Ratings Recap: Emirates, Sorford, BF&M, Unity Re

September 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 Emirates Insurance Company P.S.C. (EIC), which is based in the United Arab Emirates. The outlook for both ratings is stable. The ratings of EIC reflect its “strong level of risk-adjusted capitalization, very good track record of technical profitability and established position in the United Arab Emirates market,” Best explained. As an offsetting factor Best cited the company’s” weak investment strategy, with a significant concentration in equities.” Best added that in its opinion, “EIC’s risk-adjusted capitalization is strong, benefitting from capital and surplus of AED 784 million ($214 million) in 2011, relative to a low level of underwriting risks. Additionally, EIC’s capital position is supported by sound reinsurance protection. However, capital requirements are largely driven by EIC’s investment activities, with a high concentration in equities, which is a concern.” Concerning the equity investment concerns, Best said it “believes that while EIC’s level of risk-adjusted capitalization is sufficiently strong to absorb the concentration and fluctuation in its investment activity, it will give rise to volatility in its capital position and earnings and thereby require prudent capital management.” Best also acknowledged “the efforts made by the company in recent years to de-risk its investment portfolio, although exposure to equities and private investment funds remain high, above 60 percent of invested assets. Prospective levels of risk-adjusted capitalization are likely to be driven by improvements in its investment profile and dividend policy. EIC has demonstrated a very good track record of technical profitability in recent years, with technical profits rising to AED 56 million ($15 million) in 2011 from AED 54 million ($15 million) in 2010. This has been achieved through strict underwriting practices and careful selection to attract quality business in a competitive market environment. EIC produced a loss ratio below 60 percent in 2011, with a robust performance across most business segments. A very good combined ratio of approximately 77 percent has been maintained, with profits benefitting from significant inward reinsurance commissions.” In Best’s opinion, “EIC has become a prominent player in the United Arab Emirates’ general insurance market with written premiums of approximately AED 643 million ($175 million) in 2011, establishing itself as the fourth-largest insurer by total revenue. However, there is some pressure on EIC’s market position from increased competition and pressure on pricing. As such, EIC is expected to concentrate on underwriting profitability over premium volume. EIC has a diversified portfolio in line with local market characteristics, with a low retention level of 36 percent weighted towards motor.” Best also indicated that it “views EIC’s risk management framework as moderate, with good controls in place, particularly for underwriting and operational risks. However, there are concerns regarding EIC’s deficiencies in its investment risk management, which it is aiming to address over the next three years. There is no prospect of upward movement on EIC’s ratings in the short term. Downward pressure might arise if the company’s capital adequacy is materially impacted by investment losses or aggressive dividend policy.”

A.M. Best Co. has assigned a financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” to Bermuda-based Sorford Surety Insurance Company, Ltd and has assigned the rating s a stable outlook. The company is a wholly owned subsidiary of the Miami-based IBT Group, LLC, which is a subsidiary of Spain’s Eurofinsa S.A. They are both members of a multinational group of companies that specialize in the development, design, construction, equipment and finance of public infrastructure projects around the world. Best said the ratings “reflect Sorford’s sound business plan, supportive risk-based capitalization and the explicit financial guarantee from IBT. Also inuring to the ratings is incorporation of a favorable business plan, upon which the profitability and liquidity metrics of the ratings are based, as well as the benefits from the management and underwriting expertise provided by Willis Management (Bermuda), Ltd. As partial offsetting factors Best cited the “start-up nature of Sorford, its limited market scope/business profile, product mix and dependence on third parties for processing, servicing and administration. Furthermore, the company’s relatively large (gross) underwriting exposures, as it offers high gross insurance limits and execution risk associated with the implementation of Sorford’s business plan. Additional rating factors taken into consideration are Sorford’s fundamental business strategies of providing stable risk products including bid, performance and down payment surety bonds to be key lines of business, coupled with quality service for IBT. While the business that will be written has a history of strong underwriting results, to protect the company from undue risk exposure and underwriting volatility in its startup phase, Sorford will place various excess-of-loss with external reinsurers.” Best said it believes that Sorford’s capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is supportive of its premium growth and overall risk profile over the next five years.” However Best also indicate that is concerned “with Sorford meeting the assumptions included in its business plan, economic volatility as well as the possibility that Sorford could be exposed to a confluence of events that will test its capital strength.” Best added that it would “closely monitor the quarterly performance of Sorford against its stated operating plan. Any material adverse deviations with regard to management, earnings, capitalization or risk profile could potentially undermine the stability of the assigned ratings. Conversely, key rating triggers that could result in positive rating actions would be Sorford generating consistent net income, limiting its losses and meeting and/or exceeding its business plan and credit metrics that improve steadily supporting the ratings over the long term.

