Ratings Recap: American Safety, Al Ittihad Al Watani

February 5, 2013

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the insurance operating subsidiaries of Bermuda-based American Safety Insurance Holdings, Ltd. (ASI), which include: American Safety Casualty Insurance Company, American Safety Indemnity Company (both domiciled in Oklahoma City), Bermuda-based American Safety Reinsurance, Limited (ASRE) and its affiliate, Vermont-based American Safety Risk Retention Group, Inc. Best has also revised the outlook to negative from stable and affirmed the ICR of “bbb” of ASI. “The ratings are based on the consolidated financial condition and operating performance of ASRE and its three U.S. domestic subsidiaries and affiliate (entities), with each one receiving significant quota share reinsurance support from ASRE,” Best said. “The revised outlook reflects the unfavorable underwriting results reported in 2011 by the ASI subsidiaries” as well as Best’s “expectation of similar results for 2012, which have been impacted by weather related losses and unfavorable development in prior year loss reserves, primarily for business that has been placed in run off.” Best also said the “revised outlook “considers the inherent risks involved in ASI’s anticipated build-out of new and existing lines of business (particularly its excess and surplus lines and reinsurance divisions) through the expansion into new geographic territories, growth and expansion of its surety business associated with the recent acquisition of the Bluestone Agency in 2012 and the melding of new underwriting teams into ASI’s culture. Furthermore, this revised outlook takes into consideration the organization’s adverse prior year loss reserve development reported in 2011, and additional reserve strengthening in 2012, ASI’s recent de-emphasis on certain poorly performing reinsurance and program businesses, competitive headwinds, elements of execution risk associated with ASI’s diversification strategy and the challenges facing management to improve underwriting results over the near term.” However, Best also indicated that despite the revised outlook, “the ratings reflect the adequate consolidated capitalization of the ASI subsidiaries, their solid, overall operating results over the long term and the effective management of their insurance operations. The ratings also recognize ASI’s core underwriting expertise in its niche markets, with customized risk management programs and loss control services. While ASI’s overall risk-adjusted capitalization remains supportive of the current ratings (driven by its manageable underwriting leverage and modest investment leverage) further deterioration in operating profitability combined with the possibility of additional share repurchases could have a limiting, or even negative impact on the organization’s capital strength.” In addition Best noted: “ASI has taken advantage of its niche market expertise and has focused on generating operating earnings in support of business expansion and premium growth in recent years. However, the long-term profit or loss potential of the newer or expanded classes or lines of business have yet to be established.” Best said it “expects ASI to continue providing explicit support as needed in order to manage growth, which is part of its business plan as well as to ensure that the capitalization of ASRE and its related subsidiaries and affiliate are adequately reflected in the ratings. Positive rating actions could occur over the next 24 months, if there is notable sustained improvement in the underwriting results and operating profitability of ASI, especially as growth occurs in the assumed reinsurance portfolio and the newer segments of the excess and surplus lines portfolio. Key factors that could trigger negative rating actions include continuation of the recent deteriorating trend in ASI’s operating ratios, particularly if it results in the company’s balance sheet being materially impaired. Similarly, a failure to maintain adequate capitalization in the subsidiaries or at a consolidated level will be factors affecting the ratings adversely.”

A.M. Best Europe – Rating Services Limited has removed from under review with negative implications and affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-“of Lebanon’s Al Ittihad Al Watani (L’Union Nationale) Societe Generale d’Assurances du Proche Orient sal; however, the outlook assigned to both ratings is negative. Best said it “placed the ratings of Al Ittihad under review in 2012 following the suspension of the company’s license in Kuwait as a result of an internal fraud. This rating action was taken in order to give A.M. Best sufficient time to assess the full implications of the situation.” It now appears that Best has investigated these issues and has decided to “maintain the company’s ratings at a secure level given that management appears to have successfully navigated Al Ittihad through the worst of the crisis, whilst remaining in sound financial condition.” In addition the report said “Al Ittihad’s risk-adjusted capitalization, as per Best’s Capital Adequacy Ratio model, is considered to be strong, benefitting from the revaluation of the real estate and the capital injection it received in 2012. Al Ittihad is taking a number of corrective measures and improving internal controls.” Best said it would “continue to monitor the company’s progress in this regard in addition to the situation with its Kuwaiti license, which is yet to be reinstated. Negative pressure on the ratings of Al Ittihad may arise should management not be able to return the company to technical profitability or should it become apparent that longer-term damage has been inflicted on Al Ittihad’s franchise. Positive rating movements are considered highly unlikely in the short-term. However, the outlook is likely to be revised to stable should Al Ittihad demonstrate stability in earnings, whilst implementing improvements in its risk management.”

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