Ratings Recap: Evergreen Re, Asian Re, Toa Re, Meritz

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Bermuda-based Evergreen Reinsurance Company, Ltd. (ERCL), both with stable outlooks. The ratings reflect ERCL’s “solid risk-adjusted capitalization, consistently profitable operating performance and effective risk control under the risk management philosophy of its ultimate parent, Evergreen Group,” Best explained. The ratings also “recognize the strong commitment from the group to integrate ERCL as its core risk management unit that provides insurance and reinsurance coverage to the group and its operating subsidiaries. ERCL emanated its book of business predominately from the group’s marine and aviation businesses, while it also provides insurance protection on property, engineering, motor and casualty lines. Risk control measures are undertaken by the group’s internal risk control teams during the early stage of operations to partially mitigate the volatile nature of its portfolio. In addition, ERCL consistently adheres to a conservative underwriting standard that maintained its net retained limits at a manageable level relative to its capital and surplus.” As a partial offsetting factor Best cited ERCL’s “potential investment risk due to affiliated investments. ERCL’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, improved significantly subsequent to the full repayment of a loan by its affiliated company, EVA Airways Corporation in 2011, and the company does not maintain any affiliated investments at present. Nevertheless, ERCL demonstrated a track record of investing in affiliated companies over the past years. Any future material investments in affiliated companies (which will be tied to the future financial needs of its affiliated companies) will potentially pressure ERCL’s risk-based capitalization, given the relatively higher investment risk inherent in affiliated investments in general.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb” of Thailand’s Asian Reinsurance Corporation, both with stable outlooks. Best said the ratings reflect Asian Re’s “adequate risk-adjusted capitalization, superior liquidity and the management efforts to reduce the Corporation’s risk exposure by non-renewing its participation in unprofitable accounts. The ratings also recognize the unique organizational structure and the immunities and privileges granted by country members to the Corporation. Best noted that Asian Re’s risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), “has remained adequate in 2010 and is expected to remain almost stable for the current fiscal year ending in December 2011. This is attributable to the capital infused during 2011 which greatly offset part of the currently known losses from Thai flooding.” However, Best also indicated that, if the losses from Thai flooding deteriorate significantly, it “may revise its view on the financial strength and the ratings of Asian Re.” Best said Asian Re “continues to have a conservative investment portfolio with 72 percent of its assets constituted of cash and cash deposits in 2010. The adopted prudent investment strategy provides a strong liquidity to the Corporation. The management decision to withdraw participation from unprofitable accounts and fewer large catastrophe losses had contributed to the turn-around of the underwriting income in 2010 after two consecutive years of losses. However, Asian Re’s exposure to natural catastrophes could erode the Corporation’s underwriting performance as in 2008 and 2009.” As offsetting factors Best cited the “uncertainty over the development of the losses from Thai flooding, Asian Re’s relatively smaller capital base, management of natural catastrophe exposure, high expense ratio as compared to its competitors in Asia and claims reserving practice. Asian Re’s expense ratio is at the high range compared to its peers in Asia, primarily driven by the portfolio composition for which 94 percent is constituted of proportional arrangements and the terms set out in the reinsurance agreements with the ceding companies.” In addition Best pointed out that Asian Re “relied on the reported claim amounts from its ceding companies to set aside the outstanding reserves and added 5 percent of the outstanding reserves as incurred but not reported (IBNR).” Regarding Asian Re’s reserving practice, Best said it is of the opinion that “any adverse development of the reported claims and any large catastrophe loss could negatively impact Asian Re’s capitalization in the future.”

A.M. Best Co. has placed under review with negative implications and affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of Japan’s Toa Reinsurance Company, Limited and its subsidiary, The new Jersey-based Toa Reinsurance Company of America (TRA). Best explained that the rating actions “reflect that Toa Re has not provided an estimate for its losses in the 2011 Thailand floods.” Best added that in its opinion “Toa Re’s actual losses will be sizable relative to its capitalization, stemming from its exposure through its head office and overseas branches. As the sole domestic reinsurance company in Japan, Toa Re wrote a large portion of proportional treaty businesses with the major Japanese insurance companies, which in turn have high exposure to Thailand floods. TRA does not expect losses from the Thailand floods.” Best said it intends to “revisit the under review status once Toa Re announces its losses from the Thailand floods.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of South Korea’s Meritz Fire and Marine Insurance Company Limited, both with stable outlooks. The ratings “reflect the recovery of Meritz’s capital level through a capital injection, its favorable long-term portfolio and strengthening of enterprise risk management,” Best explained. “In March 2011, Meritz was split into an operating company and a holding company (Meritz Financial Group, Inc.) at a spin-off ratio of 7 to 3. As a result, at the end of March 2011, Meritz’s local solvency ratio dropped by 71 percent to 199 percent (184 percent on an International Financial Reporting Standards [IFRS] basis) from the previous year, and its Best’s Capital Adequacy Ratio (BCAR) deteriorated in similar magnitude as well. In September 2011, the holding company injected KRW 96 billion [$82.88 million], increasing its shares to 50 percent from 45 percent. The local solvency ratio was 187 percent (on an IFRS basis) as of September 2011. With the injection of the capital, together with the growth of net income, Meritz has recovered its capitalization level pre spin off.” In Best’s opinion “the capitalization will continue to improve gradually. Meritz’s concentration is on sales of the protection type long-term business, which has a higher profit margin than savings type long-term business. The composition of the protection type long-term business is around 64 percent of its direct premiums written. The profit level of the long-term business is expected to increase due to the improvement in the risk loss ratio, the increase of in-force premiums, the improved persistency ratio and better duration matching. In response to the increasing financial and catastrophe risks, Meritz has strengthened its enterprise risk management.” Best said it believes that this “will reduce the volatility of the performance of the company going forward.” As a partial offsetting factor Best noted the “intensified market competition. With the active marketing of the online channels of the motor insurance of large players, the competition amongst the top players has been intense since fiscal year 2010, and it is expected to continue. Although the motor loss ratio has improved for Meritz in the first half of fiscal year 2011 due to some regulatory changes and premium increases, the business environment remains very challenging for the company.”

Topics AM Best Japan