Ratings Recap: Transsib Re, First General, Arab Re, TUCI

December 13, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Russia’s OJSC Transsiberian Reinsurance Corporation (Transsib Re), both with stable outlooks. The ratings of Transsib Re continue to “reflect its excellent risk-adjusted capitalization and good, albeit subdued operating performance, pressured by declining business volumes,” Best explained. As partial offsetting factors Best cited “the high execution risk and limited expertise relating to Transsib Re’s international business expansion. The ratings also reflect the company’s exposure to the high political and financial system risks associated with its core markets.” Best noted that Transsib Re’s “level of risk-adjusted capitalization is strong and supportive of its current ratings and is expected to remain supportive of its business plans in 2013. The amount of share capital was increased in 2011 to RUB 481.2 million [$15.685 million] from RUB 181.2 million [$5.906 million], driven by changes in Russian insurance regulations regarding minimum capital requirements for reinsurance companies. Transsib Re achieved the raise in chartered capital through earnings retention and an additional capital injection. In 2011, Transsib Re produced good operating results reflected in a profit after tax of RUB 25.6 million [$834.472] (2010: RUB 39.7 million [$1.942 million]). The contribution from the technical account to overall profits has declined over the past two years caused by the decline in net earned premiums, while incurred claims and management expenses slightly increased. The decline in premiums was driven by the loss of business from Kazakhstan due to regulatory changes and cancellations of unprofitable business, especially relating to motor lines. Transsib Re anticipates returning to growth in 2012 and 2013, alleviating pressures on the company’s technical results. Despite Transsib Re’s weakening position, the company remains a strong player in the Russian specialist reinsurance market.” Best also pointed out that “due to declining premium volumes in Russia and the Commonwealth of Independent States, the company continues to focus on international growth. At year-end 2011, Transsib Re collected more than 60 percent of gross written premium from outside Russia. Transsib Re has no significant market share in any of its overseas markets, and the company’s limited expertise relating to these territories has exposed it to high losses in the past. Although Transsib Re maintains exposure to countries which,” best said it “considers to have high political and financial system risk, this exposure is somewhat tempered by the spread of the company’s geographical diversification. Positive rating actions could occur if Transsib Re would profitably expand its underwriting portfolio while maintaining risk-adjusted capitalization at a strong level over the longer term. Negative rating actions could occur if Transsib Re’s technical performance was to remain weak. Risk-adjusted capitalization falling below a level considered supportive of its current rating level also would put negative pressure on the ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’- (Excellent) and the issuer credit ratings of “a-” of Bahamas First General Insurance Company Limited (BFG) and Cayman First Insurance Company Limited (CFIC). The outlook for the ratings of BFG is stable, while the outlook for the ratings of CFIC has been revised to stable from negative. Both companies are subsidiaries of Bahamas First Holdings Limited. Best explained that as the “primary holding and major source of earnings for BFH, the ratings of BFG reflect its continued excellent capitalization, historically favorable operating performance and leading market share in the Bahamian market. These factors are supported by BFG’s conservative catastrophe program, local market expertise and solid risk management programs.” However, Best also, indicated that these “positive rating factors are offset by BFG’s dependence on reinsurance, geographic concentration and catastrophe exposure, particularly to hurricanes in the Caribbean. Additionally, there is increased competition within the Bahamian insurance market and lingering economic and fiscal concerns about the Bahamas’ overall economic outlook.” Best said the “ratings of CFIC recognize its capitalization and positive non-health operating results along with its expertise in the Cayman market. CFIC’s revised outlook acknowledges the improved operating results from its accident and health lines of business. Additionally, the revised outlook reflects CFIC’s winding down of litigation from prior ownership, which had a significant negative impact on the company’s earnings and capital position. While the outlook for BFG’s ratings is stable, positive rating actions could occur if the company exhibits sustainable long-term improvements in operating performance coupled with improvements in the Bahamas’ macroeconomic environment. Negative rating triggers could include protracted adverse operating results that are exacerbated by a large catastrophic event or a significant decline in risk-based capitalization. Negative rating triggers for CFIC would include deterioration in its operating results, in particular from its accident and health business, or a decline in equity resulting in increased leverage metrics. Positive rating triggers would include continued improved profitability and organic surplus appreciation.