Ratings Recap: Kuwait Re, Optimum, Montana Re (cat bonds)

July 18, 2011

A.M. Best Europe – Rating Services Limited has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Kuwait Reinsurance Company K.S.C. (Closed). Best said the ratings reflect Kuwait Re’s “resilient, though deteriorating risk-adjusted capitalization, its good track record of generating technical profits prior to 2011 and the geographic diversity of the company’s portfolio.” As offsetting factors Best cited Kuwait Re’s “increasing reliance on investment income and the volatility associated with its inward retrocession business, in particular the recent catastrophe losses highlight enterprise risk management (ERM) deficiencies.” Best added that in its opinion, Kuwait Re’s risk-adjusted capitalization “remains resilient; however, recent expansion and the declining performance of its retrocession programs has added strain to its position.” Best also noted that although management has “reduced Kuwait Re’s exposure to listed equities, which is viewed as positive, private equity investments remain a key contributor to capital consumption.” Best said it “believes there is risk of further deterioration given the company’s expansionary plans and the increased potential for losses in 2011 give the poor start to the year.” Nonetheless the rating agency also acknowledged Kuwait Re’s “sound track record of generating technical profits. However, following large losses in its inward retrocession portfolio in the first quarter of 2011, technical losses for the full year are now inevitable, with management budgeting for a combined ratio of 107 percent, in the absence of any further serious catastrophe losses.” Best also indicated that it “considers Kuwait Re’s inward retrocession programs and its newly signed capital quota share agreement to be potential sources of future volatility in earnings. Having implemented an ERM framework in 2008, Kuwait Re has continued to develop its risk management capabilities, which are generally on par with regional players. Nonetheless, controls around the inward retrocession programs are considered lacking given the increase in risk assumed,” which Best said it “considers to be high for a company of Kuwait Re’s relative size.” Best also said it “expects Kuwait Re to implement significant improvements in ERM, particularly with regard to the management of risk in its retrocession activities and capital management. Kuwait Re writes business in circa 60 countries in the Middle East, Africa, South and Far East Asia; thus, its business is well diversified by geography.” In conclusion Best noted that “there remains some concentration in property and engineering, which accounted for 67.5 percent of net premiums written in 2010.”

A.M. Best Co. has upgraded the financial strength rating to ‘B++’ (Good) from ‘B+’ (Good) and issuer credit ratings to “bbb” from “bbb-” for the members of the Optimum General Insurance Group (OGIG), which include: Optimum Insurance Company Inc. (OIC), Optimum Farm Insurance, Inc. (OFIC) and Optimum West Insurance Company (OWIC) (British Columbia, Canada). The outlook for all of the ratings is stable. All of the companies are domiciled in Quebec, Canada, unless otherwise specified. The rating upgrades “reflect the group’s continued consistent operating results and its favorable reserve development on both an accident and calendar year basis,” Best explained. As partial offsetting factors Best cited “the competitive pricing pressure on OGIG, particularly in commercial lines, and rate adequacy within the Canadian market. OGIG’s management continues to monitor and improve performance, underwriting guidelines and rate adequacy. Indications are favorable as its book of business provides better balance with improved performance in several key financial measures, including operating earnings, net investment income and reserve development.” In addition Best noted that “management continues to demonstrate its ability to effectively operate through insurance cycles and a rapidly changing investment market. Although the group has experienced substantial improvement during the latest seven-year period, going forward it may be challenged to balance profitability and leverage with projected future growth. Overall, surplus appreciation has been somewhat dampened by dividends paid to the holding company. The ratings are based on the consolidation of OGIG’s three members and apply to OIC, OFIC and OWIC.”

A.M. Best Co. has downgraded the debt ratings to “b” from “bb-“on $100 million series 2009-1 Class A and to “ccc” from “b” on $75 million series 2009-1 Class B principal-at-risk variable rate notes (collectively, the notes) both due December 7, 2012, issued by Cayman Islands-based Montana Re Ltd., and has removed both of its ratings on the notes from under review with negative implications and has assigned them a stable outlook. The rating actions are in response to Best’s “receipt of new attachment probabilities using the RiskLink Version 11 U.S. Hurricane Model (RiskLink Version 11) from Risk Management Solutions Inc. (RMS), the calculation agent and modeling firm involved in the transaction,” said the bulletin. “The updated attachment probabilities using the RiskLink Version 11 showed a significant increase when compared to the attachment probabilities previously calculated with the archived model, which was used in the initial modeling of the transaction,” best explained. “The notes provide Flagstone Réassurance Suisse S.A. with the following protection: Class A notes—$100 million protection against U.S. hurricanes and Class B notes—$75 million protection against U.S. hurricanes and earthquakes. The protections are based on a modified property claim services index trigger on a per occurrence basis covering a three-year period (November 30, 2009 to November 30, 2012).”

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