Ratings Roundup: ACE Seguros, SOVAG, Polish Re, CCR (Algeria)

July 19, 2013

A.M. Best Co. has assigned a financial strength rating of ‘A’ (Excellent) and an issuer credit rating of “a” to ACE Seguros S.A., which is based in Panama. Its ultimate parent is ACE Limited, now based in Zurich, Switzerland. Best has assigned a stable to both ratings. The ratings of ACE Seguros “are enhanced by the financial and operating benefits it receives as a member of ACE, which is evidenced by ACE’s capital contributions in prior years and the internal reinsurance support provided by an affiliate, ACE Tempest Reinsurance Ltd,” Best explained. “The ratings also reflect ACE Seguros’ capital position, which supports its current and projected levels of writings and expected improvement in underwriting performance following the absorption of its startup costs as well as the benefits of growing its book of business.” As a offsetting factors Best cited “ACE Seguros’ high net retention on its catastrophe related exposure compared to its policyholders’ surplus position, variability in operating results given its start-up status and its ongoing execution risks and limited market presence.” Best’s report said: “ACE Seguros’ strengths are derived from its management’s successful operating strategies and the company’s strategic role as the Latin American hub for ACE’s operations as well as affiliated reinsurance. Management’s strategies include consistent focus on underwriting profitability through careful risk selection and pricing and appropriate policy limits within the business model framework. ACE’s experienced management team provides a disciplined underwriting approach and strong risk management capabilities through a comprehensive enterprise risk management program.” Best added that it believes ACE Seguros is well positioned at its current rating level; however, “factors that may lead to positive rating actions include an improvement in underwriting and operating performance that outperforms its peers over time while maintaining a level of risk-adjusted capital that supports its operations.” There are also factors that could lead to negative rating actions. These “include a reduction in financial and operating support from ACE and its affiliates, operating performance falling short of Best’s expectations and/or an erosion of surplus that causes a decline in ACE Seguros’ risk-adjusted capital to a level no longer supportive of its current 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 SCHWARZMEER UND OSTSEE Versicherungs-Aktiengesellschaft (SOVAG), which is based in Germany, both with stable outlooks. Best indicated that “despite SOVAG’s recent poor underwriting performance, its risk-adjusted capitalization remained strong in 2012, precipitated by a reduction in its underwriting risk, as well as large unrealized investment gains. Prospective risk-adjusted capitalization is expected to remain stable, driven by an expected improvement in operating results and SOVAG’s substantial equalization reserve, which totaled €33.3 million [$43.7 million] at year-end 2012. In the short term, SOVAG is unlikely to pay significant dividends to its investors, SOGAZ Insurance Company OJSC (SOGAZ) and Volga Resources SICAV-SIF S.A (Volga Resources).” Best explained that following an “increase in attritional losses and a reduction in prior year reserve releases, technical performance deteriorated in 2012, and SOVAG reported a combined ratio of 108.4 percent (2011: 99.9 percent), which equated to a technical loss of €5.6 million [$7.35 million] (2011: loss of €900,000 million [$1.18 million]). Rating conditions remain competitive for SOVAG’s largest line of business, motor, which accounted for 41 percent of net written premium in 2012 (2011: 39 percent).” However, best also noted that the “implementation of stricter motor tariffs is expected to lead to an improvement in the technical result for this line of business. The anticipated improvement may well be offset by SOVAG’s strategic growth targets in other lines of business, which in the interim could lead to further volatility in underwriting performance, as well as higher expenses.” Best said: “SOVAG maintains a niche business profile as a specialist insurer of risks emanating from Russia and the Confederation of Independent States, as well as a leading provider of insurance cover for Russian immigrants in Germany. The company continues to benefit from SOGAZ’s majority ownership through the facilitation of business opportunities with Russian business partners. In 2013, gross written premium is expected to increase by up to 5 percent, reflecting the acquisition of new business in SOVAG’s strategic business areas.” In conclusion Best said that “positive rating actions are unlikely at present. Negative rating actions could occur if there were a continued deterioration in SOVAG’s technical and/or overall results, as well as a material decrease in its risk-adjusted capitalization. Additionally, any deterioration in the credit ratings of SOGAZ could lead to negative rating actions for SOVAG.