Ratings Recap: NIPPONKOA (China), Leadway, B&B, Montpelier Re, Milli Re

September 21, 2011

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and an issuer credit rating of ‘a-‘ to NIPPONKOA Insurance Company (China) Limited, both with stable outlooks. The ratings are reflective of NIPPONKOA China’s “strong balance sheet strength, excellent liquidity and supportive business profile,” said Best. As a strategically important and wholly-owned subsidiary of NIPPONKOA Insurance Company Ltd., NIPPONKOA China “is well positioned to benefit from the operational support of its parent, including management expertise, business generation and financial support. Since the company began operations in August 2009, it has solid brand name recognition, which markets under the NIPPONKOA name. The quality Japanese interest abroad business in China accounts for 99 percent of the company’s total premiums written for the six month period ending June 30, 2011. By leveraging strong business relationships between NIPPONKOA and its Japanese customers based in China, NIPPONKOA China primarily writes marine cargo (59 percent of gross premiums written for 2010) and property (33 percent). NIPPONKOA China’s capital position is strong relative to its limited underwriting risk at the early stages of operation, supported by a good credit quality reinsurance arrangement.” Best also noted that the company “adopts a very conservative approach to investments, with 100 percent in cash and term deposits, which is likely to be maintained over the medium term.” Best said it believes the company’s “prospective capital position by year-end 2013 remains strong to support robust premium growth.” As offsetting factors Best cited the high levels for the company’s set-up costs and the implementation risk of its business plan. In light of the lack of critical mass of its book of business and set-up costs (including the opening of a new branch), NIPPONKOA China’s expense ratio is expected to remain high through 2013. By then, the company targets to achieve break-even results. As with any relatively young company with limited underwriting track record, any adverse deviation from its business plan under the current prevailing competitive market conditions could challenge the company’s projected targets.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B-‘ (Fair) and the issuer credit rating ‘bb-‘ of Nigeria’s Leadway Assurance Company Limited, both with stable outlooks. The rating actions reflect Leadway’s “adequate risk-adjusted capitalization, improved operating performance and its good business profile in the Nigerian market, said Best. “Leadway’s prospective risk-adjusted capitalization is expected to remain volatile, but adequate and support the company’s business plan. Leadway’s capitalization decreased by 36 percent between 2007 and 2008 as a result of large unrealized losses on equity investments and higher retained business volume. This trend was reversed in 2010 when capital levels improved following a capital increase from NGN 2.7 billion ($18 million) to NGN 4.1 billion ($26 million) and higher transfers to equalization reserves.” Best add that from its point of view the company’s “volatile capital position partly reflects the higher risk profile of the company’s investment portfolio. Leadway’s investment strategy is expected to become moderately more conservative in 2011-2012;” however, Best also said it believes the risk-adjusted capitalization will remain “exposed to volatile equity markets going forward, while remaining within the tolerance levels of the current ratings. Leadway’s financial performance improved in 2010, with net income after taxes increasing by 42 percent to NGN 1.4 billion ($8.9 million) mainly driven by an improvement in non-life technical income, which increased by 6 percent to NGN 4.34 billion ($27.6 million), while the life segment posted a loss of NGN 48 million ($0.3 million). Overall, return on equity improved to 11 percent in 2010 (8 percent: 2009).” However, Best also pointed out that the company’s “non-technical account was still impacted by large unrealized investment losses and bad debt provisions.” In Best’s opinion, Leadway’s net income after tax is “likely to increase to NGN 1.5-2 billion ($10-$13 million) in the next two years primarily driven by an improved technical performance in both segments.” Nonetheless, Best also said it believes that Leadway’s “investment performance is likely to remain subdued in 2011, due to the company’s significant equity holdings, which included approximately NGN 3.2 billion ($20 million) in unquoted securities as at year-end 2010. Leadway benefits from a good business profile in non-life retail lines in the Nigerian market and in the larger commercial risks, as well as benefitting from a growing life insurance book. In 2010, the company’s total gross premiums decreased by 37.7 percent to NGN 16.8 billion ($106 million) following softer rates in most lines of business in Nigeria, difficult economic conditions and a decrease in Leadway’s share of special risk business, which primarily covers construction, property and liability risks related to the oil and gas industry. Nonetheless, the life business performed better with premiums increasing by 21 percent to NGN 2.6 billion ($16.2 million) in 2010. Prospectively, Leadway is likely to experience a good increase in gross premiums in 2011 due to higher anticipated business volumes, especially in the life segment.”

A.M. Best Europe – Rating Services Limited has downgraded the financial strength rating to ‘C-‘ (Weak) from ‘C (Weak) and issuer credit rating (ICR) to ‘cc’ from ‘ccc+’ of Belarus-based B&B Insurance Co., OJSI, and has removed both ratings from under review with developing implications and assigned a negative outlook. Best has also withdrawn the ratings at the company’s request to no longer participate in Best’s interactive rating process. The downgrades and negative outlook on the ratings of B&B reflect the “absence of sufficient information to assess the company,” Best explained. “As a result, significant uncertainty exists as to the strength of B&B’s risk-adjusted capitalization, which has been maintained at a consistently weak level and subject to considerable volatility, in view of the significant growth and poor underwriting performance of the company over the last few years. In addition, the Belarusian economy has experienced significant deterioration over the year, increasing the potential for further weakening in B&B’s risk-adjusted capitalization.” In addition best noted that following the announcement of AXA Central & Eastern Europe, a subsidiary of the French-based insurance and financial services provider, AXA S.A., of its intention to acquire 80 percent of B&B, it “has been unable to assess any potential benefits to B&B.”

Standard & Poor’s Ratings Services announced that its ratings on Bermuda-based Montpelier Re Holdings Ltd. (BBB/Stable/–) and its core operating subsidiary Montpelier Reinsurance Ltd. (A-/Stable/–) “are not affected by the sale of the Montpelier U.S. Insurance Co. (MUSIC) to Selective Insurance Group Inc. for approximately $55 million in cash consideration.” S&P added that, “although MUSIC provided a source of premium diversification to Montpelier (7 percent of 2010 gross premiums written), it did not provide any earnings diversification. The transaction will likely close in the fourth-quarter of 2011.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of ‘bbb’ of Turkey’s Milli Reasurans Turk Anonim Sirketi (Milli Re), both with stable outlooks. The ratings of Milli Re continue to reflect its “excellent market position in the Turkish insurance and reinsurance markets and its good risk-adjusted capitalization.” However, Best also indicated that these strengths “are partially offset by Milli Re’s low technical profitability in its non-life portfolio; and thus, reliance on investment income. Milli Re enjoys an excellent market position in Turkey as the only domestic reinsurer commanding a 25 percent market share. Furthermore, the purchase of an additional 37 percent share in Anadolu (one of two leading Turkish direct insurers in 2010) has further strengthened the company’s domestic franchise.” Best noted that Milli Re’s risk-adjusted capitalization “deteriorated as a result of the purchase of Anadolu shares in September 2010.” However, Best added that in its opinion, “Milli Re’s current and prospective risk adjusted capitalization remains good and supportive of the company’s current ratings.” Best also pointed out that even though Milli Re “has a long history of generating profits, the company has consistently reported technical losses, driven by the poor performance of its motor, health and engineering business lines; and therefore, continues to rely on potentially volatile investment income.” However, Best indicated that the “company’s investment strategy is fairly conservative with the majority of assets being invested in cash or bonds.”

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