Ratings Recap: Farmers Mutual (NZ), Lloyd’s Syndicate 1084, Pacific Indemnity, Caribbean Alliance

June 14, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of the New Zealand-based Farmers’ Mutual Group (FMG) and FMG Insurance Limited (FMGIL). The outlook for all of the ratings is stable. The ratings of FMG and FMGIL (the group) reflect their “strong risk-adjusted capitalization, continued operating profitability and strong business profile,” said Best. “Although the group’s risk-adjusted capitalization has declined due to higher underwriting risk, it remains supportive of the group’s current ratings. Ongoing profitability helped grow its capital by about 5.8 percent in absolute terms during the year to March 31, 2012. Ongoing marketing campaigns, competitive pricing and the acquisition of an existing livestock and bloodstock book helped the group to strengthen its profile as the country’s leading rural insurer.” Best noted that the group “experienced customer growth of about 8.5 percent, while gross premiums written grew by around 14 percent in the year ended March 31, 2012. The group’s overall underwriting results improved in fiscal year 2012, reflecting an improvement in its loss ratio to around 65 percent from 68 percent in the prior year.” However, Best also pointed out that the group’s net income declined by around 15 percent to NZ$ 8.5 million [US$6.62 million] due to lower investment results.” As offsetting factors Best cited “increased net premiums written leverage, lower profitability and unfavorable claims reserve adjustments. The group’s net premiums written leverage has increased as net premiums written growth of 17.3 percent outpaced the group’s capital growth due to lower overall profitability. Historically, capital growth was significantly supported by investment results. However, a poor investment environment led to lower investment results in 2012. The group’s higher catastrophe reinsurance deductible also weighed on profitability. These trends are anticipated to continue into 2013, and net premiums written leverage could further increase. Claims estimates relating to the Christchurch earthquakes have been adjusted upwards in 2012 to reflect the availability of better claims information and the impact of aftershocks. This has led to higher net loss reserve risk and reinsurance recoverable risk on the group’s balance sheet. A significant decrease in the group’s risk-adjusted capitalization could result in downward pressure on its ratings. A sustained improvement in the group’s profitability could result in upward movement to the ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a+” of Lloyd’s Syndicate 1084, and has withdrawn the ratings at the company’s request. Best said the ratings of syndicate 1084 “reflect the financial strength of the Lloyd’s market, which underpins the security of all syndicates. The syndicate’s managing agent, Chaucer Syndicates Limited, and main capital provider, Chaucer Corporate Capital (No 3) Limited,” are indirect subsidiaries of U.S.-based The Hanover Insurance Group, Inc. The syndicate benefits from “enhanced financial flexibility through its association with The Hanover, which is a potential source of further capital should the syndicate need it,” Best continued. “The syndicate’s 2011 performance was affected by the large catastrophe events of the year, which pushed the combined ratio up to 104.7 percent (2010: 98.9 percent). The syndicate’s five-year weighted average combined ratio is 96.5 percent, and prospective performance is likely to be in line with that. Investment income is likely to remain positive if modest in the current low interest rate environment. The investment portfolio has been de-risked significantly since 2008 and consists primarily of fixed income securities and cash. Syndicate 1084 writes a well-diversified portfolio comprising energy, marine and aviation, property, specialist lines and a UK motor book. The syndicate benefits from the profile of its managing agent Chaucer Syndicates Limited, which also manages Lloyd’s Syndicate 1176 and two third party syndicates.”

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and issuer credit rating to “a-” from “bbb+” of Guam-based Pacific Indemnity Insurance Company, and has revised its outlook for both ratings to stable from positive. Best explained that the “rating upgrades reflect Pacific Indemnity’s continued profitable underwriting performance, with favorable trends in surplus appreciation, resulting in a solid risk-adjusted capital position. Although the company is subject to potential natural catastrophes, it continues to prudently manage these risks through exercising cautious underwriting controls and loss mitigation strategies, as well as maintaining an extensive catastrophe reinsurance program.” Best also noted that the “company has managed to maintain premium levels despite more difficult localized economic and competitive market conditions. The rating upgrades also reflect that Pacific Indemnity will continue to produce profitable results and maintain its solid risk-adjusted capital position, even in future periods with more prevalent typhoon and seismic activity. Downward rating pressure could occur if catastrophic weather, seismic events or other increased loss patterns should lead to a deterioration in Pacific Indemnity’s underwriting performance and significant decline in risk-adjusted capitalization.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of {{dq8}} of Caribbean Alliance Insurance Company Limited (CAIC), which is based on the islands of Antigua and Barbuda. The outlook for both ratings is stable. The ratings reflect CAIC’s “continued strong capitalization, historically favorable operating results and conservative underwriting philosophy,” Best explained. CAIC’s favorable underwriting performance and stable investment income “have produced positive overall results, which have consistently contributed to surplus appreciation. Additionally, CAIC’s management team has extensive knowledge of the islands in which the company operates and maintains effective risk management.” As offsetting factors Best cited “CAIC’s geographic concentration of risk, high dependence on reinsurance and the challenging market conditions in the Caribbean marketplace. The company operates in competitive markets where local and large outside insurers continue to challenge established companies to maintain market share. CAIC’s book of business is exposed to both frequent and severe weather-related events affecting the Eastern Caribbean. However, the level of catastrophe risk is mitigated by CAIC’s conservative reinsurance program, which protects the company by reducing the net probable maximum loss to a manageable level. Positive rating actions could occur if CAIC maintains its consistently strong underwriting performance and long-term profitability or if there is an upgrade in Antigua’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 Antigua’s country risk tier.”

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