Ratings Recap: Milli Re, NAGICO/NICL

A.M. Best Europe – Rating Services Limited has removed from under review with negative implications the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Turkish reinsurer Milli Reasurans Turk Anonim Sirketi (Milli Re), but has assigned a negative outlook to both ratings. Best said: “Milli Re’s risk-adjusted capitalization deteriorated significantly in 2011 due to catastrophic events, the ongoing poor performance of some local business lines, a change in reserving methodology and the fair value revaluation of its subsidiary, Anadolu Anonim Turk Sigorta Sirketi, which was the driving force behind the rating downgrades at that time. Furthermore, the company’s risk-adjusted capitalization on a consolidated basis was considered to be weak, something driven by the high level of premium leverage. To reflect this, Best maintained the ratings under review with negative implications.” Best explained that it has taken the rating off of this review status, as it now “views positively the structural changes that management have since made in both its Turkish and international businesses. Milli Re’s decision to largely withdraw from local motor and medical businesses due to poor performance is beginning to show in improved technical profits. Improved profitability and a full profit retention policy in 2012 have bolstered capital somewhat during the year; however, despite flat premiums for the year on an unconsolidated basis, the consolidated business continues to grow.” However, Best added that it “remains concerned as to whether Milli Re can generate enough capital internally to sustain this,” which is the reason that Best has assigned the ratings a negative outlook. Best said the ratings “continue to reflect Milli Re’s excellent domestic franchise, its historically weak technical profits and the country risk associated with Turkey.” Best has assigned a Country Risk Tier of four (CRT-4) to Turkey due to its “high political and financial system risks and moderate economic risk.” In conclusion Best said “Milli Re’s ratings are likely to come under negative pressure should its consolidated risk-adjusted capital position weaken significantly. Positive actions on Milli Re’s ratings are likely to be driven by improvements in its technical performance and consolidated risk-adjusted capitalization.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit ratings of “bbb” of National General Insurance Corporation (NAGICO) N.V, which is based on the Caribbean island of St. Maarten, and Nagico Insurance Company Limited (NICL), which is based on Anguilla. The outlook for all of the ratings is stable. The ratings “reflect NAGICO and NICL’s common ownership, adequate individual and consolidated risk-adjusted capitalization, overall profitability in recent years and NAGICO’s dominant market presence in its domestic market,” Best explained. “NAGICO is the leading property/casualty insurer in St. Maarten with a dominant market share in the Dutch Caribbean, while NICL is one of the leading insurers in several overseas markets.” Best also noted that on an individual and consolidated basis, “the companies continue to report overall operating profits. Given their common parent company’s minimal dividend requirements, both NAGICO and NICL have been able to enhance capitalization through the retention of earnings. Consequently, both companies continue to maintain more than adequate risk-adjusted capitalization for their current business profiles. In addition, NAGICO and NICL have implemented adequate risk management policies and procedures to assess and manage risks throughout their operations.” As partial offsetting factors Best cited “the increasingly competitive regional markets in which NAGICO and NICL operate and their somewhat limited financial flexibility as a result of their private ownership structure. Both NAGICO and NICL, like other regional insurers, have significant exposure to catastrophe losses. Both companies manage this risk through the utilization of reinsurance to limit their catastrophe exposure to a manageable level and to protect their surplus against frequency of catastrophic events.” In conclusion Best said: “Factors that could contribute to rating enhancement include sustained improvement in NAGICO and NICL’s underwriting performance, consistent long-term overall profitability and an upgrade in St. Maarten and Anguilla’s country risk tier ratings. Factors that may lead to negative rating actions include significant loss of domestic market share, a sustained decline in underwriting profitability, significant deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) and a downgrade in St. Maarten and Anguilla’s country risk tier ratings.”