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-“of Lebanon’s Arab Reinsurance Company S.A.L. (Arab Re), both with stable outlooks. The ratings of Arab Re reflect its “strong risk-adjusted capitalization, satisfactory performance, its fairly good well-established franchise and the continued development of its risk management framework,” Best explained. However, the ratings also “take into account the company’s modest business profile and size compared to regional reinsurers and the country risk associated with Lebanon.” The company was established in 1972, and is a regional reinsurer domiciled in Lebanon. Best said that while Arab Re’s “business profile is fairly modest, with gross written premiums expected to reach approximately $70 million in 2012, Arab Re’s regional franchise and reputation are,” in Best’s opinion, “fairly good and well-established. Arab Re’s absolute capital base is small, standing at approximately $100 million at year-end 2012,” which Best said it believes its risk-adjusted capitalization is strong, both currently and on a prospective basis. Management have recently completed a capital modeling exercise and are able to generate internal capital requirements and stress capital for a range of scenarios.” Best added that this initiative supports its opinion that “the company’s new management team have made material enhancements to Arab Re’s risk management framework, with such improvements expected to continue going forward. Arab Re’s technical performance over the past five years has been satisfactory, recording an average combined ratio of 102.6 percent. Having deteriorated markedly in 2009 as a result of poorly performing facultative business, the company has somewhat restored its combined ratio since, through management’s efforts to improve underwriting profits. Investment income has traditionally been steady as a result of Arab Re’s focus on fixed income assets.” However, Best also noted that the company is “exposed to significant high credit risks with around 30 percent of its investment portfolio related to Lebanese government bonds at year-end 2011.” Even though such exposure is considered a drag on the company’s ratings, Best said it “has stressed Arab Re’s risk-adjusted capitalization, finding it strong enough to absorb a haircut of 50 percent.” Best also noted that “management have stated that they are now in the process of reducing their exposure to the Lebanese government. The ratings of Arab Re incorporate the perceived risk associated with operating within Lebanon.” Best said it has assigned a country risk tier of five to Lebanon due to its high political and economic risks and very high financial system risk. Negative pressure on the ratings of Arab Re may arise should the situation in Lebanon deteriorate, whilst upward movement is considered as unlikely while uncertainty in the country remains.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb+” of Saudi Arabia’s Trade Union Cooperative Insurance Company – A Saudi Joint Stock Company (TUCI), both with stable outlooks. The ratings reflect TUCI’s strong level of risk-adjusted capitalization, good local business profile and robust underwriting results. Best also indicated that it “considers that TUCI’s level of risk-adjusted capitalization has remained at a strong level and is supported by a relatively conservative investment strategy and a reinsurance panel of good credit quality. Risk-adjusted capitalization is expected to remain at a good level over the medium term as the company targets growth and will be supported by the retention of a significant proportion of future profits. TUCI assesses its own capital position via an internally developed capital model and manages its capital requirements considering both this and local solvency requirements. TUCI’s level of risk management has been developed over recent years, and further enhancements are expected during 2013. Furthermore, TUCI has a strong level of liquidity, with the majority of its funds maintained in short-term investments.” Best also noted that TUCI has “defended its competitive position in the Saudi Arabian insurance market over the past year despite a strong level of competition within core lines of medical and motor, and maintained a market share of around 3 percent. During 2011, TUCI’s gross written premium grew by 31 percent from the previous year to SR 538 million ($144 million). However, conditions have been more challenging for TUCI in the first three quarters of 2012, and the company’s gross written premium for the full year is expected to reflect a more modest level of growth. Although TUCI writes most general lines of business, there is concentration on medical and motor business, which accounted for 81 percent of gross written premiums and 93 percent of net written premiums in 2011. Although this business mix is broadly in line with that of the local market, TUCI looks to skew its portfolio in favor of more profitable business niches. Although prospective regulatory intervention is likely to stabilize premium rates for medical and motor business across the market.” Best said it considers that it is unclear how this will impact the competitive environment for TUCI. TUCI’s underwriting and overall profitability were both good in 2011, with the company reporting a combined ratio (including unallocated expenses) and return on equity (ROE) of 88 percent and 7.1 percent, respectively. This represents an improvement on the prior year. During the first three quarters of 2012, TUCI encountered more challenging market conditions and underwriting profitability has deteriorated. For the first three quarters of the year, TUCI’s combined ratio (including unallocated expenses) increased by 13 percentage points (compared to the same period in the previous year) to 97 percent. However, results so far in the final quarter of 2012 have shown significant improvement, and the company expects to achieve a good level of overall profitability for the full year. Over the medium term, there will be positive pressure on TUCI’s ratings if it is able to generate a good and stable level of underwriting profitability, together with the maintenance of a strong level of risk-adjusted capitalization and the gradual development of the company’s local business position. A significant reduction in risk-adjusted capitalization or the failure to maintain a sound level of underwriting profitability will add negative pressure to the ratings and could result in a downgrade.”

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