Ratings Roundup: AEGIS, SOGAZ, African Re, Delvag

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based Associated Electric & Gas Insurance Services Limited (AEGIS), and has assigned both ratings a positive outlook. Best said the rating affirmations “recognize AEGIS’ solid risk-adjusted capitalization, which is appropriate for its current investment and insurance risks, a historically favorable long-term financial performance, as well as an experienced management team and comprehensive enterprise risk management processes. Reserving practices are adequate for the hazards insured and losses incurred.” As partial offsetting factors Best cited the “volatility inherent in AEGIS’ underwriting results, given the high severity risk profile and concentration risk of the energy market it serves.” Best explained that “due to the long-tail nature of its business and as a mutual insurer, AEGIS typically relies on investment earnings to support overall net income where underwriting results are managed toward the break-even level, reflective of low profitability. AEGIS generally prices its business on a “total return” basis, i.e., the planned use of its investment results to support underwriting pricing.” Best said the positive outlook “reflects AEGIS’ improved risk-adjusted capitalization and operating performance in the last four years after it had encountered a significant loss of surplus in 2008, which was primarily caused by significant investment losses that resulted from the financial crisis. The company’s surplus has significantly rebounded from 2008 levels and is currently within an appropriate value-at-risk, i.e., risk tolerance/appetite level. The positive outlook further reflects the expectation that AEGIS’ ratings could be considered for positive rating actions if the company continues to demonstrate strong operating fundamentals in areas such as risk- adjusted capitalization, evidence of sustainable and stable investment results and the continuation of favorable loss development trends. Conversely, AEGIS’ outlook could be revised if external market conditions weaken significantly, resulting in weakened free cash flow, a decline in liquidity levels, an increase in underwriting leverage and/or outsized catastrophe or investment losses in conjunction with a significant decline in risk-adjusted capitalization.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Russia’s SOGAZ, Insurance Company OJSC (SOGAZ), both with stable outlooks. SOGAZ is the ultimate parent of the SOGAZ Group, which provides a range of insurance and non-insurance related services. Best said the “ratings of SOGAZ reflect its good consolidated risk-adjusted capitalization, consistently strong operating results and strong competitive position as a commercial property insurer. The ratings also consider the high country risk associated with its operations in Russia and its relationship with its major shareholders, BANK “ROSSIYA” and OAO Gazprom (Gazprom), the world’s largest natural gas company.” Best also, indicated that “SOGAZ’s consolidated risk-adjusted capitalization remains at a good level, despite significant growth in 2012. Growth was derived from all lines of insurance, particularly from the property account, which increased by 37 percent, resulting in gross written premium (GWP) of RR 84 billion [$2.5514 billion] in the year (2011: RR 60 billion [$1.822 billion]). However, the rise in premium volume was materially offset by the increase in the group’s capital base due to its strong internal capital generation.” Best also noted that “SOGAZ’s investments in non-core (strategic) assets have previously been cited as a source of potential downwards pressure on consolidated risk-adjusted capitalization.” However Best said it “understands that SOGAZ’s strategy will focus on its core insurance operations going forward, and has noted the steps taken by the group to de-risk its investment portfolio.” Best’s report described SOGAZ’s operating performance as “strong.” It noted that “consolidated pre-tax profits increased by 56 percent to RR 14 billion [$425 million] in 2012, owing to the lower impact of large single risk and weather-related losses that affected 2011’s technical results. Additionally, investment earnings of RR 7 billion [$212.5 million] (2011: RR 4 billion [$121.5 million]) were bolstered by higher invested assets, with some contributions from realized and unrealized (fair value) gains.” Best also pointed out that “SOGAZ maintains its strong competitive profile as a commercial insurer, supported by its excellent brand and long-standing relationships with large Russian corporations. SOGAZ intends to rapidly expand its regional and retail portfolio, in line with its strategic objective to be a universal insurer. Regional and retail business (combined), accounting for 22 percent of consolidated GWP in 2012, is expected to represent around a third of SOGAZ’s portfolio in the near term. In addition Best highlighted “SOGAZ’s rapid expansion plans into a highly competitive segment of the market;” which, Best said would lead it to “closely monitor the performance associated with its growth.” Best added that it “considers Gazprom’s significant influence over SOGAZ to remain. In addition to being SOGAZ’s largest single-name underwriting exposure (representing 26 percent of GWP in 2012), Gazprom (including affiliates) maintains significant influence on SOGAZ’s Board of Directors, occupying three seats out of seven (BANK “ROSSIYA” maintains two seats). Gazprom maintains a secure credit profile.” In conclusion Best said: “Positive rating actions could occur if SOGAZ continues to produce strong operating results whilst maintaining risk-adjusted capitalization at a supportive level. Additionally, further progress in its enterprise risk management framework, along with a sustained reduction in its investment risk profile, will support upwards rating pressure. Negative rating actions could occur if there was a rise in SOGAZ’s investment risk profile to a level higher than A.M. Best’s expectations, or lower than expected operating performance, particularly in relation to its regional expansion. Deterioration in country risk fundamentals could also have a negative impact on SOGAZ’s ratings. Additionally, a rise or decline in Gazprom or BANK “ROSSIYA”‘s credit profile is also likely to have a positive or negative impact on SOGAZs ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Nigeria’s African Reinsurance Corporation (Africa Re), both with stable outlooks. Best explained that Africa Re’s ratings “reflect its strong