Ratings Recap: Lemma, Adamjee, CCR (Algeria), Bosna Re

July 26, 2011

A.M. Best Europe – Rating Services Limited has removed from under review with negative implications and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Ukraine’s Lemma Insurance Company. The outlook assigned to both ratings is negative. The rating actions follow the “recent publication of Lemma’s financial results for 2009 and 2010,” said best, which “reflect Lemma’s strong financial performance and risk-adjusted capitalization.” Best explained that the “negative outlook reflects the continuing decline in the company’s premiums and the impact from a potential write-off of its investment in Zemelnyi Bank, its banking subsidiary. Lemma’s technical profitability has remained robust despite the decline in its business volumes.” Best also indicated that it “expects Lemma’s combined ratio to deteriorate to around 85 percent to 90 percent as the increase in the company’s retentions results in reduced reinsurance commissions, and therefore increases its operating expenses. Nevertheless, other technical income and expenses will continue to be a significant driver for the company’s financial performance.” Best added that it expects “Lemma’s risk-adjusted capitalization to decline, but remain in line with its current ratings, despite the pressure from increased retentions and the impact of the loss of Zemelnyi Bank.” Best’s analysis also factors in the “potential that the bank, currently under the control of the Ukrainian Central Bank, will not return to the ownership of Lemma, thus resulting in the write down of the investment, which is currently carried at HYR 200 million [$25 million] on Lemma’s balance sheet. Lemma’s gross written premiums (GWP) have been impacted by the economic crisis in the Ukraine. As a result the HYR 391 million [$48.875 million] GWP reported in 2010 represents almost 50 percent over the last two years.” Best said it “anticipates the company’s GWP to start recovering in 2011 mainly due to the early stages of economic recovery in the Ukraine and the company’s international expansion. Increase retention of the business written will result in continuing increase in net premiums.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Pakistan’s Adamjee Insurance Company Limited , both with stable outlooks. The ratings of AICL reflect its “strong risk-adjusted capitalization and established business position in the Pakistan insurance market,” said Best. As offsetting factors Best cited “its concentration of invested assets in equities, particularly in affiliated companies, in addition to underwriting results that are partially impacted by catastrophe losses in 2010.” Best added that in its opinion, “AICL’s level of risk-adjusted capitalization is strong despite being reduced in 2010, this strength results from increased credit risk arising from flood claims, lower profitability impacting earnings and a higher concentration of affiliated private investments.” Best indicated that it “expects risk-adjusted capitalization to improve over 2011, as exposure to credit risk reduces and profitability improves. Moreover, AICL’s capital position benefits from very good reinsurance support, despite having to cede compulsory cessions of up to 35 percent of treaty business to Pakistan Reinsurance Company Limited, the national reinsurer.” Best also said it believes AICL has “a strong management team that adopts prudent strategies to serve the requirements of the local market, thus, establishing a leading market position in Pakistan, with a 29 percent share of gross premiums written. AICL has a well diversified non-life portfolio, with gross premiums in excess of PKR 11.5 billion ($135 million) in 2010, supported by good retention levels above 60 percent. AICL’s profile may be further enhanced through the development of life business in partnership with Hollard Life Assurance Company Limited, in addition to some regional expansion on non-life.” Best also pointed out that the company has “experienced good underwriting results, despite being impacted by catastrophe losses in 2010. Flood losses increased the loss ratio by 5 percent to 70 percent in 2010, with reinsurers sharing the brunt of property losses. Technical profits declined to PKR 280 million [$3.24 million] in 2010 from PKR 679 million [$7.86 million] in 2009, with a combined ratio maintained below 95 percent. Investment performance tends to be volatile, dictated by market movements in equities.” However, Best also said that it has “concerns regarding AICL’s concentration in quoted equities, particularly in affiliated companies, which account for approximately 40 percent of invested assets. This can give rise to volatility in both AICL’s risk-adjusted capitalization and operating performance, which would need to be managed and controlled effectively.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Algerian reinsurer Compagnie Centrale de Réassurance (CCR), both with stable outlooks. The ratings reflect CCR’s “good local business profile, strong risk-adjusted capitalization and solid underwriting performance.” As offsetting factors Best noted “a high degree of geographic concentration in terms of business origination and investments, and an enterprise risk management ERM) program that is in the early stage of development.” In Best’s view, CCR has a “strong domestic business position as Algeria’s national reinsurer,” and Best believes that “this leading position should further be strengthened in the coming years as the volume of business written by the company will benefit from the September 2010 change that increased to 50 percent (from 5 percent or 10 percent, depending on the type of risks) the rate of compulsory cession to CCR.” As a result Best said it “expects CCR’s gross written premiums to increase by about 30 percent in 2011. During 2010, new accounting principles were introduced (SCF) that meant that CCR, along with all other Algerian companies, had to restate its 2009 results. This change in local rules resulted in a 2009 restated net profit of DZD 201 million [$2.8 million], against DZD 590 million [$8.223 million] published in 2009, mainly due to a loss on the company’s investment in Med Re.” best also noted that “CCR’s technical profitability improved in 2010 due to a lower frequency and severity of losses, which resulted in a strong 42 percent loss ratio, down from 53 percent in 2009. CCR’s risk-adjusted capitalization benefited from its 2010 solid results and remained very strong.” In the future Best said it “expects the company’s capital levels to remain supportive of the current rating, notably thanks to a contained dividend policy with a pay-out ratio below 10 percent. The ratings also factor the country risk of Algeria, which is classified as Tier 5 by A.M. Best, where CCR operates and originated 93 percent of its gross written premiums in 2010.” Best observed that “CCR’s ERM framework as being at an early stage of development, and expects the company to maintain its efforts to improve it in the next few years.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Bosnia and Herzegovina reinsurer Bosna Reosiguranje d.d. Sarajevo (Bosna Re), both with stable outlooks. Best said the ratings of Bosna Re “reflect its good risk-adjusted capitalization, stable underwriting performance and dominant domestic business position.” Best also said it believes that Bosna Re’s risk-adjusted capitalization “remains supportive of the current ratings, whilst the company’s capital level is well protected by a comprehensive retrocession program placed with securely rated companies.” In addition best noted that Bosna Re’s “technical performance slightly improved in 2010 and translated into a technical profit of BAM 1.0 million [$741,075]; the company’s combined ratio decreased to 94.6 percent (97.4 percent in 2009) due to a decline in expense ratio to 26.5 percent (30.3 percent in 2009), mainly driven by a reduction of taxes in the management expenses.” In the future Best said it expects Bosna Re’s “underwriting performance to remain at a similar profitable level, with a combined ratio in the range of 95 percent,” and it also believes that Bosna Re’s “overall performance will continue to be positive (BAM 2.7 million [$2 million] in 2010), and is likely to be mainly derived from the firm’s investment income. Bosna Re has a strong position in the domestic market mainly stemming from its solid links with its local cedants, most of which also are shareholders of the company, and from weak local competition, which translated into a healthy premium of BAM 51.3 million [$38 million] in 2010, mainly from Bosnia and Herzegovina.” Best added that it expects Bosna Re to “experience a moderate growth of around 2 percent–3 percent in its business written in the next two years. The company’s insurance portfolio mix is relatively limited, and mostly dominated by two main traditional lines of business—motor and property (accounting for respectively, 46 percent and 31 percent of 2010 net written premiums).” Best doesn’t anticipate “any substantial changes to the company’s portfolio composition in the next two years.”

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