Ratings Recap: Grupo Nacional, GBG

March 7, 2012

A.M. Best Co. has downgraded the financial strength rating to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Mexico’s Grupo Nacional Provincial, S.A.B. (GNP), and has revised its outlook on the ratings from negative to stable. These rating actions “reflect GNP’s continued elevated underwriting leverage relative to stockholders equity, its volatile underwriting and net earnings performance by segment in recent years, and a decreasing risk-adjusted capitalization measure due to significant premium growth,” Best explained. GNP’s risk-adjusted capitalization “has experienced a downward trend for the past three years and was below the guidelines for the previous rating level.” As partially offsetting these negative rating factors Best cited “GNP’s leading position in the Mexican insurance market, recent improvements in the operating results of the auto segment, diversified business profile and historically profitable overall operating performance.” The report also noted that GNP “maintains a conservative valuation policy reserves and high adequacy level of capital according to Mexican regulations. GNP is the largest domestic insurance company in Mexico as measured by direct premiums written. The company operates as a composite insurer of life and non-life business with core business segments in life, health and automobile coverage.” Best said, it “believes GNP’s ratings are well positioned in the near to medium term based on its current financial strength and risk management profile. Key rating factors that may result in negative rating actions include further volatility in earnings, decrease in the company’s capital strength and constraints in financial flexibility to support continuing new business growth.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Guernsey-based GBG Insurance Limited, both with stable outlooks. Best said the ratings “reflect GBG’s adequate level of prospective risk-adjusted capitalization, good anticipated financial performance and modest business profile. Offsetting the ratings is the relatively high level of debt within GBG’s ultimate parent, Saxton Lane Company Limited, and weaker than anticipated results in the 2011 financial year.” Best pointed out that the overall loss of $1.3 million in 2011 “is significantly below original expectations for GBG’s first year of operations (post its group wide re-organization), where a profit of around $3 million had originally been anticipated. This weak overall result had a negative impact on both GBG’s level of risk-adjusted capitalization and on Saxton Lane’s level of leverage.” However, Best also indicated that “GBG’s level of risk-adjusted capitalization remains at an adequate level. In 2011, GBG’s capital and surplus of $10.8 million backed net written premiums of $5.8 million and was supported by a reinsurance program of excellent credit quality and a conservative investment profile.” Best also explained that the loss in 2011 “can be partially attributed to a number of one-off costs.” Best said it expects “a significantly improved result in both 2012 and 2013. In these years, a profit of between $4 million and $6 million is expected to be retained in order to strengthen GBG’s level of risk-adjusted capitalization and to reduce Saxton Lane’s level of leverage. Although GBG’s loss experience has recently deteriorated, a low level of retention means that it has a minimal impact on underwriting results, which are driven by commission and fee income. However, if corrective actions prove inadequate, overall results will suffer over the medium term.” Best described GBG as having a “modest profile within the relatively fragmented international expatriate health and life insurance market. GBG is small compared to many of its more diversified peers and is likely to face significant competitive pressure as it grows its portfolio of insurance business. In order to maintain the current ratings, it is important that GBG performs in accordance with its business plans. Factors that will add negative pressure to the current rating level include a failure to generate and retain underwriting profits at the expected level, inability to reduce leveraging at the holding company and a significant deterioration in risk-adjusted capitalization. An upgrading of the ratings is not expected at this time.”

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