TEXT-S&P summary: Falcon Insurance Co. (Hong Kong) Ltd.

(The following statement was released by the rating agency)

Jan 22 -

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Summary analysis -- Falcon Insurance Co. (Hong Kong) Ltd. --------- 22-Jan-2013

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CREDIT RATING: None. Please see issue list. Country: Hong Kong

Primary SIC: Fire, marine, and

casualty

insurance

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Financial Strength Rating History:

29-Apr-2002 A-

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Rationale

The rating on Falcon Insurance Co. (Hong Kong) Ltd. (Falcon HK) reflects

explicit support provided in the form of a guarantee by Odyssey Reinsurance

Co. (Odyssey Re; local currency A-/Positive/--), a subsidiary of Falcon HK's

ultimate parent, Fairfax Financial Holdings Ltd. (BBB-/Positive/--).

Falcon HK's stand-alone credit profile is still weak, even though it has

improved over the past year. The stand-alone credit profile reflects the

company's marginal market position in Hong Kong's general insurance market,

its less favorable capitalization, and high equity investments. Offsetting

factors are the company's satisfactory operating performance, which has

improved over the past year, and its adequate liquidity.

We attribute Falcon HK's significant growth in terms of gross premiums in the

past two years to a revision in strategy. Since 2009, the company has

realigned its strategy to target mainly marine hull, regional property, and

other commercial lines, with help from regional group companies in terms of

knowledge sharing. However, we expect Falcon HK's top-line growth to slow over

the next two years to reflect the company's realigned strategy. Falcon HK

receives significant inward reinsurance business from Singapore-based First

Capital Insurance Ltd. We consider this business to be profitable although it

carries significant risk. Nevertheless, Falcon HK still needs time to prove

that its strategy has been successful in Hong Kong. The company still has a

marginal business position in the competitive Hong Kong general insurance

market. It had a market share of 2% in terms of gross premiums in 2011. Falcon

HK continues to operate its Hong Kong personal and commercial business through

its agency force and broker network.

Falcon HK's product mix changed slightly in line with the new business

strategy. The largest contributor to the gross premiums written was the motor

business (23.9%), while the contribution from the marine business reduced

(23.2%) because the company focused less on unprofitable segments within the

marine lines business. The rest of Falcon HK's portfolio includes employees'

compensation (24%), property damage (12.1%), and others (16.8%) segments.

We expect Falcon HK's underwriting performance to continue to improve over the

next 18 months due to tightened underwriting control in its HK business and

higher premiums in the compulsory liabilities business. The combined ratio

fell to 99.2% in 2011 from 113.7% in 2010. This was primarily due to an

improved loss ratio of 69.9% in 2011 (80.8% in 2010) as a result of the

company's new strategy.

We consider Falcon HK's investment profile as satisfactory, but its equity

investment exposure remains significant. At the end of 2011, 25.9% of its

assets were invested in stocks and mutual funds. The rest included

fixed-income securities (42.2%) and cash (31.8%). Falcon benefits from the

investment expertise of Hamblin Watsa Investment Counsel Ltd., a 100%-owned

subsidiary of Fairfax.

While Falcon HK's capitalization is commensurate with the stand-alone credit

profile, based on our capital model analysis, it is weak reflecting the

company's small size and risky assets exposure. The company's ratio of

shareholders' funds to net premium income is about 108% as of the end of 2011.

Enterprise risk management

Falcon HK's enterprise risk management (ERM) framework is integrated with that

of the wider group. We assess the company's parent, Fairfax, as having

adequate ERM. Our belief that adequate risk controls are in place for the

majority of the group's risks is the primary factor supporting our overall

risk assessment. The recent formalization of the organization's ERM efforts,

combined with partially centralized risk aggregation and control, currently

limits a stronger assessment.

Outlook

The positive outlook reflects the outlook on Odyssey Re based on explicit

support in the form of a guarantee. We will upgrade Falcon HK if we raise the

rating on Fairfax's guaranteeing entity. Conversely, we will revise the

outlook on Falcon HK to stable if we revise the outlook of the guarantor to

stable.

Source: http://news.yahoo.com/text-p-summary-falcon-insurance-co-hong-kong-094911501--sector.html

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