Ratings Recap: Arab Orient, Tristar, ASSA, Arabia, ACR Capital

April 27, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of United Arab Emirates-based Arab Orient Insurance Company (PSC) (Orient), both with stable outlooks. The ratings reflect Orient’s “superior risk-adjusted capitalization, solid business profile within UAE and robust operating performance,” said Best. As offsetting factors Best cited Orient’s “level of reinsurance dependence and the need for more focus on its enterprise risk management.” Best added that Orient’s superior risk-adjusted capitalization is a “reflection of constant increases in capital and surplus through high earnings retention. In 2011, its capital and surplus surpassed AED 1.0 billion [$272 million], making Orient one of the most capitalized companies in UAE. Furthermore, investment and credit risks are kept low with Orient’s particularly conservative investment strategy and good reinsurance program.” In addition Best noted that Orient “has maintained its strong position in the UAE insurance market. As indicated by the third quarter 2011 preliminary results, the company shall remain the third-largest in terms of gross written premium and largest by net profit at year-end 2011. The company is also further expanding its franchise outside UAE with the opening of a subsidiary in Sri Lanka; however, in the short term, business is likely to remain concentrated in the UAE. Orient’s operating performance is robust. In 2011, the company achieved a double digit growth of 12 percent to AED 1.265 billion [$344.4 million] in gross written premium, and while technical performance has decreased almost 7 percent to AED 115 million [$31.3 million], Orient’s operating performance was further enhanced by its non-technical account, which totaled AED 89 million [$24.23 million] in 2011.” In addition Best pointed out that although premium retention “remains fairly low with 70 percent ceded to reinsurers, Orient remains focused on underwriting, with technical profits driving net income. Furthermore, the management have embarked upon the development of an economic capital model,” which Best observed, “will enhance the company’s enterprise risk management over the coming years. Upward movement is unlikely over the medium term. A substantial deterioration in financial performance could add negative pressures to the ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘C-‘ (Weak) and issuer credit rating of {{dq0}} of Tristar Insurance Company Limited, which is based on the Caribbean Island of Saint Kitts and Nevis. The outlook for both ratings is stable. The ratings reflect Tristar’s “narrow business profile, inconsistent overall operating results and limited financial flexibility,” Best explained. “Tristar is a niche reinsurer with a very narrow business profile primarily focused on one business segment,” Best continued. “While the company is attempting to diversify its book of business, Tristar currently reinsures mostly surety coverages in Latin America, mainly in Colombia and the Dominican Republic. Overall operating results have been inconsistent and mainly reflect Tristar’s investment performance.” In addition, Best said it “considers the company’s risk management as weak and expects continued improvement in the near to medium term.” However, as a more positive factor, Best cited Tristar’s “adequate risk-adjusted capitalization for its current business profile.” Best also said it “believes that Tristar’s current ownership structure as a closely held organization limits its financial flexibility. While the ratings of Tristar are stable, factors that could contribute to rating enhancement include sustained improvement in its underwriting performance, consistent long-term overall profitability and an upgrade in Saint Kitts and Nevis’ country risk tier rating. Factors that may lead to negative rating actions include a sustained decline in underwriting profitability, significant deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio and a downgrade in Saint Kitts and Nevis’ country risk tier rating.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Panama’s ASSA Compania de Seguros, S.A., both with stable outlooks. Best said the “ratings reflect ASSA’s continued excellent operating results, favorable capitalization and strong business profile. ASSA maintains a well diversified book of business that includes both property/casualty and life/health products. ASSA is ultimately owned by Grupo ASSA, S.A. (Grupo ASSA), a publicly traded financial services holding company on the Panama stock exchange.” Best added that “ASSA has shown disciplined underwriting in a highly competitive market, while its risk-based capitalization remains fully supportive of the current ratings and outlook. ASSA’s underwriting profitability is complemented by consistent levels of investment income, which has enabled the company to steadily appreciate surplus while still providing Grupo ASSA with