Ratings Recap: Validus Re, African Re, Arab Orient, Bosna Re, SOGAZ

June 21, 2012

A.M. Best Co. has removed from under review with developing implications and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings of “a-” of Bermuda-based Validus Re Americas, Ltd., and its affiliate, Validus Re Europe Limited (Ireland). Best subsequently withdrew the ratings at the company’s request that it no longer participate in Best’s interactive rating process. Best said the ratings reflect “Validus Re Americas’ strong risk-adjusted capitalization, favorable underwriting performance and experienced management team. Offsetting these positive rating factors is the potential for adverse reserve development as the remaining contracts run off. However, reserves have been developing favorably.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of {{dq0}} of Nigeria’s African Reinsurance Corporation, both with stable outlooks. The rating affirmations reflect Africa Re’s “improved risk-adjusted capitalization, strong operating performance and established market position in the African reinsurance market’ Best explained. “Although Africa Re is exposed to the unstable political and economic environment associated with some of its operations in Africa, these risks are largely mitigated by the geographic diversification of its business, its asset-liability matching strategy and the ease with which the company can shift its operations between its regional offices.” Best also noted that Africa Re “has undertaken several capital raises over the last two years, raising a total of $203 million through the issuance of shares to existing shareholders. These capital raises followed a period in which the company achieved significant growth in premium volumes relative to its capital position, resulting in a diminishing trend in risk-adjusted capitalization. At year-end 2011, Africa Re reported shareholders’ funds of $ 482 million (2010 $: 344 million, 2009: $ 280 million), with total paid-up capital of $ 265 million (2010: $ 199 million, 2009: $ 100 million). A.M. Best understands that there will be further capital injections in 2012. Going forward, risk-adjusted capitalization is expected to be maintained at a sufficiently strong level to support Africa Re’s business plans. Operating performance remains strong, underpinned by the continuing improvement in underwriting results and positive, albeit declining, investment earnings. Underwriting results reflect Africa Re’s ongoing focus on improving profitability across its entire portfolio, which includes the non-renewal of some international facultative business. In 2011, Africa Re reported a pre-tax profit of $ 72.5 million (2010: $68.2 million), supported by a combined ratio of 90.5 percent (2010: 93 percent), and a lower investment return (including fair value gains and losses) of 3.7 percent (2010: 5.2 percent). Investment results in 2011 were largely impacted by the volatility of the equity markets.” In addition Best pointed out that Africa Re “maintains a strong competitive position across the African continent, underpinned by its privileged access to business, its long-standing relationships with stakeholders within the insurance market and the benefit of its shareholding structure, comprising member states and (re)insurance companies in Africa and supranational organizations. Despite its privileged access to business, the majority of Africa Re’s business is derived from voluntary treaty cessions (93 percent of GWP in 2011), written mainly in Africa with some international (including Middle Eastern and Asian) exposure. In addition to further expansion throughout its domestic market, Africa Re will continue to target growth outside Africa on a conservative basis. Positive rating actions could occur if Africa Re continues to demonstrate improvements in underwriting results across its entire underwriting portfolio whilst sustaining risk-adjusted capitalization at a strong level over the longer-term period. Negative rating actions could occur if there is deterioration in operating performance, particularly due to unprofitable growth in non-core markets, or deterioration in risk-adjusted capitalization due to the company’s expansion.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb+” of Jordan’s Arab Orient Insurance Company, both with stable outlooks. “Both ratings continue to reflect Arab Orient’s leading position in the Jordanian market, its robust, stable profitability and good level of risk-adjusted capitalization,” said Best. “The company’s concentrated business profile and aggressive strategy are considered offsetting rating factors. Arab Orient’s ratings also incorporate the implicit support from the company’s parent, Gulf Insurance Company K.S.C. (GIC).” Best noted that “Arab Orient ranks as the largest insurer in Jordan writing premiums of almost JOD 70 million [$98.73 million] in 2011, equivalent to a market share of 15 percent. Arab Orient dominates the medical business, one of the few growing lines in Jordan, which has allowed the company to grow very rapidly. Despite the somewhat aggressive growth strategy, Arab Orient has continued to deliver profits supported by very good technical profits and a conservative investment strategy that is largely focused on cash and term deposits.” However, Best added, “given the medical business is running at loss ratios in excess of 100 percent on an underwriting year basis,” it remains concerned “over the longer-term support of reinsurers under the current commission structure. The company’s growth, which has far outpaced the market in recent years, has strained Arab Orient’s risk-adjusted capitalization.” However, Best said it had improved in 2011, and Best now “considers Arab Orient’s risk-adjusted capitalization as ‘good,’ benefitting from the company’s conservative investment strategy, solid panel of reinsurers and sound profit retention policy. Positive movement on Arab Orient’s ratings is likely to materialize should the company continue to defend its leading position whilst improving diversification and supporting growth in capital.” Best is monitoring closely the aggressive growth strategy of the company in line with its capital needs, which is considered to be the most likely source of future negative pressure on the ratings.

