26 February 2024news

AM Best affirms Energas ratings but assigns negative outlook

AM Best has affirmed the financial strength rating of A (Excellent) and the long-term issuer credit rating of “a” (Excellent) of Energas Insurance. The outlook of these ratings is negative.

The rating agency said that the decision reflects Energas’ balance sheet strength, which it assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management. 

In addition, the ratings factor in the neutral impact from the parent, Petroliam Nasional Berhad (PETRONAS), which is the national oil and gas company of Malaysia.

Energas’ balance sheet strength assessment is underpinned by its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), which is expected to remain at the strongest level over the medium term. AM Best views Energas’ investment portfolio as conservative, with a majority of investments allocated to cash and deposits, and the remainder invested in good quality government and corporate bonds. 

Capital requirements arising from underwriting risks are viewed to be low given the company’s low net underwriting leverage, though the accumulation of high severity losses from multiple policies may still lead to moderate balance sheet volatility. An offsetting balance sheet strength factor is the company’s reliance on reinsurance to manage its exposure to accumulation and large single risks. Nonetheless, credit risk is partially mitigated by the use of a good credit quality reinsurance panel.

AM Best said that it views Energas’ operating performance as strong, supported by its five-year average combined ratio of 68.4% (2018-2022). The company’s net underwriting margins have historically benefitted from favourable reinsurance commission income and low management expenses relative to net earned premium. However, higher than expected frequency of large losses, accompanied by recent increases in its stop loss reinsurance programme’s aggregate retention level has led to increased volatility in its underwriting performance in recent years. Consequently, the company is expected to report a single digit negative return on equity ratio for financial year 2023, notwithstanding a planned turnaround over the near to medium term. Investment income is expected to be a key contributor to the company’s bottom-line over the medium term.

AM Best considers Energas’ business profile as neutral. As a single-parent captive to PETRONAS, Energas benefits from business access to the group’s insurance risks. However, the company’s underwriting portfolio shows concentration by line of business and geography, with a significant focus on upstream and downstream energy risks located in Malaysia.

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