A.M. Best Co. announced that it has affirmed the financial strength rating of ‘B++’ (Very Good) of Alliance International Reinsurance Company of Limassol, Cyprus, and has maintained its stable outlook.
“The rating reflects Alliance Re’s very good but deteriorated risk-adjusted capitalisation,” said Best. “Offsetting factors are the poor underwriting and operating performance which, for the second consecutive year, resulted in the company returning a net operating loss.”
Best said the rating is based on its expectation that Alliance Re’ has the ability to return to strong underwriting and operating results for the full year 2003 and would be able to rebuild its risk-adjusted capitalisation to prior year levels.
“Alliance Re’s risk-based consolidated capitalisation continues to be maintained at a very good level, according to A.M. Best’s capital model,” said the bulletin. “It has, however, deteriorated year-on-year with the capital and surplus at year-end 2002 having deteriorated by 22 percent over the last two years.”
This has been the result, Best indicated, of generally poor profitability, but it sees the company returning to operational profitability “with half year reported profits of CYP 456 thousand (USD 898 thousand) after very poor reported performance during the last two years. The company reported pre-tax losses of CYP 3.3 million in 2002 (USD 6.1 million) and CYP 2.4 million in 2001 (USD 3.7 million), mainly due to investment impairment charges.”
Best said it “expects the trend shown in the first half of 2003 to continue in the second half of the year, given the less volatile investment performance–a result of the conservative approach to the permanent impairment policy that was followed in 2002–and the improved performance of the Cyprus stock exchange.” It also noted that the “substantial rate increases and improved underwriting terms (i.e., higher deductibles, lower commission and peril exclusions) implemented in 2002 should continue to impact the results in 2003.”
The rating agency noted, however, that Alliance Re had reduced income “due to the cancellation of an agreement to act as a managing general agency for a run-off portfolio,” which “has not been accompanied by a commensurate reduction in operating costs.” It also said that although “premium revenue increased significantly in the first half of 2003,” the company is still “under pressure to substantially increase the amount of profitable business accepted.”
Best concluded that “the relatively small size and restricted business profile continue to limit the company’s access to high quality business. This, combined with the anticipated softening of the reinsurance market, is likely to add pressure on the medium- to long-term results.”
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