AM Best has removed from under review with negative implications and affirmed Hotai Insurance’s Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” (Good). The FSR outlook is also stable, and the Long-Term ICR outlook is positive.
These ratings reflect the company’s satisfactory operating performance, neutral business profile, marginal enterprise risk management (ERM), and a balance sheet strength assessed as weak by AM Best. The ratings also consider the support the company receives from its ultimate parent, Ho Tai Motor.
The shift to a positive outlook from a negative one and the removal of the under review status reflect the improvements in the company’s balance sheet strength, significantly impacted by pandemic insurance losses. The successful implementation of a mitigation plan substantially enhanced reported shareholders’ equity, improving from a negative TW$4.4 billion as of year-end 2022 to TW$1.8 billion as of June 2023.
Further bolstering the results were a TW$4.5 billion capital injection from Ho Tai Motor, major reserve releases related to pandemic insurance products, and the recovery in earnings and invested asset valuations. The company's capital position was further boosted by over TW$850 million from realized capital gains from property sales completed in August.
AM Best also anticipates a continued strengthening of Hotai Insurance's capital position throughout 2023, supported by the release of pandemic insurance reserves as policies mature, expected favourable operating performance from traditional insurance classes, and return on investments. The projection is for the company to progress from a very weak level as of year-end 2022 to a weak level as of year-end 2023, as measured by Best's Capital Adequacy Ratio (BCAR), with further enhancement anticipated in the following two years, although a return to pre-COVID-19 capital and surplus levels over the same period is unlikely.
AM Best also reported that this steady improvement in risk-adjusted capitalization over the short to intermediate term may lead to a stronger balance sheet strength assessment, provided the company maintains its operating profitability at a pre-pandemic level.
Given the stabilization of ultimate claims amounts related to pandemic insurance products at a lower-than-expected level, Hotai Insurance released some reserves in H1 2023, contributing to a reported net profit of TWD 1.2 billion for the same period. AM Best regards the pandemic insurance losses recorded in fiscal year 2022 as a one-off event and expects the company to achieve favorable operating earnings going forward, supported by profitable underwriting and investment results.
Hotai Insurance demonstrated substantial growth in premium revenue in 2022, particularly in the voluntary motor business, benefiting from Ho Tai Motor’s extensive network of car dealers, while strategically scaling back unprofitable businesses. The company maintained its position as the sixth largest non-life insurer in terms of direct premiums written in 2022. However, Hotai Insurance’s ERM assessment remains marginal due to larger-than-industry average losses, indicating a need for improvement in corporate governance regarding product risk and accumulation risk control.
Overall, AM Best maintains the view of Hotai Insurance as a strategic entity in Ho Tai Motor’s business ecosystem, and the group’s strong fundamentals will continue to provide explicit and implicit support to Hotai Insurance, as evidenced by capital injections.
Elsewhere in the region, AM Best also announced the financial strength ratings of Sompo Japan and Sompo International following its recent scandal with used car dealer Bigmotor.
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