Ratings Recap: Dubai Insurance, Legal & General, London General

June 6, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of the United Arab Emirates’ Dubai Insurance Company PSC (DIC), both with stable outlooks. The ratings of DIC reflect its “strong level of risk-adjusted capitalization and good underwriting performance,” Best said. As partial offsetting factors Best cited DIC’s “modest business profile and marginal level of enterprise risk management. DIC is likely to maintain a strong level of risk-adjusted capitalization over the medium term as the company seeks to expand its franchise. Capitalization is supported by a relatively large capital base, a low level of premium retention and a reinsurance panel of good credit quality.” However, Best said a “high concentration of equity securities, particularly within the local banking sector, is of some concern and gives rise to volatility in DIC’s capital position. In 2011, DIC maintained an excellent underwriting performance for the majority of its business lines and reported an overall combined ratio for non-life business of 83 percent. While this is a significant weakening when compared to previous years (when the company reported combined ratios as low as 60 percent), it is reflective of the growth achieved and the increasing volumes of medical and motor business, which are generally expected to operate with a lower level of profitability. Of some concern in 2011 was the poor performance of DIC’s medical book, which accounted for around one third of gross premiums written and reported a combined ratio in excess of 100 percent.” Best added that, although DIC “currently maintains only a modest competitive market position, the company is likely to achieve strong premium growth on a gross basis over the medium term in the region of 15 percent-30 percent per annum, although net premiums are likely to grow at a lower rate. While DIC’s gross premium income is well diversified by line of business, retained business is concentrated within the motor and medical business lines. DIC’s level of enterprise risk management is marginal and the company does not perform any sophisticated analysis of its potential catastrophe exposures.” However, Best also indicated that “over the past year, DIC has made some developments in diversifying its investment base and in seeking third party actuarial opinion on its reserve adequacy. Over time, a stabilization of DIC’s level of underwriting performance and capital base, in addition to a gradual improvement of its business profile and enterprise risk management could add positive pressures to the ratings. A significant reduction in DIC’s risk-adjusted capitalization or a considerable deterioration in its operating performance could add negative pressure to the current ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of the United Arab Emirates’ Dubai Insurance Company PSC (DIC), both with stable outlooks. The ratings of DIC reflect its “strong level of risk-adjusted capitalization and good underwriting performance,” Best said. As partial offsetting factors Best cited DIC’s “modest business profile and marginal level of enterprise risk management. DIC is likely to maintain a strong level of risk-adjusted capitalization over the medium term as the company seeks to expand its franchise. Capitalization is supported by a relatively large capital base, a low level of premium retention and a reinsurance panel of good credit quality.” However, Best said a “high concentration of equity securities, particularly within the local banking sector, is of some concern and gives rise to volatility in DIC’s capital position. In 2011, DIC maintained an excellent underwriting performance for the majority of its business lines and reported an overall combined ratio for non-life business of 83 percent. While this is a significant weakening when compared to previous years (when the company reported combined ratios as low as 60 percent), it is reflective of the growth achieved and the increasing volumes of medical and motor business, which are generally expected to operate with a lower level of profitability. Of some concern in 2011 was the poor performance of DIC’s medical book, which accounted for around one third of gross premiums written and reported a combined ratio in excess of 100 percent.” Best added that, although DIC “currently maintains only a modest competitive market position, the company is likely to achieve strong premium growth on a gross basis over the medium term in the region of 15 percent-30 percent per annum, although net premiums are likely to grow at a lower rate. While DIC’s gross premium income is well diversified by line of business, retained business is concentrated within the motor and medical business lines. DIC’s level of enterprise risk management is marginal and the company does not perform any sophisticated analysis of its potential catastrophe exposures.” However, Best also indicated that “over the past year, DIC has made some developments in diversifying its investment base and in seeking third party actuarial opinion on its reserve adequacy. Over time, a stabilization of DIC’s level of underwriting performance and capital base, in addition to a gradual improvement of its business profile and enterprise risk management could add positive pressures to the ratings. A significant reduction in DIC’s risk-adjusted capitalization or a considerable deterioration in its operating performance could add negative pressure to the current ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the issuer credit rating (ICR) of “a” of the non-operating holding company, UK-based Legal & General Group Plc, as well as the ratings for all debt issued or guaranteed by L&G. Best also affirmed the financial strength rating (FSR) of A+ (Superior) and ICR of “aa-” of Legal & General Assurance Society Limited (LGAS). The outlook for all of the ratings is stable. Best said the ratings “reflect current good risk-adjusted capitalization for LGAS and robust capitalization at the group level, which is expected to be maintained going forward, together with a resilient business position.” A partial offsetting factor is “the significant decline in profits the group experienced in 2011, predominantly driven by a sharp decline in unrealized gains on investments. L&G’s capital position is recovering its strength as capital and surplus as at the financial year ending 31 December 2011 had increased to £5.2 billion [$8.041 billion], up from £4.8 billion [$7.422 billion] as at the end of the previous year. In 2011, there was a significant reduction in the unallocated divisible surplus (supporting the with-profits fund) predominantly due to unrealized investment losses during the year.” Best explained that this is one of the “soft capital elements” for which it gives credit. Though L&G is not immune to the volatility of the financial markets, Best said it “expects the group to remain resilient and to respond positively to the regulatory changes the businesses face in the United Kingdom with the Retail Distribution Review (RDR) and pensions auto-enrolment.” In addition Best pointed out that “Solvency II remains a challenge for the industry, and L&G is making progress enhancing its risk management and corporate governance capabilities to prepare itself for the challenge. Although L&G’s 2011 IFRS profits before tax of £778 million [$1.203 billion] were 40 percent lower than the previous year, the group’s cash generation and operating profit figures exceeded prior year. The group suffered a significant decline in unrealized gains in its investment portfolio through its profit and loss account, which was the main contributor of a decline in technical results of 22 percent to £1.8 billion [$2.783 billion]. Upward rating movements are unlikely at this point. Downward rating pressures could emerge from a worsening of the financial and life insurance market conditions in the UK (L&G’s largest market), a significant shift in group strategy or a material decline in risk-adjusted capitalization.”The debt rating of “a” has been affirmed for the following senior debt issues:
Legal & General Finance Plc—
— £ 10 million [$15.463 million] 5.800 percent senior unsecured notes, due 2041
— £ 40 million [$61.852 million] 5.750 percent senior unsecured notes, due 2033
— £ 200 million [$309.23 million] 5.875 percent senior unsecured notes, due 2033
— £ 350 million [$541.203] million 5.875 percent senior unsecured notes, due 2031
The debt rating of “a-” has been affirmed for the following:
Legal & General Group Plc—
— £ 400 million [$618.46 million] 5.875 percent undated subordinated notes
— €600 million [$750 million] 4.000 percent subordinated notes, due 2025
— £ 600 million [$927.831 million] 6.385 percent perpetual preferred securities
— £ 300 million [$463.915 million] 10.000 percent subordinated notes, due 2041
The indicative rating of “a” has been affirmed for the following debt securities issued under the £2 billion [$3.093 billion] medium term note program:
Legal & General Finance Plc—
— Senior debt
The indicative rating of “a-” has been affirmed for the following debt securities issued under the £ 2 billion [$3.093 billion] medium term note program.

