Ratings Recap: BEST RE, Garant, ZEP-RE, East Africa Re, Custodian

November 23, 2011

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A- ‘(Excellent) and issuer credit rating of “a-” of Malaysia-based BEST RE Family (L) Limited, both with stable outlooks. The ratings of BEST RE Family “factor in the support from the company’s ultimate parent, Islamic Arab Insurance Company (Salama), and reflect BEST RE Family’s strong level of risk-adjusted capitalization, in addition to both a strengthening business profile and an improving underwriting performance over the medium term,” Best explained. BEST RE Family was established in 2010, when Best Reinsurance Company (BEST RE) re-domiciled from Tunisia to Labuan, Malaysia, while at the same time separating its non-life and life operations into BEST RE (L) Limited and BEST RE Family, respectively. The BEST RE group is wholly owned by Salama, and Best said it “considers it to be a vital aspect of Salama’s business profile. BEST RE Family is well integrated into the much larger BEST RE group and writes all of its life reinsurance and family retakaful business. BEST RE Family benefits from an initial capital base of $10 million,” and Best added that it “anticipates further capital support from Salama over the coming years.” In addition best said it “expects BEST RE Family’s level of risk-adjusted capitalization to remain strong over the medium term as the company develops its business profile. Although life operations are relatively new to the BEST RE group, premium income is expected to reach $25 million for the 2011 financial year.” Best also “anticipates growth in gross written premiums in the region of 40 percent-50 percent over each of the coming two years. While BEST RE Family’s portfolio is currently focused on group credit lines of business, diversification is expected to increase as the company grows. Geographically, the company already has a good split of revenue between the Middle East and the Far East. Although BEST RE Family is currently impacted by low economies of scale,” Best said it “anticipates that its underwriting performance will improve as the company grows.” Best also indicated that it believes that “BEST RE Family’s retakaful fund is likely to remain dependant on the Qard’ Hasan (interest free loan from shareholders) for up to three years until surpluses have been generated.”

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and an issuer credit rating of {{dq0}} to Austria’s Garant Versicherungs-Aktiengesellschaf, both with stable outlooks. Garant’s ratings “reflect its good current risk-adjusted capitalization, improved operating performance and developing business profile as a niche political and trade credit insurer,” Best explained. The ratings also “reflect the implicit support provided by the company’s majority shareholder, Office national du ducroire | Nationale Delcrederedienst (ONDD).” Best said it believes that Garant “will maintain good risk-adjusted capitalization supported by good retained earnings in 2011. The company’s risk-adjusted capitalization fell in 2010 due to increased premium risk as a result of the rapid growth in net written premiums (2010: 46 percent growth). Premium growth was driven by the increased demand for trade credit insurance following the financial crisis.” Best also noted that Garant “utilizes an extensive reinsurance program primarily for capital protection purposes. The reinsurance program is placed with internal group companies as well as external highly rated reinsurers. Following the financial crisis, Garant has shown strong signs of recovery in 2010 and reported a pre-tax profit of €1.1 million [$1.48 million] (2009: loss of €1.4 million [$1.885 million]). Third-quarter 2011 results are in line with expectations, and the company anticipates a solid pre-tax profit at year-end 2011. Garant operates as a niche political and trade credit insurer specializing in emerging markets. Due to historical developments, Garant has a good business profile in the Russian market as an insurance provider for political and trade credit risks.” Best added that it believes that the “involvement of ONDD, which has an 83 percent shareholding, will further develop Garant’s business profile, as well as provide additional financial flexibility. Given the number of new entrants to the political and trade credit risk insurance market, rating conditions remain competitive within Garant’s core market. As such, gross written premiums in 2011 are likely to decrease slightly as the company seeks to maintain underwriting profitability.”

