Ratings Roudup: PMG (Sony), Qatar General, Al Ittihad

December 28, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Bermuda-based PMG Assurance Ltd., both with stable outlooks. The ratings reflect PMG’s “excellent capitalization, historically strong operating performance and strategic position as the captive insurance company for Sony Group,” said Best. “These strengths are partially offset by the company’s exposure to potentially large natural catastrophe losses. PMG’s role is to meet certain global insurance requirements of Sony’s group members. In 2010, PMG did not renew nor participate in any non-related third party treaties in any form. PMG continues its operations in Bermuda but with a strategic change in underwriting directed fully towards Sony-related business as a ‘pure’ captive.” Best explained that PMG’s “strengths are derived from its underwriting focus, long-standing customer relationships and conservative operating strategy. Writing mostly proportional property and marine reinsurance business, PMG has added some life reinsurance business to achieve a more diversified and stable portfolio of exposures. However, the company maintains a large exposure to earthquake-related losses in Japan due to its coverage of Sony’s risks. PMG’s results have been excellent in recent years. While it has benefited from rate increases, the company, through prudent underwriting, has mostly avoided the major wind and flood-related losses that have impacted the industry in recent years.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb+” of Qatar General Insurance and Reinsurance Company S.A.Q. (QGIR), and maintains a positive outlook for the ratings. QGIR’s ratings reflect its “very strong risk-adjusted capitalization, the strong, albeit challenged, business position in the Qatari insurance market, as well as the sound track record of profitability reported over the years. An offsetting factor is the high concentration of equities and real estate in the investment portfolio,” Best explained. QGIR’s risk-adjusted capitalization, in best’s opinion, is “very strong and supportive of its business over the next two years.” Best sees the company’s risk profile “affected by the large concentration of assets in real estate and equity investments (primarily equities listed on the Qatar Stock Exchange). These two asset classes are the main drivers of QGIR’s required capital from a risk-adjusted perspective.” Best added that it expects QGIR to move toward a “more balanced investment portfolio. QGIR maintains its position as the second-largest insurer within the Qatari insurance market, despite the company significantly reducing the size of business written in recent years. Between 2007 and 2009, QGIR’s accounted gross written premiums decreased by 38 percent and net written premiums by 11 percent, mainly as a result of the decreasing amount of the highly reinsured energy business. In addition, QGIR is focusing on improving the profitability within the motor segment, the main contributor to the technical result, which resulted in lower sales during 2009 also in this primary line of business.” Best indicated that despite this situation the “different product mix is not detrimental to the company’s profile, which is increasing its retention ratio.” Moreover, Best said it “views positively the growing business of the takaful subsidiary, General Takaful Company. In terms of profitability, QGIR has a solid track record of good performance, both technical and non technical. Despite lower volumes of ceded business in recent years having implied a lower amount of inward commissions and negatively affecting the expense ratio, A.M. Best still expects QGIR to report a good combined ratio in the range of 90 percent at the end of 2010.” In addition Best noted that separate from the insurance business, “QGIR is developing some major real estate projects in Qatar, which are planned to be completed within the next two to three years. The project requiring the greatest contribution of QGIR is the World Trade Center, a 55-floor tower dedicated to international business, located at Doha Corniche. The estimated total development cost amounts to QAR 680 million ($187 million), which QGIR has already secured through a mixture of capital (land contribution plus cash) and debt funding.” Best said it recognizes that QGIR’s level of capitalization is currently able to absorb the exposure to these large scale projects.” Nevertheless, in Best’s view, there is a “low but material possibility that the extensive real estate exposure could put downward pressure on the company’s risk-adjusted capitalization in the medium to long term.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” of Lebanon’s Al Ittihad Al Watani (L’Union Nationale) Societe Generale d’Assurances du Proche Orient sal (Al Ittihad), and has revised its outlook on both ratings to positive from stable. The ratings of Al Ittihad reflect its “improved risk-adjusted capitalization and good underwriting performance,” Best explained. “The outlook has been revised to positive following the improvement of the company’s asset risk profile in 2009. Offsetting factors include its weak investment strategy, modest business profile, and embryonic risk management framework. Al Ittihad is a Lebanese-based insurer with branches in the United Arab Emirates and Kuwait, concentrating mainly on motor and medical business. Most of the business written by the company is originated in UAE and in Kuwait (respectively 65 and 18 percent of the premiums generated in 2009), where high competition is expected to maintain pressure on Al Ittihad’s margins in the future.” Best added that in its opinion, “Al Ittihad’s capital position is supportive of the current ratings, given the lower asset risk following the disposal in 2009 of significant private investments.” Best views the company’s prospective risk-adjusted capitalization as “largely dependent on Al Ittihad’s future investment strategy. It is critical for Al Ittihad to implement a conservative investment management to ensure capital remains strong. Additionally, Al Ittihad’s capital position is supported by the management’s decision to continue to have full earnings retention over the next few years, and by a strong reinsurance program, with over 80 percent of reinsured risks placed with highly rated companies. Al Ittihad’s financial performance has been good, though its pretax profits decreased to LBP 0.7 billion [$4.66 million] in 2009 from LBP 7.4 billion [$49.3 million] in 2008, mainly driven by its underwriting performance. Al Ittihad remained technically profitable in 2009 for both non-life and life business, despite an increase of the non-life combined ratio to approximately 94 percent up from 86 percent in 2008, principally due to a charge of LBP 3.9 billion [$26 million] attributable to outstanding claims relating to compulsory expatriate medical business in Kuwait. The provision for outstanding claims related to Kuwaiti medical business is expected to increase further in the next two years, which, combined with the competitive environment, is expected to weigh on the company’s loss ratio, which Best expects to be in the region of 60 – 65 percent.”

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