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Bosna Reosiguranje d.d. Sarajevo (Bosna Re), based in Bosnia and Herzegovina (BH). The outlook for both ratings remains stable. The rating affirmations “reflect Bosna Re’s dominant position within its domestic market in Bosnia and Herzegovina, its good operating performance and adequate level of risk-adjusted capitalization,” Best explained. As offsetting factors Best cited Bosna Re’s “limited business profile and its relatively high proportion of illiquid equity investments. The ratings also consider the recent deterioration in the sovereign creditworthiness of BH.” Best noted that Bosna Re “remains the dominant reinsurer within the small domestic market, supported by its long-standing relationships with cedants, of which some are also shareholders of the company. At year-end 2011, Bosna Re maintained a market share of 85 percent. Gross written premiums (GWP) remained relatively stable at BM 54 million [$35 million] in 2011 (2010: BM 51 million [$33 million]), reflecting the limited opportunities for growth within BH. Approximately 80 percent of Bosna Re’s premium volumes originate from BH, with the remainder derived from the former Yugoslavian states, Central Europe and Asia. Growth in the medium term is expected to target expansion in Bosna Re’s neighboring states.” However, Best added that it “believes that Bosna Re faces significant challenges with the execution of its expansion plans owing to its limited profile and the presence of strong competitors within its target markets. Despite the recent decline in economic conditions in BH,” Best said it “believes that Bosna Re’s dominant position within its domestic market will support its ability to sustain its solid rating fundamentals.” In addition best indicated that “Bosna Re’s operating performance remains stable, underpinned by positive technical results and investment earnings. In 2011, Bosna Re reported a pre-tax profit of BM 2.1 million [$1.36 million], unchanged from earnings produced in the previous year. Results were supported by a combined ratio of 94.1 percent (2010: 94.6 percent) and an investment return of 1.8 percent (2.0 percent).” Going forward, Best said it “expects operating earnings to remain at a similar profitable level, reflecting stability in Bosna Re’s business mix and the limited opportunities available to support growth in scale of its operations within its domestic market. Risk-adjusted capitalization is expected to remain at a sufficient level to support Bosna Re’s ratings, both on a consolidated and stand-alone basis. Bosna Re’s risk-adjusted capital position is exposed to a risky investment profile, due to the high level of investments in associates and unquoted equities. At year-end 2011, these investments represented 43 percent and 10 percent of capital and surplus, respectively, on a consolidated basis. A large portion of these assets relate to investments in cedants, which could have a significant impact on the financial profile of Bosna Re in an extreme market event.” Best will continue to closely monitor Bosna Re’s profitability, but it said that “positive ratings actions are not likely in the near term, in view of the deterioration in the sovereign creditworthiness of BH. Negative rating actions could occur if there is deterioration in the quality of investments or in Bosna Re’s financial profile, resulting in deterioration in risk-adjusted capitalization. Additionally, further deterioration in country risk factors associated with the company’s operations in BH could negatively affect Bosna Re’s ratings.