A.M. Best Europe – Rating Services Limited has upgraded the financial strength rating to ‘B+’ (Good) from ‘B’ (Fair) and issuer credit rating to “bbb-” from “bb+” of Kenya’s ZEP-RE (PTA Reinsurance Company), and has revised its outlook for both ratings to stable from positive. The ratings upgrades for ZEP-RE “reflect the strong improvement in risk-adjusted capitalization as well as the ongoing development of its enterprise risk management (ERM) framework,” Best explained. “Also, the ratings outcome incorporates ZEP-RE’s good and consistent operating performance and its solid business profile.” As an offsetting factor Best cited “the company’s exposure to foreign exchange losses, which has led to high unrealized losses in ZEP-RE’s recent past.” Best said the “improvement in risk-adjusted capitalization has been partly supported by recent capital raises. ZEP-RE raised a total of $10 million through private placements during 2010 and 2011. Additionally, growth in capital was supported by a change in accounting policy, which affected the treatment of provisions relating to unearned premiums and deferred acquisition costs, increasing the company’s share capital by $7.6 million. At year-end 2011, shareholders’ funds are expected to rise to approximately $70 million from the $50 million reported in the previous year. Risk-adjusted capitalization is expected to remain supportive of ZEP-RE’s business plans in the near term, as the company seeks to grow by approximately 20 percent in each of the next two years. ZEP-RE’s ERM framework continues to develop as the company increasingly adopts a risk-based approach to managing its capital.” Best indicated that it believes that ZEP-RE” will continue to make a concerted effort to evolve its risk management capabilities, supporting stability in risk-adjusted capitalization. ZEP-RE’s operating performance remains good. The company continues to generate positive technical and investment results as demonstrated by a five-year average combined ratio of 89.6 percent and an investment return of 6.3 percent, respectively. A pre-tax profit in excess of the $5.2 million reported in 2010 is anticipated in 2011, supported by better claims experience and stable income from its conservative investment portfolio.” As an offsetting factor Best noted “ZEP-RE’s exposure to foreign exchange losses. In 2010, ZEP-RE’s pre-tax profit of $5.2 million was impacted by a foreign exchange loss of $2.5 million. ZEP-RE maintains a solid business profile as a reinsurer in the southern and eastern regions of Africa. The company underwrites a diversified portfolio mainly comprising property, casualty and marine risks, which represents approximately 85 percent of gross written premiums (GWP) in 2011. A large portion of ZEP-RE’s business is written on a proportional basis. ZEP-RE benefits from compulsory legal cessions, which requires cedants in some of its markets to place 10 percent of its business with the company before ceding risks with other reinsurers. ZEP-RE is not unduly reliant on these cessions to support its expansion. At year-end 2010, compulsory business represented 8 percent of total GWP.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Kenya’s East Africa Reinsurance Company Limited (EARe), both with stable outlooks. Best said it expects EARe’s risk-adjusted capitalization “to be maintained at a sufficiently strong level to support expansionary plans in the near term. Gross written premiums of approximately KSH 1,650 million ($20 million) is anticipated in 2011 (2010: KSH 1,512 million [$18.32 million]), as the company pursues growth outside the Kenyan market. Internal capital generation has been largely supported by the full retention of earnings between 2006 and 2008. EARe’s dividend payments in 2010 amounted to KSH 20 million [$242,424] (representing a dividend payout ratio of 11 percent).” Best said it understands that “dividend payments will be maintained at a sufficient level, supporting stability in risk-adjusted capitalization going forward. The company’s capital management strategy continues to benefit from its outward retrocession program. At year-end 2010, 90 percent of outstanding recoveries were anticipated from reinsurers with secure ratings. EARe’s operating performance remains positive, although largely dependent on earnings derived from its conservative investment portfolio, which mainly comprises cash, short-term deposits and other fixed income securities (representing 89 percent of total investments at half-year 2011). Earnings in 2011 are likely to be lower than the pre-tax profit of KSH 230 million [$27.88 million] reported in the previous year, mainly due to lower income derived from the equity portfolio, reflecting the negative sentiment of the market. A combined ratio similar to the 96 percent produced in 2010 is expected in 2011, owing to the high incidences of large single risk losses experienced during the year and a rise in expenses