AM Best has removed from under review with negative implications and downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to "bbb" from "bbb+" and affirmed the Financial Strength Rating of B++ (Good) of Tune Protect Re Ltd. (TPR) (Malaysia). The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings reflect TPR’s balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The downgrade of the Long-Term ICR follows a deterioration in AM Best’s view of TPR’s operating performance assessment. Despite TPR having historically reported favourable operating performance metrics, its premium volume and net profit have declined significantly in the first half of 2020 as a result of the COVID-19 pandemic, which has driven a severe reduction in demand for TPR’s primary product line of travel insurance. While the company has promptly lowered its marketing expenditure and other management costs, AM Best expects TPR’s operating results to depict elevated volatility and fall short of historical levels over the medium term. Nonetheless, the company’s claim experience has not been impacted notably by the COVID-19 pandemic to date, and investment income has remained stable.
AM Best assesses TPR’s balance sheet strength as strong. The company’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), remained at the strongest level at year-end 2019, underpinned by its low underwriting leverage. However, an offsetting balance sheet factor is the modest size of the company’s absolute capital base, which increases the sensitivity of capital adequacy to shock events, changes in operating performance or material movements in key balance sheet items.
AM Best assesses TPR’s business profile as limited. As a single-product focused reinsurer, TPR’s business model is linked closely to, and heavily reliant on, travel insurance products that are distributed principally through the AirAsia group, an airline operator headquartered in Malaysia. In 2019, business sourced through this distribution channel accounted for approximately 80% of TPR’s revenues. During the recent period of disruption to airline travel, TPR has sought to place increased emphasis on its non-travel products and other business initiatives; however, these are currently small contributors to its overall premium base.
The negative outlooks reflect AM Best’s expectation of an increasingly challenging operating environment for TPR over the near to intermediate term, caused by the prevailing COVID-19 pandemic. AM Best expects this environment to drive heightened volatility and pressure on the company’s operating performance metrics. In addition, the company’s business profile remains sensitive to any unexpected changes in key distribution partners, as well as longer-term demand for air travel and associated insurance products.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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Tran Nhat Trung
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