dividend payments. ASSA also benefits from established risk management systems and strong reinsurance programs across most lines of business.” As partial offsetting factors Best cited ASSA’s “risk concentration in a geographically limited insurance market along with operating in a country,” which Best said it “considers to have an elevated level of country risk. Additionally, the Panamanian insurance market is becoming increasingly competitive as local and large outside insurers continue to vie for market share. Positive rating actions could occur if ASSA maintains its consistently strong underwriting performance and long-term profitability in conjunction with an upgrade in Panama’s country risk tier. Negative rating triggers could include a significant decline in the company’s risk-based capitalization, sustained adverse operating performance or a downgrade in Panama’s country risk tier.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” to Lebanon-based ARABIA Insurance Company s.a.l. (AIC), both with stable outlooks. The ratings reflect AIC’s “good level of risk-adjusted capitalization together with a well diversified business profile and solid overall performance,” said Best. “Although AIC’s level of risk-adjusted capitalization is likely to be eroded marginally as the company grows over the medium term, it is expected to be maintained at a good level. AIC’s reinsurers are generally of a good credit quality, and net premium leverage (net premiums written to capital and surplus) is unlikely to increase above 125 percent over the next two years.” Best added that “owing to a reasonably high proportion of equity securities within AIC’s investment portfolio (equity securities are expected to account for almost one third of total investments in 2011), risk-adjusted capitalization is exposed to potential volatility.” Best also explained that “AIC operates throughout the Middle East region. Along with its home operations in Lebanon, AIC has subsidiaries in Jordan (General ARABIA Insurance Company Ltd) and Syria (ARABIA Insurance Company – Syria S.A.) as well as branches and agencies in United Arab Emirates, Qatar, Oman, Bahrain and Kuwait. The company has a further affiliate in Saudi Arabia (ARABIA Insurance Cooperative Company), although common ownership is not sufficient to allow consolidation. AIC’s business is well diversified both by line of business and geographical distribution. AIC has some concentration in the motor business, which accounts for nearly half of the company’s gross premium income, though this is common throughout the region. Although AIC does not hold a leading position in any single market, it is strengthening its position in Lebanon.” Best said it expects overall earnings “to be good over the medium term, with a likely return on equity within the range of 7 percent to 12 percent over the next two years. This is in line with the company’s recent experience where it has achieved a similar level of earnings, including a profit before tax of LBP 15 billion ($10 million) in 2010. Although underwriting profits (including unallocated management expenses) dropped from LBP 12 billion ($8 million) in 2008 to LBP 4.2 billion ($2.8 million) in 2010, a stable combined ratio of around 95 percent was achieved in 2009 and 2010 and also is expected in 2011 and 2012. During the 2010 financial year, underwriting profits from AIC’s general business dropped to a five-year low, and underwriting results were supported by an unusually strong profit from the company’s life business. Furthermore, a significant proportion of equity securities in AIC’s investment portfolio exposes the company’s overall results to potential volatility. Over time, a greater presence in core markets and development of enterprise-wide risk management, together with a stable underwriting performance and maintenance of a good level of risk-adjusted capitalization could put positive pressure on the ratings. A reduction in risk-adjusted capitalization, deterioration in financial performance or an increase in country risk could add negative pressures to the ratings.”

A.M. Best Co. has commented that the issuer credit ratings (ICR) of “bbb-” of Singapore-based ACR Capital Holdings Pte. Ltd. and ACR ReTakaful Holdings Limited (United Arab Emirates) “are unchanged following ACR Holdings’ announcement that Marubeni Corporation (Marubeni) will hold around a 22 percent stake in ACR Holdings.” In addition Best said the financial strength rating of ‘A-‘ (Excellent) and ICRs of “a-” of Asia Capital Reinsurance Group Pte. Ltd. (ACR), Asia Capital Reinsurance Malaysia Sdn Bhd (ACRM), ACR ReTakaful SEA Berhad (both domiciled in Malaysia) and ACR ReTakaful MEA B.S.C. (c) (Bahrain), all reinsurance operations of ACR Holdings, are unchanged. The outlook for all ratings is stable. A portion of the proceeds will be used to maintain a sufficient level of risk-based capital at ACR.

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