Ratings Roundup: Taiping Re, First Insurance

January 24, 2012

A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating “a-” of Hong Kong-based Taiping Reinsurance Company Limited (TPRe). Best explained that the revision of its outlook “follows TPRe’s deteriorated risk-adjusted capitalization and exposure to worldwide catastrophic events. The company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), deteriorated significantly in 2011 due to the rapid increase in underwriting leverage and heightened catastrophic risk exposure relative to a lower absolute capital base.” Best also noted that the company’s “net premium leverage increased to 0.9 times in 2010 from 0.6 times in 2009, partly driven by strong business growth in China, and is anticipated to reach 1 time in 2011. For 2011, the company is expected to report an after-tax operating loss of HKD 94 million [US$12.1 million], primarily due to underwriting losses resulting from a combination of catastrophic event losses around the world. The estimated net loss in respect to the recent floods in Thailand reached HKD 480 million [US$61.85 million] as at year-end December 31, in addition to a total retained loss of HKD 349 million [US$45 million] incurred from the Japan and New Zealand earthquakes during the first half of 2011.” Best added that in view of TPRe’s significant global catastrophe exposure, it “remains cautious concerning the potential volatility over the current level of the company’s risk-adjusted capitalization in the event of future material catastrophic losses.” As partial offsets to the negative rating factors Best cited “TPRe’s historical track record of profitable operating performance during normal catastrophic years and its consistently prudent reserving practice. During 2006-2010, TPRe maintained a five-year average combined ratio of 90.4 percent in conjunction with consistently positive investment income generated from an investment portfolio that was comprised mainly of cash and highly-rated bonds. The release of redundant loss reserves partially mitigated TPRe’s earnings volatility over the past several years.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” to Jordan-based First Insurance Company (FIC), both with stable outlooks . The ratings reflect FIC’s “superior level of risk-adjusted capitalization and good overall financial performance,” said Best. However the rating agency also noted that the “company’s modest size offsets the ratings, although it is partially mitigated by FIC’s takaful and young nature.” Best added that new takaful regulations outlined by the Jordanian regulator have given it “confidence in the level of capital support offered by FIC’s shareholders’ fund to its takaful fund. Risk-adjusted capitalization of FIC’s combined policyholders’ and shareholders’ funds is supported by the company’s low level of business leverage, a generally good quality reinsurance program and a conservative investment profile. In 2011, FIC wrote gross premiums of JOD 14 million $20 million) against a capital base of JOD 25 million ($35 million).” In addition Best noted that although risk-adjusted capitalization is “likely to decrease over the medium term as the company grows its premium base and increases its risk-adjusted capital requirements, it is likely to remain at an excellent level. FIC’s underwriting performance has been improving over recent years. The company’s overall loss ratio improved from 83 percent in 2008 to 73 percent in 2011, and its combined ratio improved from 129 percent to 92 percent over the same period. While motor and medical business makes up the vast majority of FIC’s net written premiums, the company’s property line has contributed the bulk of underwriting profits. Although efforts are being made to improve the profitability of the company’s motor and medical business, competitive and regulatory conditions within the local Jordanian market will make any significant improvements challenging. Furthermore, FIC is expected to maintain a good balance of profitability between its policyholders’ and shareholders’ funds in future years, as it has successfully achieved since inception. FIC has successfully established itself within the Jordanian market since inception in 2007 and is growing into a medium sized company. At half year 2011, FIC was 11th largest in the Jordan market with a 3.73 percent market share by premium income. FIC is one of only three takaful insurers in the Jordanian insurance market, and if it continues to improve its business position, it is likely to become the leading takaful insurer over the short to medium term. Deterioration in underwriting profitability or a significant reduction in FIC’s risk-adjusted capitalization materially below expectations will likely add to negative pressure on the current ratings. An improvement in the company’s ratings is unlikely over the medium term.”

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