Ratings Recap: Nacional Re, Barents Re, PMG, MS Frontier Re

October 4, 2012

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘A-‘ (Excellent) and an issuer credit rating of “a-” to Spain’s Nacional de Reaseguros, S.A., both with stable outlooks. Nacional’s ratings reflect its “strong risk-adjusted capitalization, ongoing strong operating performance and very good business profile as Spain’s leading reinsurer,” Best explained. “The ratings also factor in Nacional’s concentration in the Spanish market; which is affected by a depressed economic environment and the company’s high exposure to sovereign debt.” Best also indicated that Nacional’s strong risk-adjusted capitalization is “supported by good retained earnings, reserve redundancies and a comprehensive retrocession program.” In addition Best observed that despite the company’s high exposure to Spanish sovereign and corporate debt (€190 million [$246 million] at year-end 2011), “Nacional’s capitalization remains supportive of its ratings on both a standard and an A.M. Best euro zone investment stress test bases. While capital levels are expected to remain strong prospectively, the current economic environment remains volatile.” Best said that in its opinion, “a significant deterioration in euro zone financial markets could negatively impact Nacional’s capitalization.” Nonetheless, the report indicated that Nacional’s operating performance “is expected to remain strong going forward with a profit before tax in the range of €35 to €40 million [$45 to $52 million] in 2012 and 2013. Nacional’s disciplined underwriting guidelines and limited natural catastrophe exposure have resulted in stable technical results over the last five years, with an average combined ratio of 93.3 percent. The reinsurer’s net income is also supported by good investment results. However, this could potentially become more volatile in 2013, putting pressure on the reinsurer’s overall performance.” In addition Best pointed out that Nacional “has a very good business profile as Spain’s leading domestic reinsurer. The company has been operating in Spain for more than 70 years and has well established relationships with its main cedants. However, its overall size is limited when compared with international players. Moreover, Nacional remains largely concentrated in its domestic market. Nacional’s gross written premiums were down 1.8 percent to €464 million [$600 million] at year-end 2011 following softer rates and lower volumes resulting from the ongoing difficult economic conditions. The challenging insurance market environment in Spain is likely to continue to limit premium growth going forward. However, revenues were stable at half-year 2012 as Nacional successfully grew its foreign book of business to offset lower premiums domestically. Upward rating movement on Nacional’s ratings is possible if the financial and economic situation in peripheral euro zone countries were to stabilize. Negative rating actions could occur if there were a worsening of Nacional’s risk-adjusted capitalization tied to investment losses or a deterioration of the operating environment in its core market.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Panama-based Barents Re Reinsurance Company, Inc. Best said Barents Re’s ratings reflect its “excellent risk-adjusted capitalization, operating performance and liquidity position, as well as its expanded risk management strategy and practices, conservative investment strategy and its management team’s extended experience in the industry. The ratings also recognize the company’s diversified operating strategy within underserved segments and the niche and specialized markets in which it is operating, in addition to its conservative underwriting and reserving practices.” As partial offsetting factors Best cited “Barents Re’s overall business environment where a relatively unpredictable and less transparent political, legal and business milieu exists along with underdeveloped capital markets, which are under a partially inadequate regulatory structure.” Best explained that the company is “a regional Latin American reinsurer with a conservative approach to underwriting. It writes most classes of proportional and non-proportional reinsurance. Barents Re has entered certain markets in the Middle East and North Africa, India and Eastern Europe. The biggest classes of business underwritten are accident, credit, bonds and massive products. Barents Re also is active within certain specialized areas of reinsurance. These areas are travel insurance, contingency, unemployment, credit, fraud and political risk.” Best said it views Barents Re’s management and corporate strategy “as strengthening the ratings, given the conservative risk limits on its underwriting, operational goals and transparency.” In Best’s opinion, “the company’s enterprise risk management practices are strong given the impact on its conservative risk culture, defined risk controls and its capital and surplus.” Best also said it had considered other factors in the rating process, including, but not limited to, “the diversification in the company’s line of business and geography, as well as investments, and Barents Re’s panel of well-capitalized and highly rated reinsurers.” As a result, Best revised its outlook, “given the company’s projections of strong future operating performance and strong earnings profile, controlled growth and business writing consistent with its capital and surplus position. Barents Re’s ratings are not expected to be upgraded nor its outlook revised within the next 12-24 months as its operating performance and capital position have already been considered in the rating process.” Best also said it “could downgrade the ratings and/or revise the outlook, if the company’s Best’s Capital Adequacy Ratio (BCAR) declines, operating performance and risk profile deteriorate, insured losses deplete capital or significant changes and turnover occur in the management team and/or risk management controls and tolerances.”

A.M. Best Co. has downgraded the financial strength rating to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Bermuda-based PMG Assurance Ltd., and has assigned a negative outlook to both ratings. Best explained that the downgrades for PMG “reflect the overall change in its parent company, Sony Corporation’s (Japan) credit risk profile. While PMG exhibits continued strong capital strength, its risk profile is compromised as a captive for Sony Corporation.” Best explained that “over the last year, Sony Corporation’s credit risk profile has significantly decayed, which by the nature of PMG’s relationship, has resulted in these rating actions. The captive continues to be an integral component of Sony Corporation’s risk management platform.” Best said that in its opinion, “the third party credit ratings as well as market based credit risk measures of Sony Corporation, indicates negative rating pressure on PMG. Negative rating movement might occur to PMG’s ratings if there is any significant downward movement in Sony Corporation’s risk profile. Any upward rating movement to PMG’s ratings is predicated on improvement in Sony Corporation’s risk profile coupled with maintenance of the captive’s capital strength.”

A.M. Best Co. has commented that the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Bermuda-based MS Frontier Reinsurance Ltd, “are unchanged following the announcement that MS Frontier will reorganize and consolidate the business of its subsidiary, Mitsui Sumitomo Reinsurance Limited (MSRe) (Ireland) and operate on a single platform under a unified brand of MS Frontier Re. The outlook for both of the ratings is stable.” MS Frontier is a wholly owned subsidiary of Japan’s Mitsui Sumitomo Insurance Company, Limited (MSI), and MSI is a subsidiary of MS&AD Insurance Group Holdings, Inc. Best added that after analyzing pertinent information, it has decided that “currently there is no negative impact from the reorganization announcement.” Best will, however, continue to closely monitor the outcome of the consolidation.”

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