A.M. Best Co. has reaffirmed the financial strength rating of B++ (Good) and issuer credit rating (ICR) of “bbb” of National Reinsurance Corporation of the Philippines (PhilNaRe) (Philippines). The outlook for both ratings is stable.

The ratings reflect PhilNaRe’s adequate capitalization, established market presence in the Philippines and conservative investment portfolio.

PhilNaRe’s risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), remained strong in 2009 and is expected to be adequate to support the company’s future premium growth in the next three years, regardless of the expected drop of the BCAR.

As the only domestic reinsurance company in the Philippines and considered its long history, PhilNaRe has established a good presence in the Filipino market.

PhilNaRe has a conservative investment portfolio, which has enabled the company to generate a stable investment income over the past five years. Positive investment incomes were influential in offsetting the underwriting losses over the past five years, except in 2007.

Offsetting rating factors include the deteriorating trend of the combined ratio and high catastrophe exposure in the Philippines. The unfavorable development of the combined ratio since 2008 arises from the instability of both the loss and expense ratios. The volatility of the loss ratio is attributed to several individual fire and marine claims and catastrophe-related losses. The loss ratio is expected to deteriorate in 2010 partly due to late claims reporting from the cedants. The expense ratio was in an upward trend in 2009, with the increase of the commission paid and the surge of the provision for impairment losses from cedants. The latter has been significantly reduced in the third quarter of 2010.

The underwriting performance is expected to remain poor in 2010. To overcome this unfavorable underwriting result, PhilNaRe continues to tighten its underwriting guidelines in its property business.

Although the company’s current risk-adjusted capitalization is adequate, continuing unsatisfactory underwriting performance and excess dividend payout will create pressure on the capitalization level, and thus, on the stability of the ratings.