S&P downgrade Dhipaya on weakening capital

 

 

 

The local currency long-term counterparty credit rating and insurer financial strength rating is lowered to 'BBB' from 'BBB+'. The outlook is negative. 

"We lowered the ratings because we believe that Dhipaya's capital position is unlikely to improve to levels that are commensurate with a 'BBB+' rating," said Standard & Poor's credit analyst Philip Chung. "A significant increase in flood-related reinsurance assets and net loss reserves due to last year's floods in Thailand has weakened Dhipaya's capitalisation more than we expected. We anticipate a moderate improvement in capitalization over the next 12-24 months to levels that are commensurate with a 'BBB' rating because of potential earnings retention."

The rating firm also expected flood loss claims to weaken Dhipaya's underwriting results for 2012. However, the company is likely to make an operating profit for the year because of the contribution from its investments. 

"We do not anticipate any further significant increase in flood-related losses because we believe that the company has identified and reserved for most of the losses. However, ultimate losses could still vary from our expectations."

In our opinion, the company's ambitious growth plans could exert further pressure on its capitalisation if there is no fresh capital injection.

"The negative outlook reflects our view that Dhipaya's credit profile could further weaken over the next 12-24 months due to the uncertainty surrounding the extent of flood-related losses," said Mr. Chung. 

In addition, losses from market agreements (sharing of business with other insurers) and from business interruption claims could further develop and negatively affect the company.

The rating could be lowered again if Dhipaya's capitalisation weakens from the current reported level because of a lower-than-expected improvement over the next 12-24 months, or if risk-adjusted capital, as measured by our capital model, weakens.