Ratings: Aviva (Subs), Flagstone Re Africa, Arig, Salama, Bahrain Nat’l., BEST RE

December 20, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of several European insurance subsidiaries of UK-based AVIVA plc, namely Aviva Vida y Pensiones, S.A de Seguros y Reaseguros, Aviva Assurances, Aviva Vie, Aviva Epargne Retraite and Eurofil. The outlook for the FSR remains stable, and the outlook for the ICR remains negative. Best has also withdrawn the ratings at the company’s request, and has affirmed the ICR of “bbb+” of Aviva Italia Holding S.p.A. The outlook for this rating is negative, and it also has been withdrawn. Best explained that the rating affirmations “factor in the subsidiaries’ importance to the group’s current strategy in markets such as France, Italy and Spain and the internal support provided by AVIVA or intermediate group companies to those subsidiaries by means of reinsurance support or capital injections as and when required. Other rating drivers include those entities’ business profile in the markets they operate and their supportive local solvency positions.”

A.M. Best Europe – Rating Services Ltd. has withdrawn the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of South Africa-based Flagstone Reassurance Africa Limited (FReA), due to the company’s request to no longer participate in Best’s interactive rating process. “The withdrawal of the ratings follow the agreement on the loss portfolio transfer for existing liabilities from FReA to the parent company, Flagstone Reassurance Suisse S.A., Best explained, and the “novation and assumption agreement for ongoing business established between FReA and RMB Financial Services Limited, both effective from 1 July 2012.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of’ B++’ (Good) and the issuer credit rating of “bbb+” of Bahrain’s Arab Insurance Group (B.S.C) (Arig), both with stable outlooks. Arig’s ratings “reflect its solid business position in the Middle East regional reinsurance market, its adequate level of risk-adjusted capitalization and sound risk management,” said Best. As an offsetting factor Best noted “the company’s historically weak underwriting profitability.” Best indicated that “Arig has a strong business profile in the Middle East, where it is recognized as a prominent regional reinsurer. Over recent years, the company has been diversifying its portfolio with a growing amount of international business. In 2013, there will be some change in the composition of Arig’s international business, although it is not expected to increase its risk profile. For the 2012 financial year, Arig is expected to report its best underwriting result in some time, and the company is likely to generate an underwriting profit. Furthermore, Arig’s overall result in 2012 is also expected to be good, with the company generating sound investment returns.” Best added that the positive result is partly due to “what has so far been a relatively benign year, but is also a consequence of management’s efforts to clean the company’s insurance portfolio over several years. The result in 2012 is expected to be a significant improvement to the overall loss of $21 million incurred in 2011. Although the performance of Arig’s underlying portfolio is expected to remain positive in 2013, there is some uncertainty over the prospective performance of its international business.” Best also noted: “Arig’s level of risk-adjusted capitalization remains adequate for its current rating level, despite deterioration in 2011 following a 15 percent fall in capital and surplus. Furthermore, Arig’s level of enterprise-wide risk management is on par with its more sophisticated regional peers. The company has internal catastrophe and capital modeling capabilities that are supported by independent actuarial consultants. If Arig can demonstrate a good track record of technical profitability over the medium term, there will be positive pressure on its ratings. Negative rating pressure may result from continued technical and overall losses or material deterioration in risk-adjusted capitalization.”

A.M. Best Europe – Rating Services Limited has placed under review with negative implications the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of the United Arab Emirates-based Islamic Arab Insurance Co. (Salama). Best explained that the rating actions are “due to the uncertainty regarding its main subsidiary, BEST RE (L) Limited [See following],” which operates in Malaysia, “and the potential implications for Salama’s capitalization, operating performance and enterprise risk management.” Best noted that “Salama’s performance in the first three quarters of 2012 was affected by the adverse development of Thailand flood losses at BEST RE, with Salama’s loss ratio rising to 76 percent as against 57 percent in the same period in 2011. Best Re represented 66 percent of the group’s gross written premium in 2011, and therefore, is material to the group.” Best will continue to monitor developments at Salama and BEST RE in order to ascertain any potential impact on Salama.

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” to The Bahrain National Insurance Company BSC (c) (BNI), both with stable outlooks. The ratings for BNI “reflect its excellent prospective risk-adjusted capitalization, robust underwriting performance and good enterprise risk management (ERM) relative to regional peers,” Best explained. As partial offsetting factors Best cited “BNI’s declining profile concentrated in the Bahraini market and equity concentration in its investment portfolio.” Best also indicated that “BNI is the second-largest insurer in the Bahraini market with an 11 percent share and writes 17 percent of all motor business. Additionally, in order to increase its regional presence, BNI established a branch in Qatar in 2011 and accepts inward facultative reinsurance business from the Gulf Cooperation Council (GCC). Motor is the most significant business line, contributing 58 percent of gross written premium and 93 percent of net written premium. The company’s general insurance division writes commercial risks across liability, engineering, marine and property lines, resulting in 10 percent retention on commercial lines.” The report also noted that “BNI benefits from strong risk-adjusted capitalization with sufficient capital to support current and prospective underwriting levels. Risk-adjusted capitalization benefits from a low level of retained insurance risk supported by a well rated reinsurance program. However, a high level of equity investments may result in volatility in the company’s capital position. BNI has demonstrated a good track record of technical profitability with consistently strong performance. BNI has achieved a five-year weighted average combined ratio of 79 percent, demonstrating strong pricing ability and underwriting controls. BNI performed well ahead of the local market in 2010 and 2011, with all lines of business producing a technical profit. While technical profitability is robust, it is on a declining trend due to competitive pressures.” As far as the company’s enterprise risk management is concerned, Best described it as “good,” adding that “management has a better understanding and control over its risks than regional direct insurance peers. The company has implemented and calibrated its own capital model and is able to use it to understand capital allocation across the business.” However, Best also expressed “concerns regarding BNI’s profile, which continues to decline. Costs will rise relative to premium income and profitability will become constrained. Therefore, BNI’s plans to expand internationally are key to a successful strategy in the future. Positive or negative pressure on the ratings could be created by the success in execution of these expansion plans. Negative rating pressure could result from deterioration in underwriting results or a continued shrinking of the company’s profile.”

A.M. Best Europe – Rating Services Limited has downgraded the financial strength rating (FSR) to ‘B’ (Fair) from ‘B++’ (Good) and issuer credit rating (ICR) to “bb” from “bbb” of Malaysia-based BEST RE (L) Limited . Best also has downgraded the FSR to ‘B+’ (Good) from ‘B++’ (Good) and the ICR to “bbb-” from “bbb+” of BEST RE FAMILY (L) Limited. The outlook for BEST RE remains negative, while the outlook for BEST RE FAMILY has been revised to negative from stable. Best then said it has withdrawn the ratings at the companies’ request. Best explained that it took the rating actions “due to the materially weakened risk-adjusted capital position of BEST RE, its reduced profitability and Best’s concerns over the company’s enterprise risk management.” The report explained that “during the third quarter of 2012, BEST RE experienced considerable adverse development due to the Thailand flood events in 2011, resulting in underwriting losses and a deterioration in its capital position. The events of the past year have demonstrated a failure to apply underwriting controls, which raises concerns over the group’s ERM capabilities, particularly at BEST RE. Following these events, BEST RE has seen a turnover in its senior management.” In addition, as noted above, Best reiterated that it has “removed the implicit support to the subsidiaries by Islamic Arab Insurance Co. (Salama) given that it has not provided capital support to the subsidiaries despite BEST RE being under capital strain. The ratings of BEST RE FAMILY reflect the potential negative impact from its sister company, BEST RE.”

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