Ratings Recap: Kuwait Re, Ageas, Al Fajer Re, Generali (Notes)

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Kuwait Reinsurance Company K.S.C. (Closed), but has maintained a negative outlook on the ratings. Best said the ratings reflect the company’s “good level of risk-adjusted capitalization and good track history of generating profits.” Best explained that the maintenance of the negative outlook is “due to recent volatilities of technical earnings associated with Kuwait Re’s inward retrocession business. Earnings volatility is likely to be mitigated through non-renewal of Kuwait Re’s major loss-making contract, which had material exposure to natural catastrophe events in the last two years. Additionally, Kuwait Re has made a concerted effort to improve risk management to provide adequate protection to its profile, for which the effectiveness will need to be assessed prospectively.” Best also noted that “Kuwait Re’s risk-adjusted capitalization deteriorated in 2011 but remains supportive of its current ratings. The decrease in Kuwait Re’s capital position resulted from higher loss reserves to catastrophic events in 2011, in addition to its capital demand emanating from its exposure to unquoted private equity investments.” However, Best indicated that going forward, it believes “risk-adjusted capitalization is likely to be strengthened with an improved level of profitability and profit retention.” Best also acknowledged Kuwait Re’s “sound track record of generating profits, although technical losses have occurred within the last two years. Underwriting losses stemmed from poor performance of Kuwait Re’s main retrocession inward business in 2010 and 2011, which has been fully offset by a sound investment performance. In 2011, investment returns totaled US$4.7 million and profit before tax reached US$1.5 million, a decrease of 70 percent compared to last year’s result. Going forward, investment returns are likely to remain stable and complement the company’s technical performance. In light of recent results, Kuwait Re has taken a series of actions to mitigate losses. In addition to the non-renewal of its main retro inward program, Kuwait Re has introduced a risk tolerance for its entire portfolio, including its other retrocession contract. As evidenced by 2012 first quarter results, these measures have already taken effect, demonstrated by an improvement in the company’s performance. Technical profits totaled US$689,626 and profit before tax was US$2.3 million, contrasting with losses of US$3.6 million in the same period last year.” Best said “positive rating actions are likely to stem from a good operating performance and a decrease in Kuwait Re’s combined ratio. Negative rating actions are likely to be driven by a deterioration in technical performance and/or a material reduction in the company’s risk-adjusted capitalization.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Hong Kong-based Ageas Insurance Company (Asia) Limited (AICA), both with stable outlooks. The ratings reflect AICA’s “solid risk-adjusted capitalization,” said Best, adding that the parent group, Ageas N.V., injected US$130 million in 2011 to strengthen AICA’s capitalization and solvency. “Unrealized investment gains from the company’s available-for-sale fixed income asset portfolio increased its capital further. AICA’s distribution channels were developed with higher productivity,” Best continued. “The number of agents and the volume of new business generated rebounded consistently after the global financial crisis in 2008. The new independent financial advisor channel grew steadily to contribute around one-fifth of new premium in 2011. The balanced product package was able to meet the market needs.” In addition the report noted that the “prudent investment strategies of AICA reduced its exposure to risky assets. Low equity exposure protected the company from a severe capital loss under a weak equity market performance in 2011. The asset portfolio was highly liquid, with most assets allocated in investment-graded fixed income securities.” As a partial offsetting factor Best cited “AICA’s volatile statutory solvency ratio. The solvency ratio dropped during 2011 as the company had to increase its reserves due to the fall in the U.S. Treasury rate. The long duration of product liability led to high interest rate risk exposure for the company given the limited choice of assets with a similar duration. AICA faced difficulties to maintain its target investment yield and to develop new long-term life insurance products amid the current historical low interest rate environment. The changes in interest rates and market conditions last year reduced value of in force business. While the ratings for AICA are stable, there may be positive rating actions if improved asset and liability management framework is in place, in conjunction with stable risk-adjusted capitalization and a stable solvency ratio. Downward rating pressure could arise if there is a significant deterioration in the company’s risk-adjusted capitalization in the event of adverse financial market movements.