Ratings Recap: Aegon, Grafton (Europe), AGA, Inbursa, Malayan

Standard & Poor’s Ratings Services has said that its ratings and outlook on Netherlands-based insurance holding company AEGON N.V. (‘A-‘/Negative/A-2) and its core insurance operating subsidiaries (‘AA-‘/Negative/–) are unaffected by AEGON’s announcement that it aims to issue 173.6 million common shares, equivalent to 10 percent of its issued common share capital. S&P also noted that AEGON’s full-year results for 2010 “were in line with our expectations.” AEGON received €3 billion [$4.14 billion] of capital from the Dutch state in the fourth quarter of 2008, of which €1.5 billion [$2.07 billion was outstanding at year-end 2010. “The equity issuance will help support its intention to fully repay this capital by June 30, 2011, at a cost of €2.25 billion [$3.105 billion], reflecting the 50 percent premium on repayment,” S&P said. “The negative outlook on AEGON reflects continuing risks and uncertainties relating to its ongoing restructuring and recognizes that the operating environment in AEGON’s core markets is still difficult.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Grafton (Europe) Insurance Company Limited, which is based in Malta. The outlook for both ratings is stable. The ratings reflect Grafton’s “innovative financial solution, which provides the captive market with the ability to transfer and finalize long-term liabilities in run-off,” Best explained. The ratings also “reflect the strong profile of the shareholders backing the company as well as the strategic quota share reinsurance agreement with a top-rated primary reinsurer.” As offsetting factors Best cited the “implementation risk associated with the innovative business proposition, which was one of the major reasons for the lower than planned income during the first year of operation, and the risk that a high level of expenses could erode prospective profitability.” Best added that in its opinion, the business proposition of Grafton is “innovative and identifies an untapped opportunity within the captive market. Namely, Grafton acquires long-tailed risks in run-off (specifically liability risks more than three years old), offering finality to the insurance obligations of both the captive and the fronting insurer involved in the transaction. The transfer of the liabilities to Grafton also allows the release of the correlated collateral that had been required by the fronting insurer, providing both capital relief and liquidity easing to the captive and its parent company.” In addition Best pointed out that the “shareholders of Grafton are recognized international investors active in the financial sector, including insurance. In addition to the shareholders’ commitment of £50 million (app. $80 million), corresponding to Grafton’s paid-up capital, the company’s risk-adjusted capitalization and profile are also supported by the 50 percent quota share agreement with the top rated reinsurer National Indemnity Company, a member of Berkshire Hathaway group.” Best said it “believes that Grafton’s technical profitability is underpinned by the prudent margins included in the pricing process, which, coupled with the run-off nature of the portfolio, is likely to reduce the volatility of the results. Nevertheless, due to the company’s operating model being based on the wide use of outsourcing, Best believes that Grafton needs to strictly monitor and manage its level of expenses going forward.” The year of 2010 has been the first year of full operation of Grafton with the company entering into active discussion with a number of clients involving business opportunities worth hundreds of million pounds sterling. The level of clients’ interest is a confirmation of the potential of Grafton’s business offer to penetrate an untapped market; however, there has been just one significant deal closed during the year (with the supermarket group Wm Morrison Supermarkets plc). Best concluded that in its view, the “implementation risk remains the main risk factor as the company struggles to increase its conversion ratio and achieve the targets set in the business plan.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a+” of French-based AGA International SA – formerly Mondial Assistance International SA (MAI) – and its subsidiary, the New York-based Jefferson Insurance Company. The outlook for all ratings remains stable. Best said the ratings reflect AGA’s “adequate risk-adjusted capitalization, continued good operating performance and excellent business profile as a leading worldwide travel insurance and assistance provider. The ratings also take into consideration the implicit support of the company’s ultimate parent, Allianz SE.” The ratings of the Jefferson Insurance Company reflect “enhancement due to explicit support from AGA in the form of an 80 percent quota share reinsurance treaty. AGA’s stand-alone risk-adjusted capitalization is adequate, taking into account the low underwriting volatility that characterizes its specialist lines of business and is demonstrated by a stable loss ratio. In addition, consistent with the short-tail nature of AGA’s insurance liabilities, its investment portfolio includes a significant element of cash and highly liquid investment-grade bonds.” Best also noted that although “AGA’s operating performance has proved resilient in difficult market conditions, pre-tax earnings are expected to weaken in 2010 as a result of claims arising in particular from the Icelandic volcanic ash cloud, leading to an underwriting loss and a modest loss before tax. In 2009, AGA reported positive pre-tax earnings of approximately €20 million [$27.6 million]. The combined ratio increased marginally to 99 percent and in 2010 is likely to be similar, especially after taking into account high acquisition expenses for distribution through large business partners. AGA’s main lines of business are travel insurance and roadside assistance, areas where the company has built a strong brand and extensive expertise. Demand for AGA’s products is likely to grow as economic conditions gradually improve and gross written premiums are expected to have increased to approximately €725 million [app. $1 billion] in 2010 from €645 million [$890 million] in 2009.

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Mexico’s Seguros Inbursa, S.A. Grupo Financiero Inbursa, both with stable outlooks. The ratings reflect Seguros Inbursa’s “solid risk-adjusted capitalization, historical overall profitability and diversified business profile,” said Best. They also reflect the company’s affiliation with Grupo Financiero Inbursa S.A.B. de C.V., one of the largest financial groups in Mexico. “Seguros Inbursa operates as a composite insurer of life and non-life business and remains one of the larger and more profitable domestic insurance companies in Mexico. The company’s focus on expense management, along with consistent levels of investment income, has historically resulted in favorable overall earnings,” Best continued. This has “enabled Seguros Inbursa to continue to enhance its risk-adjusted capitalization. In addition, Seguros Inbursa continues to benefit from synergies and significant operating efficiencies, as a result of its access to Grupo Financiero Inbursa’s vast financial and system networks.” As partial offsetting factors Best cited Seguros Inbursa’s “continuing underwriting losses in key business segments and its reliance on investment income for its overall earnings. In addition, the Mexican insurance market remains very competitive, and Seguros Inbursa will be challenged to maintain profitability and market share.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of the Philippines-based Malayan Insurance Co., Inc. (MICO), both with stable outlooks. Best said the ratings reflect MICO’s “strong business profile, adequate level of capitalization and consistent investment performance. Despite the competitive environment of its main operating market, MICO has maintained its leading position as the largest non-life direct insurer in the Philippines in terms of gross premiums written in 2009.” Best added that the Company’s “capitalization level is supportive of its current ratings and has further strengthened in fiscal year 2009, given its greater surplus growth compared to both its underwriting and assets risks. The company’s investment performance remained good in 2009, generating sufficient earnings to offset the underwriting loss and to record positive net income.” As offsetting factors Best noted the “volatility of the underwriting performance and the competitive operating environment in the non-life insurance sector of the Philippines.” Best explained that the “unfavorable development of MICO’s underwriting profitability is driven by unstable loss ratios and increasing expense ratios. The expense ratio has consistently deteriorated over the past five years to attain approximately 50 percent in fiscal year 2009; it is expected to remain at the same level in the near term. The development trend of the expense ratio induces a thinner buffer for MICO’s underwriting margin. Additionally, given the potential natural catastrophe exposure in the Philippines and higher retention of MICO’s non-marine excess of loss program, its loss ratio is expected to be more volatile in the near term, offsetting the company’s effort to withdraw its participation from unprofitable accounts. Going forward, A.M. Best will remain cautious about the development of the loss ratio as well as MICO’s ability to control its cost structure.”

Topics Europe AM Best Mexico