Lonpac Insurance Bhd’s (Lonpac) insurer financial strength rating has been reaffirmed at AA, with a Stable Outlook. The rating reflects the insurer’s reasonably well diversified business mix, excellent underwriting performance, disciplined underwriting, prudent reserving practices, and high quality investment portfolio. The rating is moderated by the vulnerability of the general insurance sector to slower economic growth, the company’s substantial reinsurance ceded to foreign reinsurers which results in exposure to global reinsurance market pricing cycles, and the highly competitive nature of the domestic general insurance industry.

Relatively diversified in terms of products and distribution channels Lonpac is a midsize personal and commercial lines underwriter with a strong reputation for its focus on client needs and quality. Its major lines are motor, fire as well as workers’ compensation and employers’ liability. The company’s continuing efforts to deepen and expand its distribution channels have met with considerable success. In 2005, the company ranked twelfth amongst the country’s general insurers, with a 3.46% share of the industry’s gross premiums. In terms of net premiums, Lonpac advanced one spot to the fifteenth ranking, with a market share of 2.94% (2003/2004: 2.66% share) in 2005. The company reported a 16% growth in gross premiums for the first nine months of 2006.

Excellent underwriting results Lonpac’s underwriting performance is viewed as strong, as illustrated by a sustained improvement in its combined ratio. The Company’s underwriting margin continued to improve further to 20.6% in FY2005, well above the industry average of 13.1%. This trend is expected to persist with the Company’s focus on pricing adequacy. For the first half of 2006, Lonpac registered an underwriting margin of 22.0%, ranking it as one of the top 5 in terms of underwriting margins registered by the general/composite (general business portion) insurers. During the nine months ended September 30, 2006, Lonpac generated an underwriting surplus of RM41.1 million, representing a 51% increase over the corresponding period in 2005.

Prudent claims recognition and reserving practices Lonpac engages in prudent claims recognition and reserving practices. Its provisions for Incurred But Not Reported (IBNR) reserves have been traditionally in excess of the independent actuary’s recommendation by a commendable margin.

Industry cyclicality and substantial foreign reinsurance placements Even though the general insurance sector is currently profitable, the industry remains vulnerable to slower economic growth, cyclical pricing, and heightened competition from old as well as new competitors, such as takaful operators. Lonpac has a substantial exposure to foreign reinsurers; with foreign reinsurance of contractors’ all risks (CAR) chalking approximately 29% of total reinsurance ceded to foreign insurers. However, the company retains strong support from global reinsurers with good ratings.