Ratings Recap: Sunderland Marine, TransRe London, Instituto Nacional (Costa Rica)

December 20, 2013

A.M. Best Europe – Rating Services Limited has placed under review with developing implications the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of UK-based Sunderland Marine Mutual Insurance Company Limited (SMMI), following the announcement that the company is entering into a merger framework agreement with The North of England Protecting and Indemnity Association Limited (NEPIA). Best noted that the “agreement is intended to form the basis of a merger between the two companies, subject to approval by their respective members and satisfaction of various merger conditions, principally regulatory approval by the UK and certain overseas regulators. NEPIA is one of the world’s largest marine mutual liability insurers, providing liability insurance to its 330 ship-owning members worldwide for coverage on approximately 5,000 ships. The company is based in Newcastle upon Tyne and is a member of the International Group of Protection and Indemnity Clubs.” Best also explained that “since January 2012, NEPIA has provided SMMI with quota share reinsurance as part of a strategic alliance between the two companies. It was announced in August 2013 that the companies were in talks that could lead to a merger.” Best explained that the “under review with developing implications status” reflects its view that, “although SMMI is expected to benefit from being a part of a larger organization with access to additional financial and managerial resources, on completion of the merger Best will need to assess the transaction’s likely effect on SMMI’s operating performance and risk-adjusted capitalization.” The ratings will remain under review pending the completion of the merger. Best will also conduct further analysis and have discussions with management regarding SMMI’s strategic fit within NEPIA.

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘A’ (Excellent) and an issuer credit rating of “a+” to TransRe London Limited (TRL), a wholly owned subsidiary of New York-based Transatlantic Reinsurance Company (TRC), both with stable outlooks. The ratings of TRC were extended to TRL “due to its role in and strategic importance to the TransRe group of companies, the explicit support provided through internal reinsurance by TRC in the form of a 60 percent quota share reinsurance agreement and TRC’s guarantee of TRL’s minimum capitalization levels,” Best explained. “TRC is expected to provide future support to TRL if required. In addition, TRL benefits from good prospective operating performance and excellent stand-alone risk-adjusted capitalization. The report also indicated that “TRL is a newly established operating subsidiary of the TransRe group. The company has been initially capitalized with $500 million of common shareholders’ equity, which has been provided by TRC. It is the intention that from 1 January 2014, risks that were written by the London branch of TRC will be renewed by TRL. Prior years’ business will be settled by the London branch of TRC. A factor that could result in upward or downward ratings movement is a change in the financial strength of TRC. Additionally, a decline in the support received from the parent could have a negative impact on the ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘(Excellent) and issuer credit rating of “a-” of Costa Rica’s Instituto Nacional de Seguros (INS), both with stable outlooks. Best said the “ratings reflect INS’ strong capitalization and liquidity position, diversified operating strategy, its position as the main insurer in Costa Rica and favorable operating profitability. The ratings also consider the explicit support INS receives from the Government of Costa Rica, as stated in the Insurance Law of 2008. This support, however, only guarantees insurance operations in the country. Also inuring to the ratings is INS’ sound reinsurance program with highly rated international reinsurers, which provides adequate protection to variations in claim severity and catastrophic events.” As partial offsetting factors Best cited “the company’s relatively high loss and underwriting expense ratios compared to other insurers in the region. Additionally, INS’ investment portfolio is heavily concentrated in government and bank-issued securities. Nonetheless, the portfolio is composed of high credit quality securities and generates significant income for INS. The rating outlook is based on the expectation of sustained strong capitalization and operating performance.” Best explained that “INS underwrites life insurance lines, health insurance, automobile, property and casualty, surety bonds and compulsory insurance, which include compulsory workers’ compensation, auto compulsory insurance and comprehensive crop insurance for the local market. Property and casualty lines account for approximately 48 percent of written premiums; compulsory lines account for approximately 34 percent of the total; and life and health lines account for approximately 18 percent. The company is authorized to write over 190 products by the Superintendencia General de Seguros (SUGESE).” It is also the “largest insurer in Costa Rica with 89 percent market share as of September 2013, and it has expansive distribution channels and local market expertise. The company’s operations are concentrated in Costa Rica, which makes the company vulnerable to regulatory, economic and political risks and market volatility. Furthermore, the local market has become very competitive, and INS will be challenged to maintain its underwriting discipline and rate adequacy while generating consistent underwriting earnings.” Best added that “while the outlook is stable, positive rating actions may result from material and sustained improvement in underwriting performance, reduced overall net exposure and diversification of the company’s investments. Rating drivers that could lead to a negative outlook or a downgrade are a material loss of capital from claims or investments, a significant deterioration in capital strength as measured by Best’s Capital Adequacy Ratio (BCAR), excessive expansion initiatives outside Costa Rica or an increase in net retention.

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