Ratings Recap: Casiopea Re, FM (UK), Jamaica Int’l., Salama, BEST RE

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Luxembourg-based Casiopea Re S.A., the reinsurance captive of Telefónica S.A., both with stable outlooks. The ratings of Casiopea Re reflect its “very strong risk-adjusted capitalization, comprehensive reinsurance program and historically good underwriting performance,” saidBbest. As an offsetting factor Best noted “the deterioration in its business profile and Telefónica’s, its weaker domestic position combined with a challenging macroeconomic environment and its high net debt position.” Best said it anticipates that Casiopea Re’s very strong risk-adjusted capitalization “will be maintained going forward. In 2011, the company’s capitalization was further strengthened by a capital injection of €80 million [$104 million] by Telefónica in preparation for Solvency II requirements;” however this has been “reversed due to the delay in implementing the Solvency II directive.” Best added that in its opinion, “Casiopea Re’s strong risk-based capitalization also is underpinned by a comprehensive reinsurance program, which provides a very good level of protection in its main lines of business and is placed with a strong panel of reinsurers. In addition, the company’s profits are retained due to the regulatory requirement to build up un-distributable reserves in the equalization reserves. In 2011, Casiopea Re’s good underwriting result—combined ratio of 89.6 percent—was in line with its historical underwriting performance: a five-year average combined ratio of 92.8 percent. However in 2012, a material deterioration of underwriting results is expected due to large claims in Latin America. Casiopea Re’s nature as a captive reinsurer exposes it to catastrophic events and earnings volatility is not unexpected. Nevertheless, Casiopea Re is expected to return to its good underwriting performance going forward.” In addition Best indicated that it believes that “the transfer of the handset business in March 2011 to Telefónica Insurance (a related company) has weakened Casiopea Re’s business profile on a stand-alone basis, as premium income is unlikely to return to similar levels prior to the loss of that line of business.” However, Best also said it “believes that Casiopea Re will maintain its strong integrated position within Telefónica’s risk management framework by reinsuring group risks. Upward rating actions are unlikely at present. Negative rating actions could occur if a significant deterioration in Casiopea Re’s risk-adjusted capitalization would be linked to no evidence of support from Telefónica to boost the latter. Additionally, a manifestation of poor underwriting results for Casiopea Re due to a change in its business profile would lead to negative rating pressure.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa” of UK-based FM Insurance Company Limited, both with stable outlooks. Best said the ratings affirmation “reflects FMI’s excellent stand-alone risk-adjusted capitalization, as well as explicit and implicit support from its parent, Factory Mutual Insurance Company and the wider FM Global Group, in particular in the form of reinsurance and a policy level financial guarantee. FMI also has a history of receiving additional capital from its parent, when required, most recently in the form of a £30 million [$48.665 million] capital injection in 2011.” Best also indicated that FMI’s prospective performance is “subject to volatility from its exposure to high severity low frequency losses. The high proportion of its investment portfolio allocated to equities also is a source of potential volatility. Performance has been weak in recent years, reflecting primarily a high level of large risk and natural catastrophe losses, and the company has reported losses before tax in three of the last five years.” Best also pointed out that through its membership in the FM Global Group, “FMI has a distinctive business profile as a leading insurer of highly protected risks within the commercial property market. FMI is an important part of the FM Global Group as it serves the group’s clients outside of North America. FM Global Group’s competitive position in its core markets is supported by the professional property engineering expertise and loss prevention services it provides to its clients. A change in the ratings of FMI’s parent is likely to lead to a change in FMI’s ratings. In addition, a decline in the support received from the parent could have a negative impact on FMI’s ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Jamaica International Insurance Company Limited (JIIC); however its outlook for both ratings is negative. Best said the rating affirmations reflect “JIIC’s strong market profile, continued adequate capitalization and financial flexibility as a result of the support and commitment of its parent, Grace Kennedy Limited (GK Group), one of the leading business conglomerates in the region. GK Group is publicly traded on the Jamaica and Trinidad stock exchanges.” Best explained that the negative outlook “is based on JIIC’s reduced investment income levels due to lower interest rates as a result of the restructuring of Jamaican bonds. In the past, JIIC’s investment income had produced positive overall earnings and consistently mitigated underwriting losses. JIIC’s management team has implemented strategies to improve underwriting performance, which resulted in an operating profit in 2011.” Best also indicated that it “is encouraged by the early success of these strategies but remains uncertain as to the sustainability of these results given the current challenges facing the Jamaican economy and insurance market. Additionally, JIIC has significant exposure to catastrophic events and must maintain a costly reinsurance program to protect its earnings and surplus. Key rating factors that could lead to a stable outlook include improved, sustainable underwriting results, an improvement in JIIC’s risk-based capitalization or an upgrade in Jamaica’s country risk tier. Negative rating factors would include deterioration in JIIC’s risk-based capitalization, a decline in its operating performance or further weakening of the Jamaican macroeconomic environment.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating of “a-” of United Arab Emirates-based Islamic Arab Insurance Co. (Salama), both with stable outlooks. The ratings “reflect Salama’s good business profile and strong risk-adjusted capitalization,” said Best. As offsetting factors the rating agency cited “the effect of the Thai flood losses on Salama’s otherwise consistent underwriting profitability and its fast growth in gross written premiums in 2011.” Best noted that “Salama benefits from a well diversified business profile geographically, along with BEST RE (L) Limited’s (BEST RE) reinsurance business in Southeast Asia and Salama’s direct insurance portfolio in the United Arab Emirates. Salama has subsidiaries and affiliates writing direct insurance business in Algeria, Egypt, Senegal and Saudi Arabia. Salama’s focus on property business is gradually reducing as the significance of its smaller subsidiaries across the Middle East and North Africa region increases.” Best said it “expects Salama to experience overall contraction in underwriting in 2012 and 2013 as it reduces gross written premiums at BEST RE whilst growing its other regional subsidiaries. Gross written premiums increased by 23 percent in 2011 to AED 2.268 billion ($618 million) due largely to a significant motor treaty written by BEST RE.” However, Best pointed out that this contract will not be renewed in 2012 as part of BEST RE’s plans to reduce gross written premiums by 15 percent in each year to 2014, concentrating on removing unprofitable business from its portfolio [See following].” Best said Salama’s overall level of profitability was reduced in 2011 by the effects of the Thai flooding on its subsidiary, BEST RE, with an improved performance by Salama compensating for this. Between 2006 and 2011, Salama’s combined ratio for non-life business fluctuated between 91 percent and 98 percent. In 2011, Salama achieved a combined ratio for non-life business of 98.1 percent,” and Best indicated that it “expects the company to improve underwriting and overall performance as it rebalances its portfolio.” Best also said it thinks “Salama’s level of risk-adjusted capitalization is likely to remain at a strong level over the medium term. Salama’s reinsurers generally hold an A.M. Best FSR of ‘A-‘ (Excellent) or above. The group maintains a relatively conservative investment allocation, with 75 percent of investments held as short-term deposits, 9 percent as equities and 16 percent as real estate. A significant proportion of future profits are expected to be retained in order to support business growth.” Best described Salama’s risk management capability as “developing, with capital requirement and planning ability concentrated at BEST RE and a lower standard at other operating entities. “In Best’s opinion, “there is no prospect of upward pressure on Salama’s ratings in the short term. Downward pressure might arise if the company’s capital adequacy is materially impacted by significant increases in gross written premiums or poor underwriting performance.”

