Ratings Roundup: Al Fajer, Tunis Re, Eastern Re

July 16, 2013

A.M. Best Europe – Rating Services Limited has revised the outlook to stable from negative and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Kuwait’s Al Fajer Retakaful Insurance Company K.S.C. (Closed).Best said the outlook change “reflects Al Fajer Re’s improved underwriting and investment results, which reduces Best’s concerns surrounding the company’s historical volatile performance. In the financial year ending 31 March 2013, Al Fajer Re reported a second year of successive profits in both its shareholders and policyholders’ funds,” Best continued. “In 2013, the company reported a surplus within its policyholders’ fund of KD 0.4 million (US$1.4 million) and a net profit within its shareholders’ fund of KD 2.6 million (US$9.2 million). Surplus within the policyholders’ fund was driven by underwriting operations, which generated a combined ratio of 98.3 percent, and was used to pay down prior year deficits. Profit within the shareholders’ fund benefitted from the reversal of prior year impairment provision and was retained in order to offset prior year accumulated losses.” Best’s report also noted that “over the past two years—and in order to stabilize its level of profitability and risk-adjusted capitalization—Al Fajer Re significantly improved its level of enterprise-wide risk management. Underwriting and investment losses during the company’s early years of operation had a material impact on its level of risk-adjusted capitalization. While currently at an adequate level, failure to generate stable operating results could place a strain on the company’s level of risk-adjusted capitalization” In conclusion Best said: “Positive rating pressure may arise by the gradual development of Al Fajer Re’s business profile over the medium to long term, while developing a good level of risk-adjusted capitalization within its retakaful fund and maintaining a profitable underwriting and investment portfolio. There will be negative pressure on Al Fajer Re’s ratings if it is unable to maintain risk-adjusted capitalization at an adequate level or if profitability deteriorates.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Tunisia’s Société Tunisienne de Réassurance (Tunis Re), both with stable outlooks. The ratings of Tunis Re reflect its “strong risk-adjusted capitalization and excellent 2012 underwriting performance,” said Best. As an offsetting factor Best cited “Tunisia’s country risk, where the company’s business profile and investment portfolio remain concentrated.” Best noted that after the 2011 political unrest, “a moderate economic recovery continued in Tunisia during 2012. In February 2013, a political crisis arose in the country; a new government was formed on 13 March, but the issues that sparked the revolution in January 2011 have remained largely unresolved.” Best added that in its opinion, “although Tunis Re’s business profile and investment portfolio remain concentrated in Tunisia, the company has promptly responded to last year’s events with new strategic actions that somehow mitigated Best’s concerns on the country risk of Tunisia.” Best also indicated that it “believes the company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, is strong and expected to increase going forward, supported by good internal and external capital generation. Tunis Re’s capital position improved following the success of its capital increase in May 2012, which amounted to TND 60 million [$36 million], equally distributed between nominal capital and premium issue. In 2012, Tunis Re’s gross written premium (GWP) increased by 9.2 percent, above the market average of 8.1 percent, to TND 77 million [$46.3 million] (2011: TND 71 million [$42.7 million]), driven by the increase in its fire and aviation lines of business, which comprises an important proportion of its business portfolio. The company’s profitability reached a pre-unrest level in 2012, with a net result that increased to TND 6.2 million [$3.73 million] (2011: TND 2.7 million [$1.624 million]), supported by both a good technical result and strong investment performance.” In conclusion Best said: “Positive rating actions are unlikely at this time considering the current pressures on the country risk of Tunisia. Negative rating actions could occur if Tunis Re’s ratings fundamentals were to deteriorate significantly or if the country risk of Tunisia as assessed by A.M. Best were to deteriorate.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Cayman Islands-based Eastern Re Ltd. SPC, both with stable outlooks. Best said the ratings recognize” Eastern Re’s strategic affiliation with its holding company, Eastern Insurance Holdings, Inc. (EIHI) and the member companies that comprise the Eastern Alliance Insurance Group (EAIG), its historically profitable operating results as well as its sound stand-alone capitalization.” As partial offsetting factors, Best cited “Eastern Re’s exclusive reliance on EIHI and EAIG for the production of all its business, as well as the mono-line orientation of Eastern Re, which primarily acts as a workers’ compensation reinsurer. All named companies are domiciled in Lancaster, Penna., unless otherwise specified.” Best also explained that Eastern Re “is a segregated portfolio company or cell captive, whose general cell is a wholly owned subsidiary of EIHI, which also indirectly owns EAIG, and all these workers’ compensation insurance companies produce business through regional agents. These insurance companies provide both fronting capabilities and reinsurance protection to Eastern Re. Eastern Re also utilizes the expertise of Employers Alliance Inc., an insurance services provider and member of EAIG that acts as the third party administrator and provides services for all of the cells of Eastern Re. Eastern Re issues preferred shares to its cell owners, which are agent or group captives that purchase workers’ compensation coverage from EIHI. These agent and group captives participate in the profits and losses of the cell for which they are the owners. This dynamic provides added incentive to the agent or group captive to prevent adverse selection for the business being assumed by Eastern Re.” In conclusion Best said: “Factors that could result in either an upgrading or a downgrading of Eastern Re’s ratings include a change in the overall risk profile of EAIG (more or less risky) as well as a change in the consolidated capital strength of the segregated cells.”

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