associated with the company’s growth.” Best also observed that “EARe’s business profile continues to be limited by the compulsory legal cessions enjoyed by its larger competitors in both the local and regional markets. These legal cessions require cedants to place a portion of their risks with some of EARe’s competitors, before ceding business to the company.” Best added that in its opinion “EARe faces considerable challenges in attaining significant market share in its targeted markets, whilst these legal cessions remain. Additionally, the company operates in a competitive environment, with larger reinsurers who benefit from better economies of scale, further constraining the company’s ability to expand. Non-life business continues to dominate EARe’s underwriting portfolio, representing approximately 85 percent of gross written premiums. Business derived from Kenya represents approximately 50 percent of gross written premiums.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B’ (Fair) and issuer credit rating (ICR) of “bb” to Nigeria’s Custodian and Allied Insurance Plc, both with stable outlooks. “The ratings of Custodian reflect its weak enterprise risk management and the uncertainty associated with its reserving strategy and rapid growth plans,” Best explained. “Positive factors are its strong level of risk-adjusted capitalization, strong operating performance to date and solid business profile as a commercial risk insurer based in Nigeria. The ratings of Custodian also incorporate a view of its exposure to Nigeria,” which best described as a country that it “considers to have moderate economic risk and very high political and financial system risk. Risk-adjusted capitalization is expected to remain strong, although subject to volatility reflecting the various negative rating fundamentals underpinning its ratings. Custodian’s capital base has grown considerably since 2007 partly through raises, following increases in minimum regulatory requirements. Internal capital generation has also supported growth in this period. At year-end 2010, Custodian reported shareholders’ funds of NGN 11.8 billion (approximately $71 million) compared to NGN 3 billion (approximately $18 million) in 2006.” Best also pointed out that the “company’s capital management strategy is heavily reliant on its reinsurance treaties, which are all placed with reinsurers with a secure rating. An offsetting rating factor in Custodian’s rating assessment is its enterprise risk management framework,” which Best said it “considers to be weak. Although controls and guidelines are in place, which support underwriting, investments and reinsurance placements, the company lacks an adequate risk-based approach to capital management. Additionally, uncertainty exists as to the adequacy of its reserving strategy, underpinned by an unsophisticated reserving methodology and concerns relating to data quality. Going forward, a statistical approach to reserving is expected to be implemented, which should provide some comfort as to its reserve adequacy. Operating performance is strong as demonstrated by a five-year average combined ratio and investment returns (including fair value gains and losses) of 61 percent and 10 percent, respectively. The company maintains a conservative investment portfolio, albeit with some exposure to riskier asset classes, which creates potential for earnings volatility. Equity and property investments combined represented 18 percent of total investments at year-end 2010.” In addition best observed that “overall performance is likely to continue to be affected by the write-off of premium debtors, an issue that affects all insurers in the region. At year-end 2010, total provisions and write-offs of premiums owed by debtors reduced pre-tax profits by NGN 943 million [$5.65 million] to NGN 2.4 billion [$14.4 million]. Custodian maintains a solid business profile in the commercial segment of the Nigerian insurance market. The company has a market share of approximately 8 percent by premium income and writes a good spread of largely property-orientated risks. Gross written premiums are anticipated to grow at an annual rate of approximately 20 percent over the next two years, as the company seeks to capitalize on legislation promoting higher insurance penetration in Nigeria. Custodian is expected to continue to focus on expansion within the oil and gas segment, which has grown substantially in recent years, representing 48 percent of net written premiums in 2010 compared to 16 percent in 2008. Additionally, growth is anticipated from the retail account, representing approximately 10 percent of gross written premiums at year-end 2010. A.M. Best remains cautious of Custodian’s growth plans, particularly in relation to the expansion of the oil and gas business segment, where the company is wholly reliant on its international brokers for its technical expertise.”

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