Ratings Roundup: China Taiping (NZ), BEST RE (Malaysia)

December 3, 2010

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of China Taiping Insurance (New Zealand) Company Limited (CTPNZ), both with stable outlooks. The ratings reflect CTPNZ’s “adequate risk-adjusted capitalization, notable improvement in the underwriting margin in 2007-2009 compared to previous years, and corresponding surplus accumulation,” Best explained. The ratings also acknowledge the “shift in the strategic focus by management over the past three years, which guided the company to establish a profitable book of business. CTPNZ’s risk-based capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remains sound for year-end December 2009. Due to expected higher retained underwriting risk and underwriting losses arising from the recent earthquake in September 2010, the BCAR will deteriorate in 2010.” Best added that it believes that the “forecasted BCAR for the next two years is still adequate to support the current ratings. However, there will be pressure on the company’s ratings if the BCAR negatively deviates from the forecasted level going forward. CTPNZ’s operating performance notably improved over the past three years (2007-2009) due to the strengthening of the underwriting margin and stable investment performance. As a result of the emphasis on underwriting profitability, more stringent underwriting standards and cost rationalization initiatives were undertaken by the company. Consequently, CTPNZ’s combined ratio decreased to 93.2 percent in fiscal year 2009, compared to 121.9 percent in 2006. For the first nine months to September 2010, CTPNZ’s combined ratio increased to 110.4 percent, which was attributed to higher claims arising from the earthquake in September 2010.” As an offsetting factor, Best cited the “company’s exposure to catastrophic events. As with all general insurers in New Zealand, CTPNZ is exposed to catastrophic perils in various geographic regions of the country. Currently, the company’s catastrophe limit is estimated using a generic industry-based approach. However, the industry-based standard might not effectively portray the potential catastrophe exposure of CTPNZ’s commercial-focused portfolio. In an effort to improve the effectiveness of its loss estimation, CTPNZ has adopted a wide range of approaches in benchmarking its potential catastrophic exposure and risk aggregation.” For the future Best said it “anticipates the company will continue to develop a more firm-specific approach in estimating and monitoring this exposure.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” to BEST RE (L) Limited (BEST RE Non-life) (Malaysia) and BEST RE Family (L) Limited (BEST RE Life) (Malaysia). The outlook assigned to both ratings is stable. Best has also withdrawn the FSR of ‘A-‘ (Excellent) and ICR of “a-” of BEST RE (Tunisia) and assigned an NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR as a result of the company’s portfolio being transferred to the two new entities, BEST RE Non-life and BEST RE Life, and the company ceasing reinsurance operations.” Best explained that the “ratings of BEST RE Non-life and BEST RE Life reflect their significant importance to their ultimate parent, SALAMA Islamic Arab Insurance Company (P.S.C.) (SALAMA), with BEST RE Non-Life representing the majority of SALAMA’s consolidated gross written premium and BEST RE Life being the key driver behind the group’s life reinsurance expansion plans. These newly formed companies represent the non-life and life portfolios, respectively, of BEST RE, which has been separated into distinct entities upon the group’s relocation to Labuan, Malaysia. The ratings also reflect the group’s solid business position, anticipated strong financial performance, excellent risk-adjusted capitalization and the benefits of operating in a more regulated environment.” Best said it “believes that BEST RE Non-life’s business profile is diversified both geographically and in terms of premium written. BEST RE Life’s profile is considerably smaller (gross written premiums of $20 million projected for 2010) and still developing but will benefit from the strong BEST RE brand. Gross written premiums for the two companies combined are likely to increase at a rate of 18 percent-20 percent in 2010 (compared to BEST RE’s premium in 2009), which is similar to the growth in the prior period.
Prospectively, the company is seeking to continue expansion of business in its traditional markets of Malaysia, the Middle East and Northern Africa as well as take advantage of the potential growth in life products in Southeast Asia.” Best also indicated that it believes that the combined BEST RE entities “will post strong overall earnings, with pre-tax profits of $8 million in 2010 (BEST RE posted pre-tax profits of $8.7 million in 2009 and $5.6 million for the first half of 2010).” In Best’s view, the companies’ “overall earnings will be driven by consistently high technical results from the profitable portfolio received from BEST RE (a combined ratio of 88 percent in 2009). According to A.M. Best’s risk-adjusted capital model, both entities remain well capitalized as BEST RE Life has retained BEST RE’s capitalization of $100 million and also received an additional $40 million in capital from its parent. Similarly, BEST RE Life has received a capital injection of $10 million.” Best added that in the medium term, it believes that the companies’ “projected financials are supportive of a stable risk-based capitalization. Nonetheless, increased levels of dividend payments and material deviations from the company’s business plans are likely to have a detrimental effect.”

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