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings of “a-” of UK-based London General Insurance Company Limited (LGI) and London General Life Company Limited (LGL) both with stable outlooks. LGI and LGL “are expected to maintain excellent risk-adjusted capitalization in 2012, supported by a modest increase in shareholders’ funds for both companies,” Best said. “LGI’s risk-adjusted capitalization continues to be supported by letters of credit and trust arrangements, which the company holds as collateral to mitigate reinsurer default risk. LGI is expected to maintain strong technical performance in 2012, despite the ongoing impact of the economic downturn on creditor business and adverse claims experience for mobile phone business in Continental Europe. The company reported an excellent underwriting profit of approximately £10.0 million [$15.463 million] in 2011, albeit materially lower than the £19.5 million [$30.14 million] achieved in 2010.” Best explained that the “performance was affected by a sharp decline in earned premium due to the effect of challenging economic conditions on demand for creditor business. The result benefited from reserve releases due to better than initially anticipated claims experience for recession-affected lines such as creditor business as well as some warranty lines. LGL’s technical profit in 2012 is expected to be materially lower than the £2.0 million [$30.926 million] achieved in 2011. The company’s strong technical performance in 2011 was supported by profitable multi-year contracts written in prior years, and also by a reduction in its long-term business provision of approximately £20.8 million [$32.14 million] (2010: £9.3 million [$14.37 million]). In addition Best noted that both LGI and LGL “maintain a good specialist profile in the United Kingdom, Ireland and Continental Europe. The companies share a client base, and their combined underwriting portfolio includes extended warranty, accidental damage and creditor insurance. LGI’s net premium income is likely to increase in 2012 due to a number of new large warranty contracts secured in late 2010 and early 2011 as well as organic growth of existing business. A decline in the net premium written by LGL in recent years, due to weak economic conditions and consequent reduction in demand for consumer loans, has weakened the company’s business profile. Any increase in LGL’s premium volume is dependent on an increase in lending activities in the UK and European markets. A.M. Best believes LGI and LGL are well positioned at their current rating level. Factors that could lead to negative rating actions for both companies include a significant decline in risk-adjusted capitalization and weaker than expected operating performance. In addition, further deterioration in LGL’s business profile would likely lead to a review of its ratings.”

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