SINGAPORE–(BUSINESS WIRE)–A.M. Best has removed from under review with negative
implications and affirmed the Financial Strength Rating (FSR) of C++
(Marginal) and the Long-Term Issuer Credit Rating (Long-Term ICR) of
“b+” of Capital General Insurance Company Limited (CGI). Concurrently,
A.M. Best has removed from under review with negative implications and
affirmed the FSR of C- (Weak) and Long-Term ICR of “cc” of Capital Life
Insurance Company Limited (CLI). The outlook assigned to CLI’s Credit
Ratings (ratings) is negative. The outlook assigned to the ratings of
CGI is stable. Both CGI and CLI are subsidiaries of Capital Insurance
Group Limited (CIGL) and domiciled in Papua New Guinea.
The latest rating actions follow the conclusion of A.M. Best’s full
assessment of the rating fundamentals of CLI and CGI, which had been
placed under review as part of rating actions taken on June 22, 2018.
The ratings of CLI reflect its balance sheet strength, which A.M. Best
categorizes as weak, as well as its adequate operating performance,
limited business profile and weak enterprise risk management (ERM). The
ratings of CGI reflect its balance sheet strength, which is categorized
as strong, as well as its strong operating performance, limited business
profile and weak ERM. No rating lift or drag has been applied to either
CLI’s or CGI’s ratings in respect of their 100% ownership by CIGL.
CLI’s risk-adjusted capitalization, as measured by Best’s Capital
Adequacy Ratio (BCAR), has deteriorated to a very weak level following
an internal control failure relating to the processing of medical
claims. While preparing its full-year 2017 financial statements, CLI’s
management team became aware that a large volume of medical claims had
not been appropriately processed through its internal systems, which led
to notable reserve strengthening and to a change in the view of this
portfolio’s performance. While the extent of the issue was fully
understood and accounted for, the company delayed finalizing its
full-year financial statements.
CLI’s year-end accounts have now been filed, with gross outstanding
claim provisions having increased to PGK 12.6 million (USD 4.0 million)
at the end of 2017 as compared with PGK 3.9 million in 2016, and the
pre-tax operating result falling to a loss of PGK 6.7 million in 2017
(2016: profit of PGK 2.5 million). The company’s shareholders’ equity
also deteriorated to PGK 11.5 million at year-end 2017 from PGK 19.3
million in 2016. Additionally, based on unaudited financials for the
first six months of 2018, the company recorded a pre-tax loss of PGK 2.6
million, driven by the continued under-performance of the company’s
Since the incident at CLI, the CIGL group has made key management and
personnel changes, sought to rapidly re-price and adjust the scope of
cover afforded by its core medical portfolio, as well as strengthen its
approach to governance and risk management with the support of
third-party consultants. Whilst A.M. Best views these steps favorably, a
time lag is expected between these actions being implemented and notable
improvements in earnings and balance sheet strength fundamentals arising.
The negative outlook assigned to the ratings of CLI reflects the
company’s very small absolute capital base, which is viewed to be highly
sensitive to any further deterioration in earnings, reserves or other
balance sheet items. In addition, while recent events have not resulted
in any regulatory action to-date, any change in this position could
further impede the rating fundamentals of CLI.
CGI’s strong balance sheet strength assessment is underpinned by its
very strong level of risk-adjusted capitalization. The company continues
to report strong operating performance, as evidenced by a five-year
average return on equity of 30% (2013-2017). Despite CGI being a leader
in the Papua New Guinea non-life market, it remains small when compared
internationally. Whilst no contagion of the recent issues at CLI is
expected at CGI, both companies operate under a common risk management
framework, which is currently considered under-developed.
Ratings are communicated to rated entities prior to publication.
Unless stated otherwise, the ratings were not amended subsequent to that
This press release relates to Credit Ratings that have been published
on A.M. Best’s website. For all rating information relating to the
release and pertinent disclosures, including details of the office
responsible for issuing each of the individual ratings referenced in
this release, please see A.M. Best’s Recent
Rating Activity web page. For additional information
regarding the use and limitations of Credit Rating opinions, please view Understanding
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use of Best’s Credit Ratings and A.M. Best press releases, please view Guide
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Action Press Releases.
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