Ratings Recap: PaCRe, Barbados, Cotswold, Orient, Kuwait Re

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings of “a-” of Bermuda-based PaCRe Ltd., both with stable outlooks. The ratings of PaCRe are based on its “excellent risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR); its experienced underwriting team, which is exclusively managed by AlphaCat Mangers Ltd. a business unit within Validus Holdings, Ltd,” said Best, adding that PaCRe’s ratings are also based on the “overall business plan of writing upper layer property catastrophe business combined with assets managed by the investment expertise of Paulson & Co Inc. Positive underwriting performance for PaCRe’s first year in business was offset by unrealized investment losses due to overall macro-economic volatility.” As partial offsetting factors, Best cited the “start-up nature of PaCRe along with the greater investment risk that is associated with this investment strategy. In addition, PaCRe’s business plan will be challenged by established reinsurers as well as other alternative investment reinsurers entering the market and more capacity into an already overcapitalized reinsurance marketplace could pressure underwriting margins.” Best also indicated that, although it is concerned about the “possibility of PaCRe being exposed to a simultaneous adverse asset and underwriting event, this concern is mitigated by its low underwriting leverage, strong capitalization, as well as the strength of Validus Holdings, Ltd.’s underwriting performance and Paulson & Co. Inc.’s 19-year successful investment track record. The assets of PaCRe will be managed by Paulson & Company, a New York-based, SEC-registered multi-strategy event arbitrage investment advisor.” In conclusion Best said: “Key rating triggers that could result in positive rating actions would be PaCRe meeting and/or exceeding its business plan over the long term. Key rating triggers that could result in negative rating actions would be PaCRe not executing its business plan over the long term.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Insurance Corporation of Barbados Limited (ICBL), both with stable outlooks. Best said the ratings reflect “ICBL’s solid capitalization, leading market presence in its domestic market, favorable earnings in recent years and its affiliation with Bermuda-based BF&M Limited, its majority owner, which is publicly traded on the Bermuda Stock Exchange. ICBL is publicly traded on the Barbados Stock Exchange. As the leading property/casualty insurer in the Barbados market, ICBL has excellent brand name recognition. ICBL has achieved favorable underwriting results in recent years through prudent risk selection and underwriting discipline. Underwriting profitability has been augmented by consistent levels of investment income, and this has enabled the company to continue to enhance its capitalization. In addition, ICBL’s affiliation with BF&M Limited affords it access to the organization’s resources, including financial services, investment management expertise and information technology.” As partial offsetting factors Best cited the “geographic concentration of ICBL’s business in Barbados and the increasingly competitive market in which it operates. ICBL, like other regional insurers, has significant exposure to catastrophic losses. The company manages this risk through the utilization of reinsurance to limit its catastrophe exposure to a manageable level and protect its surplus against frequency of events. In conclusion Best noted that while the ratings of ICBL are stable, “factors that could contribute to rating enhancement include sustained improvement in underwriting performance and a continued strong overall profitability. Factors that may lead to negative rating actions include significant loss of market share, continued decline in the company’s underwriting profitability and substantial deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR).”

A.M. Best Co. has removed from under review with negative implications and downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and the issuer credit ratings to “bb” from “bbb-” of Cotswold Insurance Limited, which is based on Anguilla in the British West Indies, and has assigned a negative outlook to both ratings. Best then withdrew the ratings due to management’s request to no longer participate in its interactive rating process.” Best explained that the rating downgrades “reflect Cotswold’s negative revenue and earnings trends based on Best’s review of its unaudited data. This decline was due in part to ongoing changes to its business strategy and changes in the holding company structure, to facilitate this change. The company’s inability to produce timely cost efficient consolidated annual financial statements, the lack of audited data and receipt of other data requirements on a timely basis were viewed as negative factors in the analysis of the financial condition of Cotswold.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of United Arab Emirates-based Orient Insurance Company (PJSC), both with stable outlooks. The ratings reflect Orient’s “supportive level of risk-adjusted capitalization, solid business profile within the UAE and robust operating performance,” said Best. An offsetting factor is Orient’s “concentrated investment profile.” Best noted: “Orient’s level of risk-adjusted capitalization remains supportive of the current ratings despite a substantial reduction in 2012, stemming from higher investment risk following the purchase of a single equity holding. Supporting Orient’s risk-adjusted capital position is its high level of internal capital generation, low retention of insurance risks and a reinsurance program of good credit quality. Orient remains the third-largest insurance company in the UAE by gross written premium with approximately 10 percent market share. Premiums grew 11 percent in 2012 to AED 1.4 billion ($380 million), driven by Orient’s strong multichannel distribution network and its position within the Al Futtaim group.” Best also indicated that Orient “continues its strategy of diversifying its premium generation following the regional expansion of its parent’s franchise. However, at present, the majority of its business is generated within the UAE. For the third consecutive year, Orient has generated the highest net profit in the UAE insurance market with earnings continuing its upward trend despite increased market competition. Profits increased 5 percent in 2012 to AED 213 million ($58 million), and the return over adjusted capital and surplus remained at approximately 20 percent. Orient’s technical results remain strong, achieving a combined ratio of approximately 60 percent in the last four years of operation.” Best does express its concerns “regarding a shift in Orient’s investment strategy, with material exposure to a single equity investment, which consumes one-third of the company’s asset allocation. This change in strategy may create a potential volatility in Orient’s capital base and investment return, thereby creating the need for an enhanced enterprise risk management framework to ensure investment risks are controlled and mitigated effectively.” The report also, said Best expects “further improvement in risk management over the coming year, with the development of an internal capital model.” Going forward, Best said a “material reduction in risk-adjusted capitalization, a significant impairment emanating from its equity investment, or insufficient improvements in its enterprise risk management could add negative pressure to the ratings. Upward movements are unlikely over the medium term.”

A.M. Best Europe – Rating Services Limited has revised the outlook to stable from negative and affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Kuwait Reinsurance Company K.S.C. (Closed) (KRe). Best said the revision in the outlook “reflects KRe’s improved technical performance benefitting from stronger internal controls and risk selection. The ratings incorporate the company’s supportive level of risk-adjusted capitalization and stability of earnings in recent years.” Best also indicated that KRe’s capital position “remains supportive of the current ratings despite weakening in 2012 as a result of increased underwriting leverage. However, KRe’s full profit retention in 2012 has partially offset the increased capital requirement. Going forward, KRe’s prudent dividend policy and the further de-risking of its investment portfolio is likely to support planned growth and stabilize its capital position.” Best noted that in 2012, “KRe’s profit after tax reached KWD 2.6 million ($9.4 million), and the return on adjusted capital and surplus represented 6.9 percent, compared to just 1.0 percent in 2011. In recent years, KRe’s overall earnings have been driven by a good level of investment return, with invested assets yielding 3.2 percent. KRe has been taking measures over the past two years to restructure its portfolio and provide better protection to its profile, particularly for inward retrocession business. In the absence of catastrophe losses in 2012, KRe’s technical account returned profits of KWD800,000 ($2.8 million), with the combined ratio decreasing to 94.2 percent from 101.0 percent. Furthermore, KRe has a sound profile in its core market and is looking to further diversify its position. In conclusion Best said “a material reduction in KRe’s risk-adjusted capitalization or a deterioration in technical performance would add negative pressure to the ratings. Upward rating movement is unlikely in the short term.”

Topics AM Best