Ratings Recap: Sun Hung Kai, Jamaica International, Palms, Watania

March 20, 2013

A.M. Best Asia-Pacific Limited has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating to “a” from “a-” of Hong Kong’s Sun Hung Kai Properties Insurance Limited (SHKPI), both with stable outlooks. Best said the upgrades “reflect SHKPI’s consistently favorable underwriting performance and investment performance, and its strong risk-adjusted capitalization. SHKPI recorded an average combined ratio of approximately 57 percent over the past five years under management’s prudent underwriting strategy. The company’s historical underwriting income was mainly underpinned by favorable performance of the employees’ compensation business generated from both group-related and third party construction projects. Moreover, its low acquisition cost of group-related business and stable reinsurance commission income also contributed essentially to its favorable underwriting performance.” In addition Best noted: “SHKPI leveraged on the investment arm of its parent company, Sun Hung Kai Properties Limited, when selecting an investment that offers satisfactory returns relative to its risk profile. SHKPI consistently achieved a positive investment performance over the past few years. SHKPI’s capitalization remains solid and supportive of the current ratings on both an absolute and risk-adjusted basis. The company’s surplus was steadily strengthened through the retention of after-tax net profits despite its historical high dividend payouts.” As an offsetting factor Best cited the “potential high earnings volatility associated with investment performance. Throughout the past five years, the company’s investment income was largely supported by material realized gains on the disposal of various private equity investments and gains from property revaluation. The company’s future investment return may be lower than its historical level in view of the expected completion on the disposal of its private equity investment portfolio in the coming years, while any potential negative revaluation from the current value of its investment properties could also unfavorably impact its future investment earnings. Notwithstanding, SHKPI’s current level of capitalization remains adequate to absorb potential earnings volatility over the short to medium term.” Best concluded: “SHKPI is well placed for its current ratings. Factors leading to negative rating actions include the substantial deterioration in its risk-adjusted capitalization due to operating losses, and/or excessive risks taken from underwriting and/or investment activities.”

A.M. Best Co. has downgraded the financial strength rating to ‘B+’ (Good) from ‘B++’ (Good) and the issuer credit rating to “bbb-” from “bbb” of Jamaica’s Insurance Company Limited (JIIC), and has removed the ratings from under review with negative implications and assigned a negative outlook. Best then withdrew the ratings in response to company management’s request to no longer participate in its interactive rating process. Best said the rating downgrades and negative outlook reflect its “concerns regarding the recently announced National Debt Exchange ‘NDX’, its effect on the Jamaican financial markets, JIIC and potentially, its parent company, GraceKennedy Limited (GKL).” Best added that although it expects JIIC “to remain at least marginally profitable in non-catastrophe years, there also is the expectation that JIIC’s investment income will continue to be negatively impacted by the reduced coupon rates and extended maturities on Jamaican bonds, which is a function of the NDX and its predecessor, the Jamaican Debt Exchange ‘JDX.’ The likely decrease in investment income will require JIIC to continue implementing underwriting improvements originally introduced after the JDX to maintain its current level of profitability. Another key concern is JIIC’s concentration risk in regards to both its investment holdings and underwriting diversification.”

A.M. Best Co. has assigned a financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” to Cayman Islands-based Palms Insurance Company, Limited, both with stable outlooks. Best said the ratings reflect Palms’ “excellent risk-adjusted capitalization, history of consistently strong operating performance, sound risk management capabilities and conservative balance sheet strategies. The ratings also recognize its history of maintaining sufficient capital and financial resources to support its ongoing obligations.” As partial offsetting factors Best cited “Palms’ limited market scope and high net loss potential stemming from a single, severe occurrence relative to surplus.” However, best also noted that this is “somewhat mitigated by the company’s excellent loss history, favorable geographic spread of risk and the history of support of Palms’ strong surplus position by its parent, NextEra Energy Capital Holdings, Inc. (NEECH). Somewhat offsetting these positive rating factors are the fact that Palms depends on third parties for processing, servicing and administration. Nonetheless, the senior management of its ultimate parent, NextEra Energy Inc. (NEE], is intimately involved in these operations.” Best explained that “Palms is a single parent or pure captive insurer wholly owned by NEECH, which in turn is wholly owned by NEE; hence, Palms insures select risks for NEE. Palms accepts insurance risks only from NEE and its affiliates, providing specialized direct and assumed property and casualty coverages, workers’ compensation, automobile liability and employers’ liability and property risk. Although Palms participates in a range of coverages for very large risks, these risks are underwritten with tight guidelines and significant loss control measures by the insured affiliates.” In addition Best noted that “Palms has consistently produced profitable net operating earnings resulting from underwriting experience and investment income in each year of the past decade through December 31, 2012. Its balance sheet strength has been bolstered through substantial retained earnings. Over the past five years, returns on surplus have averaged 18.7 percent, despite dividend payments in 2011 and 2010 totaling $40 million to its sole shareholder.” Best said it “believes Palms is well positioned to sustain a superior level of operating performance due to its demonstrated risk management expertise and conservative underwriting criteria, hence the assigned outlook of stable.” In conclusion Best said: “Positive rating actions on Palms appear unlikely at this time. The potential for future volatility is reflected in the current rating level. Nonetheless, downward rating pressure could result from weakened free cash flow, a decline in the company’s liquidity levels, an increase in underwriting leverage and/or outsized catastrophe or investment losses in conjunction with a significant prolonged decline in risk-adjusted capitalization. In addition, financial issues resulting in rating pressure on NEECH could impact Palms’ ratings.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B+’ (Good) and an issuer credit rating of “bbb-” to the United Arab Emirates National Takaful Company (Watania) PJSC, both with stable outlooks. Best said the ratings for Watania “reflect its strong prospective risk-adjusted capitalization, supported by strong reinsurance protection, a conservative investment strategy and its sound business plan.” As offsetting factors Best noted the “below target results in 2012 and the execution risk Watania faces in the competitive UAE insurance market.” Best explained that Watania was founded in 2011 as a new company providing all lines of non-life Takaful business. The company currently has offices in Abu Dhabi and Dubai, with plans to expand into the other Emirates during 2013. Medical is the most significant business line, contributing 72 percent of gross written premiums (GWP) and 81 percent of net premiums in 2012. In addition Best noted that Watania “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 and a conservative fixed income focused investment portfolio. Watania’s performance in 2012 was below its plan in terms of GWP and profitability. Watania’s overall portfolio in 2012 was more biased towards medical business than expected. Due to lower volume overall the company was less able to cover its high initial expenses. The loss for 2012 was AED 10.5 million ($2.9 million).” Best added that it views Watania’s enterprise risk management “as developing with a strong structure being implemented over the course of 2013. The company has a financial analysis tool, which will be used to monitor capital adequacy and shape business plans as well as reinsurance optimization and pricing strategy.” In addition Best pointed out that “Watania has entered a very competitive market place and will face pricing pressure from both takaful and general insurance providers, which may present difficulty in achieving ambitious premium volume targets. However, the company benefits from strong management and a good understanding of insurance risk control. In the future, positive or negative rating pressures are likely to result from Watania’s ability to successfully execute its business plan.”

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