risk-adjusted capitalization and operating performance, as well as its established market position across the African reinsurance market. Although Africa Re is exposed to the unstable political and economic environment in some regions of Africa, these risks are largely mitigated by its geographic diversity, asset-liability matching strategy and the ease with which the corporation can shift its operations between its regional offices.” Best noted that Africa Re continued with its capital-raising initiative during 2012, resulting in a rise in paid-up capital to US$287 million from US$100 million in 2009. This partly supported the rise in shareholders’ funds to US$609 million in 2012 (2011: US$482 million).” Best also pointed out that “Africa Re’s strong financial flexibility is supported by its status as a Pan-African reinsurer and its shareholding structure, which predominantly comprises member states and (re)insurance companies in Africa, and supranational organizations. Further capital injections, along with higher retained earnings, are expected to support Africa Re’s strong level of risk-adjusted capitalization in 2013.” Best’s report also noted that “despite the exposure to a high incidence of large single risk losses in West Africa and the impact of the challenging market conditions and weather-related events in South Africa, Africa Re reported a 35 percent increase in pre-tax earnings to US$93 million in 2012. Results were supported by a rebound in the equity markets, resulting in higher investment returns (including fair value gains) of 5.7 percent (2011: 3.7 percent), and a stable combined ratio of 91 percent. Africa Re’s strong underwriting performance reflects the benefit of its diversified portfolio (by class and geographic spread) and its focus on quality portfolio selection. In particular, the international account continues to demonstrate a downward trending combined ratio, following the cleansing of the portfolio of non-performing policies.” Best said Africa Re’s “competitive position remains strong. The corporation enjoys privileged access to business through its compulsory legal cessions and its longstanding relationship to stakeholders. Growth prospects remain constrained by the strong competitive conditions within some of its markets, particularly in South Africa. Business sourced through its South African subsidiary accounted for approximately 30 percent of gross written premium in 2012. Additionally, growth in premium volumes are likely to be affected by Africa Re’s focus on quality portfolio selection.” In conclusion Best said: “Positive rating actions could occur if Africa Re continues to maintain its strong underwriting results and risk-adjusted capitalization over the longer-term period. A.M. Best expects the corporation to sustain the improvements it has demonstrated in the weaker performing segments of its underwriting portfolio. Negative rating actions could occur if there is deterioration in Africa Re’s operating performance, particularly due to unprofitable growth in non-core markets, or deterioration in risk-adjusted capitalization due to its expansion.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of Delvag Luftfahrtversicherungs-AG (Delvag) and its subsidiary, Delvag Rueckversicherungs-AG (Delvag Rueck), both domiciled in Germany. The outlook for all of the ratings is stable. The ratings of Delvag reflect its “solid risk-adjusted capitalization and consistently strong operating performance,” Best said. They also consider “Delvag’s role as the insurance captive of its ultimate parent, Deutsche Lufthansa-AG (Lufthansa). Support from Lufthansa is underpinned by a profit and loss absorption agreement provided to Delvag” Best said the ratings of Delvag Rueck “benefit from full rating enhancement to the level of Delvag’s ratings, reflecting Delvag Rueck’s strategic importance to the Delvag group, integration into Delvag in terms of business strategy and management, as well as the profit and loss absorption agreement provided by Delvag. Prospectively, Delvag’s risk-adjusted capitalization is expected to remain strong. Although the profit and loss absorption agreement with Lufthansa limits Delvag’s accumulation of earnings, it does provide balance sheet protection. The insurer remains heavily dependent on reinsurance to protect the Lufthansa fleet business; however, the associated credit risk is mitigated through the use of a highly rated and diverse reinsurance panel. Delvag Rueck’s risk-adjusted capitalization remains good, strengthened by its equalization reserve and silent claims reserve.” Best also noted that “following record underwriting results in 2011,” Delvag reported an excellent technical profit of €12.8 million [$16.665 million] in 2012 (2011: €10.9 million [$14.192 million]), which translated to a loss ratio of 43.1 percent (2011: 46.4 percent).” Best said the “result was largely due to positive reserve developments from Delvag’s general liability run-off business. The company’s disciplined underwriting approach and comprehensive reinsurance program continue to contribute to Delvag’s stable claims experience.” Best said it “expects the company’s combined ratio to remain below 85 percent for 2013. It is anticipated that Delvag’s earnings will continue to be supported by strong investment returns stemming from the upwards distribution of profits from its subsidiaries. In 2012, Delvag Rueck is projected to report a pre-tax profit (after the equalization reserve transfer) of approximately €400,000 [$520,800] (2011 €300,000 $390,600].” Best also indicated that in conjunction with its core Lufthansa fleet portfolio, “Delvag continues to leverage its aviation and transport expertise to write a diversified book of business. In 2013, gross premiums written are forecast to fall slightly, reflecting an anticipated decrease in the aviation business. The Delvag group’s offerings are enhanced by Delvag Rueck’s portfolio, which includes life and health business written for the Lufthansa group, as well as third party non-life reinsurance business. Gross premium income for the reinsurer is anticipated to remain stable in 2012.” In conclusion Best said: “Positive rating actions are unlikely at present. Negative ratings actions could occur if there were a material decrease in risk-adjusted capitalization, and/or a significant deterioration in the operating performance of either Delvag and/or Delvag Rueck. Additionally, any deterioration in the credit rating of Lufthansa could lead to negative rating actions for Delvag and Delvag Rueck.

Topics USA Europe Russia AM Best