Ratings Recap: Qualitas, Qatar General

October 17, 2011

A.M. Best Co. has affirmed the financial strength rating of ‘B-‘ (Fair) and issuer credit rating of “bb-” of Mexico’s Qualitas Compania de Seguros, S.A.B. de C.V., both with stable outlooks. The ratings reflect Qualitas’ “strained risk-adjusted capitalization, consistently elevated underwriting leverage and trend of underwriting losses,” Best explained. “Historically, the company has operated with underwriting leverage considered higher than expected for an automobile insurance provider. Additionally, Qualitas maintains combined ratios just above breakeven due to its high level of loss and loss adjustment expenses recorded each year.” Best also noted that “Qualitas, a publicly traded insurer listed on the Mexican Stock Exchange, writes only automobile coverages and faces increasing competition from both foreign and domestic insurers.” It also “continues to report underwriting losses and relies on its investment income for its overall earnings.” Best added that “competitive pricing, along with increased automobile theft rates in Mexico, will further pressure business retention and market share. Furthermore, in recent years, Qualitas has maintained very weak risk-adjusted capitalization for its business profile as a result of its consistently elevated underwriting leverage.” However, Best indicated that on the positive side the company has a “leading market position in the increasingly competitive Mexican automobile insurance segment,” as well as a “formidable distribution network and solid overall profitability in recent years. Qualitas operates through a network of local agents, financial institutions and service offices and has established a formidable distribution capability throughout Mexico. This has enabled the company to maintain its leading market position in the Mexican automobile insurance segment in extremely challenging economic and market conditions.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Qatar General Insurance and Reinsurance Company S.A.Q. (QGIR), and maintains a positive outlook on both ratings. Best said the “ratings reflect QGIR’s strong level of risk-adjusted capitalization, its good business position within the local market, along with its good track record of profitability.” As a partial offsetting factor Best noted “the high concentration of real estate and equities within QGIR’s investment portfolio.” Best said it believes that QGIR’s “prospective level of risk-adjusted capitalization is strong and supportive of the company’s business plans over the medium term.” In Best’s opinion, “QGIR’s risk profile is heavily weighted towards investment risks, which accounts for the majority of capital requirements. At December 31, 2010, 56 percent of QGIR’s total investment portfolio was invested in real estate, with a further 30 percent placed in quoted equities.” Best also indicated that it anticipates that “the significance of the real estate investments is likely to be reduced over the medium to long term, increasing diversification within the company’s investment portfolio. QGIR remains the second largest insurer within the Qatari market with a 24 percent market share, despite a significant reduction in gross premium income between 2007 and 2009, mainly as a result of declining energy business.” Best said it “considers that QGIR is likely to maintain its good local business position over the coming years given the company’s strategy to increase its focus on non-energy lines. Furthermore, QGIR’s Shari’a compliant subsidiary, General Takaful Company, is enjoying rapid growth and is likely to contribute significantly to QGIR’s business profile in future years. QGIR has maintained a good level of both underwriting and overall profitability in recent years. In 2010, the company reported an underwriting profit of QAR 33.3 million ($9.1 million), a combined ratio of 81.8 percent, a net profit before tax of QAR 119.4 million ($32.8 million) and a return on equity of 4.9 percent. An improving loss ratio supported improved underwriting profitability in 2010 compared to 2009, which was due to the changing nature of QGIR’s insurance portfolio.” Best added that it also considers that “QGIR’s level of overall profitability is likely to remain exposed to potentially volatile over the medium term, given its high concentration in real estate and equity investments.”

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