Best Affirms Polish Re’s Ratings; Outlook Stable

July 20, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Polskie Towarzystwo Reaskuracji S.A. (Polish Re) , both with stable outlooks.

The rating affirmations reflect Polish Re’s “strong risk-adjusted capitalization combined with the explicit support provided by its ultimate parent, Fairfax Financial Holdings Limited, in the form of a legal binding guarantee with an indefinite term,” Best explained.

As partial offsetting factors the report cited the “uncertainty associated with Polish Re’s ability to sustain a positive operating performance going forward following its historic volatility in underwriting and investment income and its business profile, which continues to be exposed to a small number of cedants.”

Following the capital injection by Fairfax in 2009, Polish Re’s risk-adjusted capitalization continues to be supported by a high capital base, albeit slightly offset by significant premium growth of 26 percent in 2011.

Best also indicated that in addition to the explicit parental guarantee, “Fairfax continues to offer support and expertise with regards to underwriting and asset management. Hamblin Watsa, Fairfax’s investment counsel, is responsible for Polish Re’s investment management. Prospectively, stand-alone risk-adjusted capitalization is expected to rely on improved profitability, profit retention and moderate growth.”

Best’s report also noted that “Polish Re’s operating performance has been subject to considerable volatility for several years, partly underpinned by weak underwriting performance. In particular, 2011’s combined ratio of 110.2 percent (2010: 104.6 percent) was affected by further loss exposure to the 2010 and 2011 weather-related events, reserve strengthening of the motor account and material losses from the crop portfolio. Polish Re commenced underwriting crop business in 2011.”

Best added that it “understands that Polish Re has taken steps to mitigate any further deterioration in underwriting performance; however, the impact of these actions has yet to materialize.

“Exceptional one-off drivers, largely due to the restructuring of Polish Re’s investment portfolio to less volatile asset classes following its acquisition by Fairfax, have also contributed to volatility in overall earnings.

“In 2011, Polish Re’s sale of its associate, Polskie Towarzystwo Ubezpieczen S.A. (PTU), contributed PLN 26.7 million [$7.865 million] to pre-tax profits of PLN 20.2 million [$5.95 million]. Although earnings derived from investments are expected to stabilize, contribution to overall company results is expected to be at a lower level than in the past.”

Best also pointed out that “Polish Re remains exposed to a high concentration risk, despite the fact that the top 10 cedants’ premium shares decreased from 73 percent to 63 percent between 2008 and 2011. Despite the sale of PTU, Polish Re’s business relationships have been maintained and stand at approximately 30 percent of its total business for 2011.

“Positive rating actions are unlikely in the medium term.

“Negative rating actions are likely if there is a reduction in the level of support from Polish Re’s parent, Fairfax. Risk-adjusted capitalization falling below a level considered supportive of the company’s current rating level would also put negative pressure on its ratings.”

Source: A.M. Best Europe

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