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb” to Russia’s SOGAZ, Insurance Company OJSC, the operating holding company of the SOGAZ Group, which provides a range of insurance and non-insurance related services. The outlook assigned to both ratings is stable. Best said the “ratings reflect SOGAZ’s “strong competitive position as a commercial property insurer, good consolidated, albeit potentially volatile, risk-adjusted capitalization and good technical performance. Additionally, SOGAZ’s ratings consider the high country risk associated with its operation in Russia and its strong relationship with its majority shareholder, Bank Rossiya, and OAO Gazprom (Gazprom), the world’s largest natural gas company.” Bes explained that SOGAZ “operates as a leading insurer in Russia, writing a range of predominately short-tailed non-life commercial risks. The company benefits from strong competitive positions across its underwriting portfolio, particularly in relation to the property account, where it maintains a significant market share. The property account focuses on industrial, energy and other commercial business and represents approximately 50 percent of consolidated gross written premiums (GWP). SOGAZ’s market profile is supported by its more than 600 sales offices and regional branches across the Russian Federation and its long-term relationships with major Russian corporations. In particular, SOGAZ benefits from its strong relationship with Gazprom, as a former captive insurer of the organization. Gazprom-related premiums accounted for 33 percent of consolidated GWP in 2011.” Best also indicated that “despite the strategy to reduce reliance on Gazprom-related business going forward,” it believes that “SOGAZ’s underwriting portfolio will maintain sizeable concentrations to business derived from this source, at least in the medium term. Although maintained at a good level, consolidated risk-adjusted capitalization is likely to be subject to volatility going forward. This reflects SOGAZ’s material holdings of non-core (strategic) assets, accounting for 16 percent of shareholders’ funds at year-end 2011 (2010: 23 percent). SOGAZ’s investment portfolio comprises a high level of low credit quality assets (as measured under international standards), reflecting the limited investment opportunities in Russia, and large concentrations of deposits in major Russian banks, including banking affiliates. Risk-adjusted capitalization is also exposed to major losses arising from the largely industrial and energy focused property portfolio. However, this risk is tempered by a prudent reinsurance program that is largely placed with international reinsurers which maintain secure ratings. Despite weak pricing conditions for the Russian commercial lines sector, technical results remain good, as demonstrated by a five-year average combined ratio of 91 percent. With the exception of voluntary medical insurance (accounting for approximately 30 percent of consolidated GWP), performance typically has been supported by profits from most classes of business. For 2012, a further improvement in the combined ratio is expected, partly due to corrective actions taken to reduce poor claims experience arising from certain policies, including those affected by the weather-related events of 2010.” Best added that “although Bank Rossiya maintains a good business profile in Russia, A.M. Best considers the bank to maintain a vulnerable credit profile (as determined under international standards) and exposure to the high financial system risk associated with the local banking sector. Although there are risks to SOGAZ’s financial strength arising from the bank’s credit profile,” Best said it believes that “SOGAZ’s financial strength is likely to be sustained through its strategic partnership with Gazprom. In addition to being SOGAZ’s largest single-name underwriting exposure, Gazprom (including associates) has a 24 percent shareholding in the company and maintains significant influence on the Board of Directors, occupying three seats out of seven (Bank Rossiya maintains two seats). Gazprom maintains a secure credit profile.” Best doesn’t “expect positive rating actions in the near term. Negative rating actions could occur if there was deterioration in consolidated risk-adjusted capitalization due to a rise in SOGAZ’s investment risk profile or lower than expected operating performance. Deterioration in country risk fundamentals also could have a negative impact on SOGAZ’s ratings. Additionally, a rise or decline in Gazprom’s or Bank Rossiya’s credit profile is also likely to have a positive or negative impact on SOGAZ’s ratings.”

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