Ratings Recap: Leadway, ICON Re, Montpelier Re (Notes)

October 8, 2012

A.M. Best Europe – Rating Services Ltd. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B-‘ (Fair) and issuer credit rating of “bb-” of Nigeria’s Leadway Assurance Company Limited. Best explained that its negative outlook on Leadway’s ratings reflects “the ongoing uncertainty associated with the performance of its aggressive investment asset allocation with large equity and unquoted securities holdings; hence, the subsequent impact on its risk-adjusted capitalization. The ratings also consider Leadway’s exposure to the high political, economic and financial system risks associated with its operation in Nigeria.” Best noted that “Leadway’s risk-adjusted capitalization has weakened in 2011, due to the decline in equities revaluation reserves owing to substantial reductions in stock prices in the capital market.” Best also said it “believes that Leadway’s risk-adjusted capital position is likely to remain under pressure due to the volatile domestic capital markets and Leadway’s ambitious growth targets. Leadway’s net income after taxes decreased by 25.6 percent to NGN 1 billion ($6.5 million) in 2011 due to a higher claims payout than the prior year, which was caused by large single losses. The life segment returned to profitability in 2011, posting a gain of NGN 147 million ($0.9 million).” However, Best added that the “company’s non-technical account continues to be negatively impacted by allowances that are created for doubtful quoted and unquoted investments as well as write offs and provisions for bad and doubtful accounts. In 2011, the proportion of equities in the investment portfolio declined to 30 percent (2010: 39 percent) and fixed-income holdings were actively increased to 6 percent (2010: 0.1 percent) of the total investment portfolio. While Leadway grows its annuity business it is thriving to back its life liabilities with government bonds. Despite the reduction of equities within Leadway’s portfolio,” Best said it “believes that investment performance is likely to remain subjected to significant volatility going forward, due to the company’s large equity holdings and approximately NGN 5.8 billion ($36.6 million) (2010: NGN 4.1 billion) of unquoted securities as at year-end 2011.” Best also indicated that “Leadway benefits from a good business profile within its local market as an established writer of non-life retail lines and larger commercial risks. Additionally, the company continues to grow its life insurance book. In 2011, the company’s total gross premiums increased by 44 percent to NGN 24 billion ($151 million), mainly driven by one large contract within the oil and gas industry. The life business grew by 75 percent to NGN 4.5 billion ($28 million) driven by a significant increase in Leadway’s annuity business, which the company had started writing in 2010. Prospectively, Leadway is likely to experience good premium growth in 2012, especially in the life segment.” Best indicated that “positive rating actions would occur if Leadway strengthens its risk-adjusted capitalization and continues to decrease its large equity holdings and investments in unquoted securities. Negative rating actions could occur if the company experiences further deterioration in its risk-adjusted capitalization below a level considered supportive of the current ratings. Deterioration in operating performance also would be seen negatively.”

A.M. Best Europe – Rating Services Ltd. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B-‘ (Fair) and issuer credit rating of {{dq0}} of Nigeria’s Leadway Assurance Company Limited. Best explained that its negative outlook on Leadway’s ratings reflects “the ongoing uncertainty associated with the performance of its aggressive investment asset allocation with large equity and unquoted securities holdings; hence, the subsequent impact on its risk-adjusted capitalization. The ratings also consider Leadway’s exposure to the high political, economic and financial system risks associated with its operation in Nigeria.” Best noted that “Leadway’s risk-adjusted capitalization has weakened in 2011, due to the decline in equities revaluation reserves owing to substantial reductions in stock prices in the capital market.” Best also said it “believes that Leadway’s risk-adjusted capital position is likely to remain under pressure due to the volatile domestic capital markets and Leadway’s ambitious growth targets. Leadway’s net income after taxes decreased by 25.6 percent to NGN 1 billion ($6.5 million) in 2011 due to a higher claims payout than the prior year, which was caused by large single losses. The life segment returned to profitability in 2011, posting a gain of NGN 147 million ($0.9 million).” However, Best added that the “company’s non-technical account continues to be negatively impacted by allowances that are created for doubtful quoted and unquoted investments as well as write offs and provisions for bad and doubtful accounts. In 2011, the proportion of equities in the investment portfolio declined to 30 percent (2010: 39 percent) and fixed-income holdings were actively increased to 6 percent (2010: 0.1 percent) of the total investment portfolio. While Leadway grows its annuity business it is thriving to back its life liabilities with government bonds. Despite the reduction of equities within Leadway’s portfolio,” Best said it “believes that investment performance is likely to remain subjected to significant volatility going forward, due to the company’s large equity holdings and approximately NGN 5.8 billion ($36.6 million) (2010: NGN 4.1 billion) of unquoted securities as at year-end 2011.” Best also indicated that “Leadway benefits from a good business profile within its local market as an established writer of non-life retail lines and larger commercial risks. Additionally, the company continues to grow its life insurance book. In 2011, the company’s total gross premiums increased by 44 percent to NGN 24 billion ($151 million), mainly driven by one large contract within the oil and gas industry. The life business grew by 75 percent to NGN 4.5 billion ($28 million) driven by a significant increase in Leadway’s annuity business, which the company had started writing in 2010. Prospectively, Leadway is likely to experience good premium growth in 2012, especially in the life segment.” Best indicated that “positive rating actions would occur if Leadway strengthens its risk-adjusted capitalization and continues to decrease its large equity holdings and investments in unquoted securities. Negative rating actions could occur if the company experiences further deterioration in its risk-adjusted capitalization below a level considered supportive of the current ratings. Deterioration in operating performance also would be seen negatively.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Cayman Islands-based ICON Reinsurance Ltd. Best concurrently withdrew the ratings as the company has requested to no longer participate in its interactive rating process. Best explained that the negative outlook is based on its “concerns regarding ICON’s coal reserve holdings and the effect on its risk-adjusted capitalization and cash flows. The rating affirmations reflect ICON’s experienced management team and the steady growth of retained earnings.”

A.M. Best Co. has assigned a debt rating of “bbb” on $300 million, 4.70 percent senior unsecured fixed notes, due in 2022 of the recently filed offering by Bermuda-based Montpelier Re Holdings Limited with a stable outlook. Best noted the “proceeds from the offering are expected to be used to redeem Montpelier’s outstanding 6.125 percent senior notes due 2013 and for general corporate purposes.”

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