Ratings Recap: Ansvar, ARABIA (Jordan), ARABIA (Lebanon), ARABIA (Saudi Arabia), Transmonde

March 29, 2013

A.M. Best Asia-Pacific Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Australia’s Ansvar Insurance Limited, both with stable outlooks. The rating affirmations reflect Ansvar’s “strong risk-adjusted capitalization, initiatives to de-risk its balance sheet and reinsurance support from the Ecclesiastical Insurance Office plc (EIO),” Best said. “Full retention of its better than expected 2012 earnings and a share capital injection helped to increase Ansvar’s capital to A$74 million [US$77 million].” Best also explained that Ansvar’s “exit from the personal lines business and the retrospective reinsurance cover on selected liability claims by EIO help to de-risk Ansvar’s underwriting portfolio and to support the company’s risk-adjusted capitalization. As a partial offsetting factor Best cited “challenges to Anvar’s profitability. In 2012, the company’s profitability was significantly impacted by market increases in reinsurance costs, and results before investments remained negative during 2012. In response to this, Ansvar has implemented various measures to both reduce the cost of its reinsurance program through significant improvements in data quality and increase premium rates in its commercial property portfolio, although these measures have yet to restore underwriting profitability. As higher property reinsurance costs attract more competitors into the liability business, results from Ansvar’s profitable liability line could come under pressure.” Best also pointed out that “in the past, investment results, mostly interest and dividend income, provided steady and positive contributions to Ansvar’s overall profitability. Investment results could fall short from budgeted levels in the current yield environment and impact overall profitability. A significant deterioration in risk-adjusted capitalization could result in negative pressure on the ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” of ARABIA Insurance Company–Jordan (AIC-J), both with stable outlooks. Best said the “ratings reflect AIC-J’s good level of risk-adjusted capitalization.” As offsetting factors Best cited the company’s “marginal historical operating performance and modest business profile in the Jordanian market. AIC-J receives rating enhancement from its parent company, ARABIA Insurance Company s.a.l. (AIC).” Best also noted that it benefits from being a part of the much larger ARABIA group, with support from AIC provided in the form of shared corporate governance and risk management guidelines, group reinsurance purchasing and a broad base of technical expertise.” Best said: “AIC-J’s level of risk-adjusted capitalization is expected to be maintained at a good level over the medium term and is supported by a moderate level of business leverage, with capital covering net written premiums at a ratio of around 1-to-1 in 2012. Risk-adjusted capitalization is expected to be supported by an improving level of underwriting profitability. In 2012, the company generated an underwriting profit and a combined ratio below 100 percent (including unallocated administrative expenses). Both motor and medical business, which together account for nearly three quarters of gross written premiums, were loss making in 2012 and profits were driven by the company’s life insurance line and reserve releases from property business. AIC-J remains a fairly small player in a fragmented and competitive Jordanian market. Although the company is expected to grow over the medium term, its market position is not expected to change dramatically.” In conclusion Best said that if “AIC-J is able to improve its level of underwriting profitability over the medium term in core business lines while maintaining stable overall profitability and a good level of risk-adjusted capitalization, there will be positive pressure on the ratings. A material deterioration in risk-adjusted capitalization or removal of group support could result in a negative rating action.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb+” of ARABIA Insurance Company s.a.l. (AIC) (Lebanon). The outlook for both ratings remains stable. Best said its ratings of AIC “reflect its good level of risk-adjusted capitalization, together with a well-diversified business profile and a solid overall performance.” Best also indicated that “AIC’s level of risk-adjusted capitalization is expected to be maintained at a level adequate for the current ratings and is supported by a good quality reinsurance program. However, risk-adjusted capitalization is likely to marginally decrease if the company achieves strong growth in future years. Additionally, a material portfolio of equity securities exposes the company’s capital base to potential volatility.” In addition Best explained that “although based in Lebanon, AIC’s operations are well diversified throughout the Middle East region, with less than one-fifth of the company’s business revenue derived from its home country. AIC has some concentration on motor business, which accounts for over half of gross written premiums; however, this is spread throughout a number of countries and the company writes a number of other lines. Although AIC’s head office location exposes it to significant economic, financial system and political risk, country risk factors are partially mitigated by the company’s level of diversification and business continuity plans. While AIC has diverse operations, it does not hold a leading position in any one market in terms of market share. AIC’s overall earnings are expected to be good over the medium term, with return on equity (ROE) likely to remain broadly in line with the company’s –five-year average of 8 percent. This is likely to be split evenly between underwriting and investment activities, with the company’s five-year average combined ratio of 94 percent and five-year average net investment return of approximately 2 percent-3 percent likely to be indicative of future performance. The company’s good level of diversification means that performance is not necessarily impacted by social or political unrest in any particular country of operation.” Best also noted that “during 2012, the management of AIC invested in projects to develop the company’s brand, distribution networks and risk management framework. While it is likely that it will take time before these projects are completed, favorable developments are expected over the short term. Over time, a stable underwriting and overall financial performance together with the development of an excellent level of risk-adjusted capitalization and the gradual progression of AIC’s business profile could put positive pressure on the ratings. Additionally, a reduction in country risk factors could have a positive impact on the ratings. A reduction in risk-adjusted capitalization, a deterioration in financial performance or an increase in country risk factors will add negative pressures to the ratings.”

