporting the company for its future development.

Central Re has achieved stable underwriting results in the past five years. The company’s combined ratio has stayed in the range of 96% to 97% for that period. Benefiting from an increase in net underwriting income, Central Re’s net profit after tax increased from TWD 359 million (USD 11 million) in 2003 to TWD 399 million (USD 12 million) in 2004.

Central Re no longer has priority to accept reinsurance business in Taiwan after the termination of the “Central Reinsurance Corporation Act” on 23 June 2004. However, given the company’s over thirty years of building relationships with local insurance companies, Central Re has been able to maintain its business in Taiwan. Gross premiums written decreased slightly by 1.9% in 2004, due mainly to the soft pricing environment, but increased by 10% for the first nine months of 2005.

Offsetting factors include Central Re’s higher earthquake catastrophe exposure and an increase in competition in Taiwan’s insurance market.

Central Re’s earthquake catastrophe exposure increased substantially in the past two years. Premium income from earthquake coverage increased by 41% and 99% in 2003 and 2004, respectively. Providing comfort is that Central Re has increased its catastrophic excess of loss retrocession limit.

Taiwan’s insurance market was liberalized in recent years causing intense pricing competition, especially in the fire line of business. This competition has put pressure on the premium income of Central Re.

A.M. Best expects that Central Re will still be facing pricing competition in the future, given that the Taiwan market will continue to liberalize.