Ratings Recap: Grain, Chartis (Europe), Boubyan Takaful

December 6, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Grain Insurance and Guarantee Company, which is domiciled in Manitoba, Canada, and has revised its outlook on both ratings to negative from stable. Best said the rating affirmations “are supported by Grain’s consistently solid operating performance, favorable reserve development, on both an accident and calendar year basis, its long-standing market presence, historically steady investment stream and seasoned management team.” As partial offsetting factors and “as a reflection of the current outlook,” Best cited “the recent drop in Grain’s surplus, the continued competitive pricing pressures throughout Canada, particularly in commercial lines, affecting rate adequacy in the market, as well as the company’s susceptibility to catastrophic events in the territories in which it writes.” Best added that Grain’s management “continues to monitor and improve performance, underwriting guidelines and rate adequacy. Indications are favorable as the company’s book of business provides balance with steady performance in several key financial measures, including operating earnings, net investment income and reserve development. The management team continues to demonstrate its ability to effectively operate through various insurance cycles and a rapidly changing investment market.” However, Best also noted that Grain “does maintain high investment leverage, as its equity holdings represent approximately 50 percent of invested assets and 90 percent of surplus. The recent market value downturn in the portfolio led to an 8 percent drop in surplus in 2011. While values surged back somewhat in 2009 after the prior year’s downturn, the current equity market has not rebounded as quickly from the 2011 result. This situation was further exacerbated by an 11 percent drop in surplus caused by a material adjustment in Grain’s capitalization due to the recent accounting change affecting the valuation of pension assets. As a result of these circumstances, surplus fell by over 20 percent and underwriting leverage rose by a third. While year-end 2012 projections indicate a roughly 50 percent recoupment of the 2011 surplus shortfall, the current improved rate taking environment will hold net underwriting leverage, as well as other leverage measures at 2011 levels. This, in concert with other capital adequacy measures, alludes to a continued weakened capital position out into the midterm. Any additional capital deterioration could lead to further negative rating movement in the near to midterm. Management remains confident, however, in Grain’s ability to regain its surplus organically over time supported by its historically excellent operating position.”

A.M. Best Europe – Rating Services Limited has withdrawn the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Chartis Europe S.A. (CESA) (France) following its merger into its affiliate, UK-based AIG Europe Limited, formerly Chartis Europe Limited (CEL). Best said the merger took effect as of the first of December, 2012, “at which time all assets and liabilities of CESA were merged into AIG Europe Limited. This merger completes the Chartis group’s restructuring of its European operations and more closely aligns its legal entity and management structures in Europe.” The bulletin also noted that CEL changed its name to AIG Europe Limited on December 3, 2012, and that the “company’s FSR of ‘A’ (Excellent) and ICR of “a” remain unchanged with a stable outlook.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘C++’ (Marginal) and an issuer credit rating of “b” to Kuwait’s Boubyan Takaful Insurance Company K.S.C. (Closed) (BTIC), and has assigned a positive outlook to both ratings. Best said BTIC’s ratings “reflect its strong risk-adjusted capitalization on a consolidated basis (shareholders’ and policyholders’ funds), sound, yet somewhat untested, distribution lines through its shareholders and the efforts currently being made by management to introduce best practices throughout the firm. However, the ratings are tempered due to the weak capitalization of the policyholders’ fund, the company’s poor performance since its incorporation, the lack of governing documentation with regard to the takaful model and the country risk associated with Kuwait.” Best explained that the positive outlook on the ratings acknowledges its “expectations that the policyholders’ fund is to be independently capitalized in the next 12 months through the ring-fencing of assets, as well as general improvements, which are being made in terms of governance and risk management.” Best also noted that since the company was established in 2006 as part of the Boubyan Bank Group, “BTIC’s consolidated performance has been fairly weak to date, largely as a result of negative fair value adjustments on its investments in the shareholders’ account. The company’s technical performance has been mixed with technical profits in its life account, generally offsetting losses in the general account. BTIC is currently embarking on a change in strategy, away from price-driven broker business and towards a multi-channeled distribution approach including captive business from its group partners, which includes Boubyan Bank and National Bank of Kuwait. Whilst growth plans appear ambitious given the company’s modest domestic franchise, it appears to be on track to deliver growth in contributions of around 80 percent.” Best added that in the “absence of any specific company acts or local regulation with regard to takaful companies,” it puts “more emphasis on the stand-alone capitalization of the policyholders’ fund than the consolidated position.” Thus, even though Best said it considers the consolidated risk-adjusted capitalization of the company as “strong, limited capital is located in the policyholders’ fund itself, which is a substantial drag on the assigned ratings.” Best indicated that it “views positively the efforts made by new management to implement best practices within the company.” In Best’s opinion, “there is a lack of documentation supporting the governance of BTIC’s takaful model and the interaction between policyholders’ and shareholders’ funds. The ratings of BTIC also incorporate the perceived risk associated with operating within Kuwait, which, Best said, it currently places “in country risk tier three (CRT-3), with political risks ranked as moderate and economic and financial system risks ranked as low. Positive actions on BTIC’s ratings are likely to be driven by improvements in governance and operations as well as, more significantly, the stand-alone capitalization of its policyholders’ fund. Negative rating actions are considered to be unlikely but may occur should the company’s performance not develop in line with Best’s expectations.”

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