Ratings Recap: Echelon, Nationale Suisse, MAPFRE Global Risks/Empresas

December 21, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb+” of Echelon General Insurance Company, as well as the ICR of “bb+” of Echelon’s publicly traded parent, EGI Financial Holdings Inc. (EFH). The ratings and outlook for Echelon are “based upon the company’s good risk-adjusted capitalization, historically profitable earnings as a result of strong net investment income and low exposure to catastrophic loss,” Best explained. “As primarily a non-standard auto insurer, the company has minimal property loss exposure due to a catastrophic event of any appreciable size. The ratings also consider that the parent holding company is publicly traded on the Toronto Stock Exchange, affording potential greater financial flexibility to raise equity during favorable markets.” As partial offsetting factors Best noted “Echelon’s varied underwriting results in recent years, concentration in the Ontario non-standard auto market, strong competitive market pressures and soft market pricing conditions in other lines of business” best said the ratings of EFH are “based primarily on the overall financial strength of its operating insurance company, Echelon. In addition to Echelon, EFH is the parent of CIM Reinsurance Company Ltd, a Barbados captive reinsurer, CUISA Managing General Agency Corporation, a British Columbia specialty insurance agency, American Colonial Insurance Company and Qudos Insurance A/S, vehicles for growing business in the non-standard auto market in the United States and program niche business in Europe, respectively.” Best indicated that it will “closely monitor the growth of these unrated entities and progress of these companies and their potential impact on the overall financial strength of the organization. The ratings and outlook of EFH and/or Echelon could benefit from a consistently favorable earnings trend that outperforms peers in the long term, while maintaining strong risk-adjusted capitalization. However, the ratings and outlook of EFH and/or Echelon may come under negative pressure if an unfavorable earnings trend develops, underwriting and financial leverage increases significantly, and/or risk adjusted capital erodes.”

A.M. Best Europe – Rating Services Limited has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A’- (Excellent) and issuer credit rating of “a-” of Schweizerische National-Versicherungs-Gesellschaft AG (Nationale Suisse. Best explained that the affirmation and outlook revision reflects Nationale Suisse’s “improving operating performance and strong risk-adjusted capitalization. The ratings also take into account the company’s evolving business profile” Best said it “expects Nationale Suisse’s profits to increase in 2012 and 2013, supported by further strong non-life results domestically and improving profitability in the foreign business where the company has been reinforcing its underwriting function. This disciplined underwriting approach is forecast to result in a combined ratio in the low 90s in 2012 and 2013. In 2011, Nationale Suisse’s after-tax profit rose by 182 percent to CHF 167.7 million [$183.4 million], following a significant motor-related reserve release. Excluding this reserve release, the after-tax profit increased by 9.2 percent to CHF 100.6 million [$110.02 million] in 2011.” Best also indicated that it “believes that Nationale Suisse’s prospective risk-adjusted capitalization will remain strong, taking into account its growth plans and relatively low risk profile. Capitalization is expected to be supported by good earnings retention after dividends of one-third to one-half of net profit. The company continues to protect its capital base by using prudent underwriting limits and a comprehensive reinsurance program. Nationale Suisse has a good business profile in its domestic market where it has been growing above market average in its target lines of business. The company is continuing with the optimization of its business mix and is focusing on growing its domestic and specialty lines businesses. Nationale Suisse further reduced its life business in 2011 and is increasingly focusing on less capital intensive products.” Best also said that for 2012 it “expects Nationale Suisse’s overall business volumes to stabilize at approximately CHF 1.5 billion [$1.64 billion]. The good anticipated growth in the non-life Swiss business will be largely offset by a further decrease in life premiums. Specialty line business development is expected to be affected by unfavorable exchange rates, the cancellation of some unprofitable business and a decrease in premiums written within the credit business. The ratings of Nationale Suisse could increase if it continues to improve the profitability of its foreign business, while maintaining good technical results in its core Swiss business. The ratings could be negatively impacted by excessive premium growth resulting in a deterioration in the company’s operating performance and risk-adjusted capitalization.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” to Spain’s MAPFRE Global Risks, Compania Internacional De Seguros Y Reaseguros S.A. (MAPFRE Global Risks). However, Best also said the “outlook for all ratings is negative.” The ratings reflect “MAPFRE Global Risks’ integral role within MAPFRE S.A,” Best explained, as well as the company’s “excellent operating performance and strong business profile within the Spanish and Latin American markets.” As partial offsetting factors Best cited the company’s “weak risk-adjusted capitalization and high exposure to peripheral Eurozone sovereign and financial institutions investments. MAPFRE Global Risks’ stand-alone risk adjusted capitalization remains weak,” Best added, “although it is forecast to improve in 2012 as the company increases retained earnings and also improves the credit quality of its bond portfolio. MAPFRE Global Risks has a large exposure to peripheral Eurozone sovereign and financial institution investments representing over 200 percent of year-end capital and surplus. In recent months, the company has taken steps to reduce this exposure by investing into highly rated sovereign bonds.” Best also noted that the “company aims to protect its capital base through a comprehensive reinsurance program, placed with well rated reinsurers.” MAPFRE Global Risks was established in 2009, and it “has expanded rapidly to provide comprehensive international program insurance to multinational companies with a network spanning 75 countries. The company targets not only large multinationals but businesses that operate in the global sectors of aviation, marine and energy. Through its 99.9 percent owned subsidiary, MAPFRE Empresas, the company insures Spanish commercial risks for companies with a turnover of less than €600 million [$793.2 million]. Premium growth is expected to remain strong in 2012, driven by the expansion of international business increasingly through Europe” Best also observed that “premium growth will be somewhat muted for MAPFRE Empresas, despite a portfolio transfer from MAPFRE Familiar as a result of the challenging economic conditions in Spain and a soft market. MAPFRE Global Risks is expected to report an excellent net income after tax of between €EUR 105 million [$138.8 million] and €120 million [$158.6 million] at year end 2012, with the net combined ratio expected to be less than 90 percent. The company has an excellent five-year net combined ratio of 90 percent, reflecting its disciplined underwriting and strong business profile. In 2011, the company reported a net combined ratio of 88.1 percent, an improvement on the 93 percent reported in 2010, a result heavily affected by the Chile earthquake. Mapfre Empresas remains an extremely profitable part of the business with reduced economic activity in Spain translating into reduced claims activity and therefore improving the 2011 net combined ratio to 83.7 percent (2010: 86.8 percent). Positive rating actions are unlikely at this point. Negative rating actions could occur if there were a worsening of risk-adjusted capitalization, either at a consolidated or stand-alone level, tied to investment losses or a deterioration of the operating environment in Spain.”

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