Ratings Recap: Electrical Contractors’, Scotia, Société Centrale, Adamjee

August 10, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of UK-based Electrical Contractors’ Insurance Company Limited (ECIC), both with stable outlooks. ECIC’s risk-adjusted capitalization is “likely to remain excellent in 2012 and into 2013, in spite of a payment to be made in the second half of 2012 of an exceptional dividend of £6 million [$9.36 million],” Best explained. “This payment is to help ECIC’s parent, the trade organization The Electrical Contractors’ Association, meet cash calls in relation to a loss-making Lloyd’s syndicate, the interest in which has now been sold. Risk-adjusted capitalization is otherwise supported by retained earnings and a move to a more conservative investment portfolio.” As an offsetting factor Best cited “ECIC’s high reliance on third-party reinsurance, particularly quota share agreements, with the company having ceded approximately 40 percent of gross premiums written in 2011 (2010: 50 percent). However, this proportion is expected to reduce further in 2012, with subsequent reductions likely to take it to nearly 25 percent in 2014, thereby diminishing ECIC’s exposure to increased reinsurance rates and credit risk.” Best added that “despite challenging market conditions in the United Kingdom, a good underwriting performance is anticipated for ECIC in 2012, with a combined ratio between 40 percent and 45 percent. ECIC has a strong underwriting record, which is underpinned by an excellent knowledge of its core market. In 2011, the company produced an exceptional combined ratio of 15 percent, due to a negative loss ratio since the decrease in net claims reserves was marginally greater than the amount of net claims paid. ECIC’s investment performance is less volatile than in the past after reallocations of a proportion of investments from equities to high quality fixed income securities during 2010 and 2011 and improved oversight of investment managers’ performance. ECIC has a good niche business profile providing insurance to electrical and mechanical building services contractors and other specialist construction professionals in the United Kingdom. The company benefits from its relationship with its parent, which provides access to a large membership base. Distribution is primarily via a network of brokers across the United Kingdom and has been enhanced by an electronic trading platform. Positive rating actions are unlikely in the near future for ECIC, whereas unexpected weak operating performance or a deterioration in its risk-adjusted capitalization could lead to negative pressure.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Scotia Insurance (Barbados) Limited (Scotia Re), both with stable outlooks. “Scotia Re is primarily a life reinsurer that is ultimately owned by The Bank of Nova Scotia (Scotiabank). Scotia Re principally reinsures credit insurance policies underwritten by third-party life insurance carriers on consumer loans originated by Canadian, Latin American and Caribbean retail branches of Scotiabank,” said Best. “Scotia Re then retrocedes the Canadian risks to unaffiliated reinsurers and accepts similar non-Canadian risks from those unaffiliated reinsurers. In addition, Scotia Re also accepts a moderate level of international property/casualty risks.” Best said the “rating affirmations reflect Scotia Re’s adequate levels of capitalization and geographically diversified revenue and operating earnings, which differentiate it somewhat from its peers. Additionally, the ratings reflect Scotia Re’s enterprise risk management (ERM) framework, which is well integrated into its ultimate parent’s ERM risk process, and its highly liquid investment portfolio that consists primarily of term deposits with a bank affiliate and other North American financial institutions.” As partial offsetting factors Best cited “Scotia Re’s dependence upon consumer loan originations within Canada, and to a lesser extent, Latin America and the Caribbean. Premium growth has the potential to decline if consumer loan originations slow in any of these markets. Additionally, a further decline in economic conditions in Europe could impact the company’s ability to retrocede assumed risks to its European counterparties. Scotia Re is exposed to potential earnings volatility from its assumed property catastrophic risk, which could impact capital levels. Scotia 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 the company’s capitalization, operating performance or business model. Such changes could include a material shift in business growth within property catastrophic risk exposure relative to its core credit insurance business.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Morocco’s Société Centrale de Réassurance (SCR), both with stable outlooks. Best explained that the “ratings reflect SCR’s adequate risk-adjusted capitalization and good business profile in the North African markets.” As an offsetting factor Best noted the “potential volatility in SCR’s future technical performance as the company increases the share of business it underwrites in the open market in Morocco and overseas. The ratings also factor in the explicit support provided by the Moroccan state through a comprehensive loss absorption agreement.” Best said it views SCR’s “current level of risk-adjusted capitalization as adequate, although it diminished in 2011 following a decrease of the market values gains on the company’s investment portfolio. Given the significance of unrealized gains on investments in SCR’s economic capital, the company is exposed to fluctuations in its capital position due to financial market volatility. SCR’s prospective level of capitalization is also limited by the high dividend requirements of its main shareholder, state-owned Caisse de Depôt et de Gestion.” However, Best also indicated that it “believes these factors are offset by the explicit support provided by the Moroccan state through a comprehensive loss absorption agreement covering the integrality of the company’s activities.” Best said it “expects SCR’s pre-tax earnings to be around MAD 400 million ($45 million) in 2012 (MAD 581 million [$68 million] in 2011), reflecting a continuing reduction in business written, as the legal cession is progressively being phased out by 2013, and a slight deterioration in technical performance as the company increases its share of non-life business underwritten in the open market in Morocco and abroad, which should increase its earnings volatility. SCR maintains a strong competitive position as the leading reinsurer in the Moroccan market.” In Best’s view, the company’s business profile “should further benefit from its pivotal role in the new natural catastrophe protection system whose implementation is currently under project in Morocco. Best expects the additional premium income that should be generated from this natural catastrophe reinsurance scheme to offset over the medium term the decrease in business volume due to the gradual phasing out of the legal cessions regime in Morocco.” Best said it would “continue to monitor the impact of these prospective business changes on SCR’s risk-adjusted capitalization. Upward rating movement could occur if Best were to positively revise its current evaluation of Morocco’s country risk tier or if SCR were to demonstrate a controlled growth of its open market business combined with a strong technical performance. Downward rating pressure could occur if SCR’s development of open market business were to impact negatively its technical fundamentals, if the country risk of Morocco as assessed by Best were to deteriorate, or if the conditions of the current explicit state guarantee were to become less favorable to the company.”

