Ratings Recap: Continental Re, Gulf Re

July 30, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Nigeria’s Continental Reinsurance Plc, both with stable outlooks. Best said the ratings of Continental Re “continue to reflect its strong risk-adjusted capitalization and underwriting results as well as its established position as a local reinsurer in Nigeria. The ratings also consider Continental Re’s exposure to the high political, economic and financial system risks associated with its operation in Nigeria. Continental Re’s risk-adjusted capitalization is expected to remain supportive of its business plans in 2012 and 2013, despite its ongoing trend of strong premium growth and high dividend payments. The company’s strong risk-adjusted capitalization is underpinned by a large capital base.” Best noted that at the end on 2011 Continental Re reported “a modest rise in shareholders’ funds to NGN 12 billion (app. $75 million). Annual growth of approximately 25 percent is anticipated in the near term as Continental Re seeks to benefit from growth opportunities mainly within Nigeria and through diversification in Francophone West Africa, East Africa and North Africa.” Best also indicated that Continental Re “continues to produce strong underwriting results, despite its rapid expansion in recent years. 2011’s pre-tax profit of NGN 1.6 billion [app. $10 million] was underpinned by a combined ratio of 83.8 percent, in line with the company’s five-year average combined ratio of 81.1 percent.” Best added that “although prospective operating results are expected to remain strong and be supported by Continental Re’s improving risk management practices,” it remains cautious about the “potential impact of the company’s planned growth on underwriting profit margins going forward. Continental Re benefits from a good business profile with approximately 50 percent market share of local life business and a 10 percent market share of local non-life business. Business derived from its core market accounted for 62 percent of gross written premiums in 2011. Additionally, the company continues to develop its profile outside of Nigeria, through the establishment of regional offices. In 2012, Continental Re turned its Nairobi branch into a fully-fledged subsidiary in order to support its operations in Southern Africa and East Africa.” Best pointed out that in order to maintain its current ratings, Continental Re is expected to continue to profitably expand its underwriting portfolio while maintaining risk-adjusted capitalization at a strong level. There are no current upward rating pressures. Negative rating actions could occur if Continental Re’s operating performance were to deteriorate. Risk-adjusted capitalization falling below a level considered supportive of its current rating level also would put negative pressure on the ratings. Additionally, deterioration in country risk factors associated with Continental Re’s operations in Africa could negatively impact the company’s ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of United Arab Emirates-based Gulf Reinsurance Limited, both with stable outlooks. Best said that Gulf Re’s ratings “continue to reflect its excellent prospective risk-adjusted capitalization, supportive shareholders and selective underwriting.” As offsetting factors Best cited the company’s “relatively small size compared with its competitors and the developing state of the company’s enterprise risk management (ERM).” Best said: “Gulf Re’s performance has been solid during 2011 surpassing the expectation of its business plan and producing its first year of technical profits. Gulf Re’s loss ratio improved to 54.1 percent (2010: 60.0 percent) demonstrating sound risk selection and its controlled expenses produced a combined ratio of 91.1 percent (2010: 94.5 percent). Underwriting in the first quarter of 2012 has performed well in terms of both volumes and profitability; thus, placing Gulf Re in a good position to meet its plan.” Best added that in its opinion, “Gulf Re’s prospective risk-adjusted capitalization remains excellent, benefiting from the company’s relatively low risk profile given its limited exposure to natural catastrophes, low credit risk on its outward retrocession programs and conservative investment strategy.” Best also indicated that it “considers Gulf Re to have abundant capital to support any foreseeable growth over the next two years. Gulf Re’s conservative investment strategy with holdings limited to highly rated debt represents a low level of investment risk.” In addition Best believes the “support received by Gulf Re from its joint ultimate parents, Gulf Investment Corporation G.S.C. (GIC) and Arch Capital Group Ltd. (ACGL), has been essential to the success of the enterprise to date and is likely to remain important going forward.” As a result Best “views positively the joint venture agreement, which commits GIC and ACGL to Gulf Re into at least 2016. Gulf Re continues to grow at a steady pace and should reach its planned gross written premiums of $53.2 million for 2012. Nevertheless, the company’s as-yet limited profile represents a greater vulnerability to fluctuations in underwriting results and cedent performance than larger competitors.” From Best’s viewpoint “Gulf Re benefits from a capable and experienced management team that has implemented best practices throughout the company with the support and expertise of ACGL. However, ERM remains in the developing stage. Gulf Re now has the benefit of an appointed chief risk officer at ACGL, giving the company access to build a more sophisticated risk framework.”

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