A.M. Best Co. has affirmed the financial strength ratings of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of BF&M Life Insurance Company Limited and BF&M General Insurance Company Limited. Best also affirmed the ICR of “bbb” of BF&M Limited. The outlook for all ratings is stable. All companies are domiciled in Hamilton, Bermuda. The ratings of BF&M Life reflect its “consistent favorable operating results, premium growth and strong level of capital. Operating income for 2011 was the highest reported in the last five years, aided in part by a one-time credit for an adjustment to the retiree benefits liability. The positive net income has contributed to the company’s strong capital level through retained earnings while still maintaining a dividend to its parent company, BF&M.” As offsetting rating factors Best noted “margin pressure due to competition and economic conditions, the effect of the low interest rate environment on BF&M Life’s pension business and investment income and income statement volatility due to asset valuation. BF&M Life operates mainly in the local Bermuda market, which concentrates its business geographically and limits domestic growth opportunities.” Best said its “ratings for BF&M General reflect its consistent overall profitability, excellent capitalization and top line premium growth. In addition, BF&M General continues to maintain a leading market position in the domestic Bermuda market. As partial offsetting factors, Best cited the “geographic concentration of BF&M General’s business in Bermuda, the level of intra-group receivables, and like its domestic peers, reliance on reinsurance to protect its earnings and capitalization. BF&M Life and BF&M General are well positioned for their current ratings. Negative rating actions could occur if BF&M Life or BF&M General experience a significant deterioration of operating trends, there is a drastic decrease in either company’s level of capital or if the consistent low interest rate environment has a material adverse effect on operating results.”

A.M. Best Europe – Rating Services Limited has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Russia’s Unity Reinsurance Company, Ltd. Best explained that the positive outlook “reflects Unity Re’s ability to maintain a strong technical performance and a strong level of risk-adjusted capitalization while growing its business in Russia and outside its domestic market. The positive outlook also reflects the recent de-risking and de-leveraging of Unity Re’s balance sheet, driven by the significant reduction in its use of repurchase agreements to date. The ratings also incorporate Best’s view of Unity Re’s exposure to country risk through its operations in Russia. Best described Unity Re’s risk-adjusted capitalization as “strong and supportive of its ratings. A major banking institution is expected to take a 20 percent stake in Unity Re in September 2012, which will include an injection of new capital into the company. Additional capital needs generated by Unity Re’s ambitious growth plans will be largely met by this capital injection and will be further supported by internal capital generation. Unity Re has been actively involved in repurchase transactions since 2010, which have been used to invest in fixed-income instruments rated within the vulnerable category. However, this trend has reversed since the beginning of 2012 and at half year 2012, Unity Re had significantly reduced its use of repurchase agreements, improving the risk profile of the company.” Best also indicated that the reinsurer “continues to produce strong underwriting results, despite its rapid expansion in recent years. Technical profitability has remained at a strong level with a combined ratio of 76 percent in 2011 (2010: 75 percent). Although prospective operating results are expected to remain strong,” Best said it “remains cautious about the potential impact of the company’s planned growth on underwriting profit margins going forward. Nevertheless, Unity Re has demonstrated a consistent quality in its underwriting in recent years with a five-year average combined ratio of 79.1 percent. Unity Re is a leading reinsurer operating in Russia and the Commonwealth of Independent States. Despite Unity Re’s relatively small size by international standards, gross written premiums grew by 25 percent in 2011 to RUB 1.275 billion [$40.45 million], estimated to represent around 6 percent of the local reinsurance market (2010: 5 percent). Unity Re’s portfolio of cedants includes most of the largest local insurance companies, and unlike most competitors, its portfolio of risks excludes captive business and financial schemes. Positive rating actions could occur if Unity Re continues to profitably grow its business whilst maintaining risk-adjusted capitalization at a sufficient level to support its ratings, and maintains a prudent investment strategy. Negative rating actions could occur if there is an increase in the use of repurchase agreements to levels similar as at year-end 2011, or risk-adjusted capitalization falls below a level considered supportive of the current ratings. Additionally, a deterioration in operating performance or country risk factors could negatively affect Unity Re’s ratings.

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