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Polskie Towarzystwo Reasekuracji S.A. (Polish Re), both with stable outlooks. Polish Re’s ratings “reflect the explicit support provided by its ultimate parent,” Canada’s Fairfax Financial Holdings Limited, “in the form of a legal binding guarantee with an indefinite term.” As offsetting factors Best noted “Polish Re’s track record of weak underwriting performance and its business profile, which is highly concentrated in a small number of cedants.” Best explained that in addition to the explicit parental guarantee, “Fairfax continues to provide technical support and other forms of assistance, which includes reinsurance protection and investment management services. Fairfax has further demonstrated its commitment to Polish Re, through the capital contribution of PLN 20 million (app. $6.2 million), which is expected in the third quarter of 2013.” Best indicated that despite the generation of positive operating results, “Polish Re’s underwriting performance remains weak. The combined ratio of 112.7 percent in 2012, which continues the trend of technical losses reported by the company since 2009, was affected by further adverse prior-year loss development on the motor account. Additionally, Polish Re reported material losses in the crop portfolio, which it commenced underwriting in 2011, due to the exposure to losses from the Winterkill (weather-related) event in 2011/2012.” Best did note “the corrective actions taken by Polish Re to improve its underwriting results;” however, the report said that “to date, the positive impact of these actions has yet to materialize.” Best indicated that “Polish Re’s risk-adjusted capitalization is expected to remain at a supportive level in 2013, due to Fairfax’s capital contribution. This follows the significant deterioration in 2012, owing to the impact of the company’s high loss exposure and growth in premium volumes. However, given the low interest rate environment and in the absence of the exceptional one-off investment contributions that supported prior-years’ positive operating results.” Best also said it “considers that Polish Re’s risk-adjusted capitalization will remain under pressure without material improvements in its technical performance. Polish Re is exposed to a high concentration risk, with premiums from the top 10 cedants accounting for 60 percent of gross written premium in 2012. Polish Re’s business relationships with Gothaer Allegmeine Versicherung AG (formerly Polskie Towarzystwo Ubezpieczen S.A.) have been maintained and stand at approximately 24 percent of its total business for 2012, despite its disposal in 2011.” In conclusion Best said: “Positive rating actions are unlikely in the near term. Negative rating actions are likely if there is further deterioration in Polish Re’s underwriting performance or erosion of risk-adjusted capitalization to a level considered unsupportive of the company’s current rating level. Additionally, a reduction in the level of support from Fairfax would result in negative actions being taken.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Algeria’s Compagnie Centrale de Réassurance (CCR), both with stable outlooks. The ratings reflect CCR’s “good local business profile, strong risk-adjusted capitalization and solid underwriting performance,” Best said. As offsetting factors the rating agency cited “the company’s concentration of risks within Algeria and an enterprise risk management (ERM) program in the early stage of development.” Best described CCR as having a “very good domestic business position as Algeria’s national reinsurer. CCR’s leading position has been further strengthened in recent years following the September 2010 regulatory mandate that increased the rate of compulsory cession to CCR to 50 percent. The mandatory cession rate had been 5 percent or 10 percent, depending on the type of risk.” Best’s report indicated that as “a result of this development, together with a successful growth of international business, CCR’s gross written premium has increased by approximately 68 percent since 2010 to DZD 16.5 billion ($211.8 million) in 2012. CCR’s technical result improved to DZD 1.8 billion ($23.4 million) in 2012, with a combined ratio of 78 percent. Operating performance was further supported by a solid investment income of DZD 785.9 million ($10.1 million) that contributed to CCR’s 2012 record profit-after-tax of DZD 2.0 billion ($26.1 million).” Best also indicated that CCR’s risk-adjusted capitalization remains strong despite the significant increase in net premium written.” Going forward, Best said it “expects the company’s capital level to remain supportive of its current ratings, notably as a result of a prudent dividend policy with a pay-out ratio expected to remain below 25 percent. Upward rating movement could occur to CCR’s ratings if improvements are noted in Algeria’s socio-political and economic environment or if the company were to demonstrate a controlled international diversification combined with continued strong technical performance.
Downward rating pressure could occur if CCR’s plan to increase its international business were to negatively impact its technical fundamentals or if the political and economic conditions in Algeria were to deteriorate.”

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