A.M. Best Europe – Rating Services Limited has downgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘A-‘ (Excellent) and issuer credit rating (ICR) to “bbb” from “a-” of Malaysia-based BEST RE (L) Limited, and has assigned a negative outlook to both ratings. Best has also downgraded the FSR to ‘B++’ (Good) from ‘A-‘ (Excellent) and ICR to “bbb+” from “a-” of BEST RE FAMILY (L) Limited , which is also based in Malaysia; however, the outlook for these ratings is stable. Best explained that the rating downgrades for BEST RE and BEST RE FAMILY reflect the change in its assessment of the implicit support provided by the companies’ parent, United Arab Emirates-based Islamic Arab Insurance Co. (Salama) [See above]. Best said that in its opinion, “the implicit support for BEST RE and BEST RE FAMILY by Salama has declined as evidenced by significant delays in providing a capital injection to support the low risk-adjusted capital position of BEST RE.” In addition Best said it “views Salama’s group-wide capital management as weak given the low risk-adjusted capital position of BEST RE.” The ratings reflect its “weakened level of risk-adjusted capital as a result of losses incurred from the floods in Thailand during 2011, in combination with its strong growth in premium income during the same year.” Best noted that it had placed BEST RE’s ratings under review with negative implications in May 2012, “pending improvement in its capital position through new business plans to reduce premium volumes over the medium term and the anticipated $50 million capital injection by Salama.” Best also indicated that it “views positively BEST RE’s plan to reduce premium volumes and expects that risk-adjusted capital will have improved significantly by the end of 2012. Additionally, the company’s conservative investment policy, which is focused on short-term deposits (77 percent of investments), and its well-rated reinsurance program are positive for its capital position. However, following a loss of $300,000 in the first half of 2012, BEST RE’s capital and surplus has declined, placing added pressure on capital adequacy.” In Best’s opinion, “there is potential for upward pressure on BEST RE’s ratings in the short term with significant improvement in its capital position. Conversely, negative rating pressure may occur if BEST RE is not able to reduce gross written premiums in line with its plan or losses reduce the capital available to support its underwriting activities.” Best said the ratings for BEST RE FAMILY “acknowledge its status as a start-up company and its very strong risk-adjusted capitalization. An offsetting factor is the execution risk the company faces in achieving its strategic objectives. BEST RE FAMILY has generated gross written premiums of $28 million, producing a marginal underwriting loss of $400,000 in its second year of operation, marginally below its plan. This was due to the underperformance of certain contracts that have not been renewed in 2012.” Best added that it “expects the company to produce a profit in 2012. BEST RE FAMILY has very strong risk-adjusted capitalization. The company was established with $10 million of capital, which is more than adequate to support prospective underwriting in the short term. Additionally, BEST RE FAMILY’s investment portfolio is entirely concentrated in Mudharabah deposits and cash representing low investment risk; however, 89 percent of deposits are held with two banks representing a concentration risk.” Best said it “views BEST RE FAMILY’s reinsurance program as adequate, providing cover on a per-person and catastrophe basis from well rated reinsurers.” Best also “expects risk-adjusted capitalization to decline as capital supports the significant planned growth by the company. There is no short term upward rating pressure on the individual assessment of BEST RE FAMILY given its limited profile and status as a start-up without a record of profitable underwriting. Negative rating pressure might arise if the company is unable to meet its business plans.”

Topics Europe AM Best