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb+” of Kuwait’s Al Fajer Retakaful Insurance Company K.S.C. (Closed) (Al Fajer Re), both with negative outlooks. The ratings reflect the “good level of risk-adjusted capitalization within Al Fajer Re’s combined shareholders’ and retakaful funds,” said Best. As an offsetting factor the report cited the “marginal level of risk-adjusted capitalization within the company’s stand-alone retakaful fund and historically volatile financial results.” Best said the negative outlook reflects its “concerns over Al Fajer Re’s historically weak financial results and its deteriorating level of risk-adjusted capitalization, particularly within the stand-alone retakaful fund.” Best added: “Although Al Fajer Re’s financial results have been somewhat volatile in the past, with underwriting results being affected by large losses and investment results impacted by significant provisioning, the company reported improved figures for the financial year ending March 31, 2012, with modest profits from both underwriting and investment operations. In fact, the 2012 financial year represented Al Fajer Re’s first year of underwriting profits since inception in 2008, with the company reporting a loss ratio of 59 percent and a combined ratio of 96 percent. In the same year, the company’s retakaful fund repaid KD 0.8 million (US$ 3 million) of its outstanding KD 6.6 million (US$ 23.4 million) Qard Hassan (interest free loan from shareholders), and its shareholders’ fund reported a net profit of KD 0.2 million (US$ 0.8 million).” Best also noted that “Al Fajer Re is making a concerted effort to improve its level of enterprise wide risk management following the difficulties it has encountered over previous years,” and Best said it “expects that improvements will continue in the coming years. The level of risk-adjusted capitalization within Al Fajer Re’s stand-alone retakaful fund decreased to a marginal level during the 2011 financial year, mainly as a result of provisioning for the company’s investment in The Investment Dar Company and underwriting losses. These same factors also reduced the level of risk-adjusted capitalization within Al Fajer Re’s combined retakaful and shareholders’ fund; however, in A.M. Best’s opinion, this currently remains at a good level. Al Fajer Re’s level of risk-adjusted capitalization was stabilized in 2012 following management’s actions to curtail new business growth and premium volumes, and similar action is expected in 2012.” Best added that its ratings “take into consideration Al Fajer Re’s level of risk-adjusted capitalization within the combined funds as capital available in the company’s shareholders’ fund can be accessible in order to support any potential future losses in the retakaful fund via a Qard Hassan. A downgrading of Al Fajer Re’s ratings is likely if there is any further deterioration in the level of risk-adjusted capitalization in its stand-alone retakaful fund or if the company experiences any further significant underwriting or investment losses. A stabilization of the ratings is likely over the next 12 to 24 months if Al Fajer Re is able to perform in accordance with its business plans and generate profitable new business while maintaining an adequate level of risk-adjusted capitalization.”

A.M. Best Europe – Rating Services Limited has assigned a debt rating of “bbb+” to the €750 million [$922.5 million] senior dated subordinated notes due 2042 and callable 2022 to be issued by Italy’s Assicurazioni Generali S.p.A., and has assigned a negative outlook to the issue. Best explained that the notes “will be issued by Generali under the €7 billion [$8.61 billion] Euro Medium Term Note (EMTN) that was renewed in April this year.” Best said it “expects the net proceeds from the offering to be used to refinance the existing €750 million subordinated notes due 2022 and callable on 20 July 2012. The notes will pay a fixed annual coupon of 10.125 percent until the call date in 2022, when the interest rate will convert to a floating rate based on a three-month Euro Interbank Offered Rate plus a margin. Debt leverage ratios are expected to remain within Best’s tolerance levels as the new issue aims to replace existing debt with similar characteristics and seniority.” Best will continue to monitor the evolution of Generali’s interest coverage ratio in the future.

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