Ratings Recap: CIBC Re, ACS (NZ) Ltd, CCR (Algeria)

July 19, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Barbados-based CIBC Reinsurance Company Limited (CIBC Re), both with stable outlooks. Best explained that “CIBC Re is a life reinsurance subsidiary that is ultimately owned by the Canadian Imperial Bank of Commerce (CIBC) (Toronto, Ontario). CIBC Re principally reinsures credit insurance policies that have been underwritten by third-party life insurance carriers on consumer mortgages, loans and credit cards originated by CIBC’s Canadian branches. Then, CIBC Re retrocedes these risks to several unaffiliated reinsurers and in turn, accepts non-Canadian risks of a similar nature from those unaffiliated reinsurers. To a lesser extent, CIBC Re also participates in excess retrocession pools within the United States and Canada under a variety of treaties.” Best said the “rating affirmations reflect CIBC Re’s continued trend of strong capitalization, favorable operating earnings and its conservative investment portfolio. The ratings factor in CIBC Re’s enterprise risk management framework that is well integrated into CIBC and the high credit quality and strong liquidity of the company’s investment portfolio, which consists entirely of term bank deposits with a CIBC affiliate.” As a partial offsetting factor Best cited “CIBC Re’s dependence upon consumer loan originations for growth, which has a potential to decline if consumer loan originations slow in the Canadian market. If this were to occur it would impact CIBC Re’s volume of reinsurance received. Additionally, a further decline in economic conditions in Europe could impact CIBC Re’s ability to retrocede assumed risks to its European counterparties. CIBC Re is considered well positioned at its current rating level. Positive rating actions are unlikely in the near or intermediate term. Factors that may cause negative rating actions include significant adverse changes in CIBC Re’s capitalization, operating performance or business model.”

A.M. Best Co. has downgraded the financial strength rating to ‘B-‘ (Fair) from ‘B+’ (Good) and issuer credit rating to “bb-” from “bbb-” of ACS (NZ) Limited (New Zealand). Best has also placed both ratings under review with developing implications, which, it said, “reflects the company’s near-term regulatory risk.” These rating actions acknowledge ACS’ risk-adjusted capitalization and its separation from the UK-based Ecclesiastical Insurance Office plc (EIO), as well as the potential vulnerability of ACS’ capital position. “Following the recently approved Scheme of Arrangement, EIO has strengthened ACS’ capital position,” Best noted. “Also, EIO is providing additional reinsurance cover (to extend the cover up to NZ$570 million [US$457 million]) to extend reinsurance protection for the February 2011 earthquake event. However, ACS’ current risk-adjusted capitalization remains stressed as reinsurance recoverable risk remains a significant drag. Adverse development to the February 2011 earthquake cost estimates and slower than anticipated claims settlements during the first half of 2012 have resulted in a higher than anticipated level of reinsurance recoverable risk as of June 30, 2012.” In addition Best indicated that “ACS’ Scheme of Arrangement and the transfer of its majority ownership away from EIO remove the likelihood of any further financial support from EIO. This leaves ACS’ capital position vulnerable to any further increases in claims estimates, especially if these develop beyond ACS’ extended reinsurance coverage (NZ$ 570 million), which could weaken ACS’ ability to fully meet policyholder claims. The company faces near-term regulatory risk.” Best also indicated that it had been “informed by ACS that it has yet to submit its final solvency calculations as of June 30, 2012 to the Reserve Bank of New Zealand (RBNZ). It remains to be seen whether the RBNZ will view ACS’ final solvency calculations as compliant.” Best said it “has sighted the draft calculations the company has lodged with the RBNZ. While these show a positive regulatory solvency margin, it is thin and the RBNZ has publicly voiced concerns on ACS’ regulatory solvency. Partially offsetting these negative rating factors are anticipated cash settlements by ACS of major claims by December 31, 2012, since the company’s management recently informed A.M. Best that it reached agreement on cash settlement amounts (totaling around NZ$ 366 million [US$293.5 million]) with major policyholders. This could lead to a significant reduction in reinsurance recoverable risk by December 31, 2012 and an improvement in risk-adjusted capitalization. Also, an agreed cash settlement of major claims would reduce the impact and likelihood of any further adverse claims cost development and would help to protect the company’s capital position. Developments that could result in negative rating actions include negative regulatory action, a slower than anticipated reduction in ACS’ reinsurance recoverable risk and erosion of its capital position.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Algeria’s Compagnie Centrale de RĂ©assurance (CCR), both with stable outlooks. “The ratings reflect CCR’s strong local business profile, good risk-adjusted capitalization and solid underwriting performance,” said Best. As offsetting factors Best cited CCR’s “high degree of geographic concentration in terms of business origination and investments and an enterprise risk management (ERM) program that, despite progress achieved in 2011, is in the early stage of development.” Best said that in its opinion, “CCR has a strong domestic business position as Algeria’s national reinsurer.” Best also said it, believes “this leading position has been further strengthened in 2011 as the volume of business written by the company has benefited from the September 2010 change that increased the rate of compulsory cession to CCR to 50 percent (from 5 percent or 10 percent, depending on the type of risks). As a result of this development, together with a successful growth of business originated abroad, CCR’s gross written premiums have increased by about 38 percent in 2011 to DZD 13.5 billion [$165 million]. CCR’s technical result remained solid in 2011 and improved to DZD 1.3 billion [$15.87 million]. This improvement resulted from the significant increase in gross written premiums, whilst the company managed to maintain a good technical profitability, with a combined ratio of 74 percent. In addition to a sound technical performance, CCR’s 2011 record profit of DZD 1.8 billion [$22 million] was also driven by an increased investment income of DZD 941.3 million [$11.593 million] (against DZD 518.8 million [$6.387 million] in 2010), mainly due to a large dividend payment received from one of its participations.” Best also noted: “CCR’s risk-adjusted capitalization benefited from its 2011 solid results and remained good despite the significant increase in its net premiums written.” In the future Best said it “expects the company’s capital levels to remain supportive of its current rating level, notably as a result of a contained dividend policy with a pay-out ratio that A.M. Best expects to remain below 20 percent. The ratings also factor in the country risk of Algeria,” which Best classifies as a “Tier 5 where CCR operates and originated 94 percent of its gross written premiums in 2011. Furthermore, although acknowledging the progress made on it in 2011,” Best said it views CCR’s ERM framework “as being at an early stage of development and expects the company to maintain its efforts to improve it in the next few years. Upward rating movement could occur if Best were to positively revise its current evaluation of Algeria’s country risk tier or if the company were to demonstrate a controlled diversification of its business profile through international growth combined with a strong technical performance. Downward rating pressure could occur if CCR’s plan to increase its international business were to impact its technical fundamentals or if the country risk of Algeria” in Best’s assessment “were to deteriorate.”

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