A.M. Best Europe – Rating Services Limited has placed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb” of ARABIA Insurance Cooperative Company (AICC) (Saudi Arabia) under review with negative implications. Best explained that the rating action “reflects a deterioration of AICC’s level of risk-adjusted capitalization following significant growth and an overall loss in 2012.” The report also noted that the company’s management “has the second quarter of 2013 to update its business plans and demonstrate how AICC’s level of risk-adjusted capitalization will be improved to a good level over the short and medium term.” At that point Best said it “will review the ratings before the end of July 2013.” Best explained that “underwriting risks drive AICC’s level of risk-adjusted capitalization, and in 2012 the company increased its net written premium base by 42 percent to SAR 498 million [$132.8 million]. During the same period, the company incurred a net loss for the year, and its capital and surplus decreased by SAR 7 million [$1.866 million] to SAR 167 million [$44.53 million]. Since inception, AICC’s gross premium leverage (gross premiums written, capital and surplus) increased from around 1.7 in 2009 to approaching 4 in 2012. It is this high level of business leverage that drives AICC’s level of risk-adjusted capitalization.” Best added that a “material reduction in net premium risk and credit risk is expected in 2013;” however, Best also said it “needs more time to evaluate the impact of the reduction on the company’s prospective level of risk-adjusted capitalization. A rating downgrade could occur if AICC’s level of risk-adjusted capitalization fails to improve to a good level over the short term.”

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating to “a” from “a-” of Bermuda-based captive Transmonde Services Insurance Company, Limited, both with stable outlooks. Best explained that the rating upgrades are based on Transmonde’s “historical operating performance, excellent risk-adjusted capitalization and minimal underwriting leverage,” which have “allowed Transmonde to enhance its surplus considerably in recent years.” As partial offsetting factors Best cited Transmonde’s “relatively high retentions and concentration in liability lines with significant loss severity potential. An additional offsetting rating factor is its limited market profile as a single parent captive. Transmonde provides professional, general and pollution liability coverages to members of the International Association of Superintendents, which is a subsidiary of SGS SA, a publicly traded Swiss company.” In addition Best noted that Transmonde “has maintained very conservative underwriting leverage ratios as surplus has consistently grown to support its business volumes. The company has posted low loss and loss adjustment expense ratios, reflecting SGS’ effective risk management. Transmonde’s relatively high per occurrence retentions are mitigated by significant deductibles and conservative reserving practices. The ratings recognize the company’s balance sheet strength and conservative underwriting leverage measures as well as its role as the captive insurance company of SGS.” Best added that while it “believes Transmonde is well positioned at its current rating level, factors that may lead to negative rating actions include unfavorable operating profitability trends, outsized investment losses and a significant decline in its risk-adjusted capital that would not be supportive of its current rating level.”

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