Ratings Recap: Mansard, Custodian & Allied, Ability Re, TATIL

November 30, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Nigeria’s Mansard Insurance Plc, both with stable outlooks. The ratings of Mansard reflect its “strong risk-adjusted capitalization, good business profile and strong underwriting performance,” said Best. As an offsetting factor Best cited “Mansard’s investment strategy, which has a significant concentration on both land and property under development asset;” however, Best added that it “acknowledges the efforts made by the company to reduce the property exposure.” The ratings also incorporate Best’s view of the company’s “exposure to the very high political and financial system risks associated with its operation in Nigeria.” With regard to Mansard’s risk-adjusted capitalization, Best noted that it is “strongly supported by a large capital base, and although it is expected to slightly decrease going forward, it will remain supportive of the company’s ratings. Mansard paid dividends of NGN 900 million ($4.4 million) in 2011 equating to a dividend pay ratio of 96.6 percent, and in Best’s opinion, this could negatively impact the company’s capitalization growth. Moreover, Mansard implemented a prudent reserving approach and has an adequate enterprise risk management underpinned by a triple level governance structure.” Best’s report described Mansard’s overall underwriting operating performance as “good; its return on capital and surplus during 2011 increased as well as its overall operating performance, which was driven by the strong performance of its non-life account, mainly composed of the motor business and oil and gas results. The company’s performance is expected to improve in 2012, and the provisions for outstanding premiums owned by debtors continue to have a low impact on overall performance, highlighting the company’s tight credit control policy.” Best also pointed out that in July 2012, “Mansard changed its name from Guaranty Trust Assurance Plc due to the change in its ownership in 2011, and undertook a number of measures in order to manage its rebranding successfully. The company has a wide and effective distribution network, which benefits from its bancassurance agreement with GTBank and alliances with First City Monument Bank. Since Mansard’s leadership did not change, its growth strategy and focus on retail insurance remains intact. Moreover, during 2012, the company’s business volume has continued to grow. Mansard’s investments in equities, managed funds and property represent approximately 40 percent of its total investments. Last year, the company expressed its intention of reducing its property investments starting in 2012; in fact, in February 2012, Mansard divested from its subsidiary.” Best added that it “acknowledges, the efforts made by the company to decrease the exposure to the property risk, although the proportion remains considerable, and in Best’s view, this could create the potential for volatility in Mansard’s risk-adjusted capitalization and overall profits.” Best indicated that going forward it “expects Mansard to continue to maintain underwriting discipline as it expands as well as to pursue prudent reserving practices. Weaker than expected performance, particularly in relation its investment portfolio or significant erosion in its risk-adjusted capitalization is likely to have a negative impact on the company’s ratings. Positive factors that could drive a rating movement are the reduction of concentration of assets in property, the maintenance of a good level of risk-adjusted capitalization and a more sophisticated assessment of its probable maximum loss.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb” of Nigeria’s Custodian and Allied Insurance Plc, both with stable outlooks. Best said the ratings of Custodian “reflect its good risk-adjusted capitalization, solid business profile as a commercial risk insurer based in Nigeria and its good operating performance.” As offsetting factors Best cited the company’s “weak enterprise risk management (ERM), the uncertainty associated with its reserving strategy and rapid growth plans. The ratings of Custodian also incorporate a view of its exposure to the very high political and financial system risks associated with its operation in Nigeria.” Best indicated that “Custodian’s risk-adjusted capitalization is expected to slightly decrease going forward but still remain supportive of its ratings. The shareholders’ funds have grown considerably in the last five years partly through raises, following increases in minimum regulatory requirements. During 2010 and 2011, the growth of the shareholders’ funds has declined, but during 2012, the company received a convertible loan of $12.5 million from the International Financial Corporation (a member of World Bank Group) in order to support Custodian’s business growth plans.” In addition Best noted that “Custodian maintains a solid business profile in the commercial segment of the Nigerian insurance market. During recent years, the company business registered a continued growth; although in 2011 the gross written premiums decreased by 26.7 percent to NGN 10 billion ($62 million). This was mainly related to a loss of a large oil and gas contract that was written as a one-off. However, without considering this large account, Custodian’s business volume increased by 50 percent. Custodian’s technical account result in 2011 decreased by 64 percent to NGN 932 million ($5.8 million) (2010: NGN 2.6 billion [$16 million]) largely due to a decrease in revenue relating to the loss of the large contract, but the overall return on capital and surplus (16 percent) remained in line with the industry.” Best said it “remains cautious of Custodian’s growth plans, particularly in relation to the oil and gas business segment. An offsetting rating factor in Best’s rating assessment is Custodian’s ERM framework,” which, Best said, it “considers to be weak. Although controls and guidelines are in place, the company lacks an adequate risk-based approach to capital management.” Additionally, Best said it “remains cautious of Custodian’s adequacy of reserves, although a statistical approach has been implemented in 2012. Negative rating actions could occur if Custodian should experience a deterioration in its operating performance or significant erosion in its risk-adjusted capitalization. Negative rating actions could also be taken if Best’s concerns related to the company’s reserving methodology, prospective business plan and ERM still remain going forward. Upward rating movements are unlikely in the next 12-24 months.”

A.M. Best Co. has downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and issuer credit ratings to “bb” from “bbb-” of Ability Reinsurance (Bermuda) Ltd. and Ability Insurance Company (AIC), which is based in Omaha, Nebraska, collectively referred to as Ability Re. All of the ratings remain under review with negative implications. Best said the “downgrades reflect AIC’s significant statutory losses incurred year-to-date through September 30, 2012, the ongoing uncertainty regarding pending litigation and a material decline in the absolute capitalization of AIC. The weakness in its operating results continues to reflect deterioration in its long-term care insurance block as well as increased litigation costs.” Best also, indicated that it “believes that given the magnitude of the losses, Ability Re has reduced financial flexibility. The company is currently exploring strategic solutions, and the ratings will remain under review as Best monitors the company’s ultimate litigation risk as well as any changes in its overall strategy.” Best explained that Ability Re’s ratings “were originally placed under review with negative implications on April 16, 2012. The under review action reflected the uncertainty surrounding the ultimate financial impact on the company following a Montana court jury award of roughly $34 million in compensatory and punitive damages to an Ability Re long-term care policyholder. The litigation is currently pending and Ability Re is awaiting the outcome.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Trinidad & Tobago Insurance Limited (TATIL), both with stable outlooks. The ratings reflect TATIL’s “historically profitable overall operating performance, solid capitalization and the support it receives from its ultimate parent, ANSA McAL Limited (AMCL),” said Best. “AMCL is one of the largest diversified companies in the Caribbean and is publicly traded on the Trinidad & Tobago Stock Exchange. Historically, TATIL’s prudent underwriting philosophy and conservative risk management strategies have produced favorable underwriting results. This has enabled the company to record consistent overall earnings in recent years while enhancing its risk-adjusted capitalization. As an important strategic focus within AMCL’s financial services segment, TATIL has the support and commitment of AMCL and benefits from group synergies, along with access to AMCL’s considerable resources, including information technology and financial and investment management services.” As partial offsetting factors Best cited the “geographic concentration of TATIL’s operation, the continuing challenges to maintain overall earnings and market share in extremely competitive markets and the potential impact from exposure to catastrophic events. While TATIL’s outlook is stable, factors that could contribute to rating enhancement include continued strong underwriting performance and overall profitability, and an upgrade in Trinidad’s country risk tier rating. Factors that may lead to negative rating actions include a sustained decline in underwriting profitability, significant deterioration in TATIL’s risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) and a downgrade in Trinidad’s country risk tier rating.”

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