HONG KONG--(BUSINESS WIRE)--#insurance--AM Best has downgraded the Financial Strength Rating to B++ (Good) from A (Excellent) and the Long-Term Issuer Credit Rating to �bbb� (Good) from �a� (Excellent) of Hotai Insurance Co., Ltd. (Hotai Insurance) (Taiwan). Concurrently, the under review status of these Credit Ratings (ratings) has been revised to developing implications from negative.

The ratings reflect Hotai Insurance�s balance sheet strength, which AM Best assesses as weak, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM). The ratings also reflect the support that the company receives from its ultimate parent, Ho Tai Motor Co., Ltd. (Ho Tai Motor).

The ratings downgrade reflects the material deterioration in Hotai Insurance�s risk-adjusted capitalisation from the strongest level in 2021 to the very weak level in its 2022 year-end projection, as measured by Best�s Capital Adequacy Ratio (BCAR). This is mainly due to the very significant claims arising from pandemic insurance products, which exceeded the two rounds of capital injection from Ho Tai Motor that totalled TWD 26.0 billion. Given Hotai Insurance�s cash and cash equivalents, and liquid investments, AM Best views the company as being equipped with adequate liquidity to fulfil its claims obligations.

Going forward, AM Best expects capital and surplus growth to resume through full retention of earnings derived from profitable non-pandemic insurance underwriting, albeit it is unlikely to recover to pre-COVID levels over the short to intermediate term. In addition, the company�s ERM assessment was revised to marginal from appropriate to reflect the larger-than-industry average losses experienced by the company, which exposed its shortcomings in corporate governance in product risk and accumulation risk control. The under review with developing implications reflects the uncertainty in the ultimate claims amount, which depends on Taiwan�s COVID-19 development and potential changes in the government�s pandemic policies over the next few months, as well as potential further capital support from Ho Tai Motor if needed.

Hotai Insurance reported a significant net loss of TWD 21.8 billion for the first nine months of 2022, compared to a net profit of TWD 713 million during the same period last year. Notwithstanding, AM Best considers the pandemic insurance loss as a one-off event, and the company is likely to return to profitability and support the adequate operating performance assessment prospectively, given the improving trend in underwriting and operating performance from 2017 to 2021.

Leveraging its long-established relationship with Toyota Motor Corporation, Ho Tai Motor has been the top automotive distributor in Taiwan for two decades and holds a reasonable lead ahead of its competitors. Since Hotai Insurance was acquired in 2017, it has benefitted from the parent�s extensive network of car dealers to achieve rapid growth in the motor business, in addition to active expansion in commercial and personal lines. Going forward, AM Best expects that Hotai Insurance will continue to play a strategic role in Ho Tai Motor�s business ecosystem and the group�s fundamentals will remain strong to provide explicit and implicit support to Hotai Insurance, as demonstrated by the capital injections. The lift assessment reflects AM Best�s expectation that the parent will provide additional explicit support in a timely manner to strengthen the company�s balance sheet strength, if the ultimate pandemic insurance claims losses well exceed the TWD 26.0 billion capital injection.

The ratings will remain under review with developing implications pending increased visibility of the pandemic insurance ultimate loss level and the magnitude of capital impact, as well as the level and timeliness of financial support from the parent. AM Best will continue to hold discussions with Hotai Insurance�s management team on claims development and potential further contingency capital plans if needed to assess the impact to the company�s credit profile.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

This press release relates to Credit Ratings that have been published on AM 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 AM Best�s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best�s Credit Ratings. For information on the proper use of Best�s Credit Ratings, Best�s Performance Assessments, Best�s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best�s Ratings & Assessments.

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