A.M. Best Europe – Rating Services Limited has downgraded the financial strength rating to ‘B+’ (Good) from ‘B++’ (Good) and the issuer credit rating to “bbb-” from “bbb+” of Pakistan’s Adamjee Insurance Company Limited, and has placed both ratings under review with negative implications. Best said its “decision to downgrade the ratings of Adamjee was driven by new information that came to light regarding the company’s probable maximum loss (PML) estimations, which stand considerably higher than those used in previous assessments of the company.” In Best’s opinion, “Adamjee has sufficient capital on a risk-adjusted basis to cover risks in its everyday business.” However, in line with Best’s methodology, “companies’ capital is stressed for both one in 100 years and one in 250 years catastrophe events in Best’s Capital Adequacy Ratio (BCAR) model. In view of the considerable catastrophe risk being run by the company (in a one in 250 years event) relative to its capital base,” Best said it “considers Adamjee’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), to be significantly weakened.” The report added that Best understands that management is currently exploring options with regards to increasing catastrophe cover, and the rating agency is continuing to monitor the situation closely. Best said it “continues to recognize Adamjee’s excellent domestic franchise and satisfactory profitability. Established in 1960, Adamjee is one of Pakistan’s oldest insurers, and in Best’s opinion, enjoys an excellent domestic franchise. The company wrote GWP of PKR 11.1 billion [app. $118 million] in 2011, with 80 percent of these premiums emanating from Pakistan, where the company enjoys a leading position and a 29 percent market share. Best added that despite the “difficult operating environment characterized by a high level of price competition, Adamjee has a good track record of generating small technical profits. The company’s overall profitability is satisfactory, though results have weakened somewhat in the past two years. Adamjee generates a good level of investment income. However, Best also indicated that it “considers Adamjee’s investment portfolio, which is concentrated in affiliated equities, to be a source of risk.” Best noted that “investment returns create additional volatility in the company’s net income given that revaluations are taken through the profit and loss account.” Best also said that in its “opinion, further negative rating actions are likely in the event that Adamjee does not reduce its high PML in line with management’s plans. Positive rating actions are considered to be unlikely in the near term.”

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