Ratings Recap: Patria Re, Arab Insurance, Provident Insurance (NZ)

August 2, 2013

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Mexico’s Reaseguradora Patria, S.A.B. (Patria Re). Best also assigned an ICR of “bbb-” to Patria Re’s ultimate parent, Pena Verde, S.A.B. The outlook for this rating is also positive. Best explained that the “revised outlook reflects Patria Re’s strong enterprise risk management infrastructure, expansive knowledge of the Latin American market and its outperformance of a peer group of regional reinsurers. The rating affirmations reflect Patria Re’s excellent risk-adjusted capitalization, consistent overall earnings and strong leverage and liquidity metrics. Patria Re is a reinsurer operating primarily in the Mexican and Latin American markets and is focused on the prudent management of its underwriting risks in these regions.” Best’s report also indicated that as a result of its “comprehensive domestic and regional knowledge, Patria Re has established a strong niche position in Mexico and Latin America, which allows it to selectively accept profitable business, while maintaining a diversified product portfolio tailored to specific markets. This strategy has resulted in favorable overall earnings and further bolstered Patria Re’s risk-adjusted capitalization.” As partial offsetting factors Best cited “Patria Re’s elevated expense structure due to its significant share in proportional contracts, the concentration of equities in its investment portfolio and the company’s exposure to frequent and severe catastrophic losses. In addition, Patria Re’s risk profile has shifted in recent years mainly as a result of its exposure to European and Asian risks. While this affords Patria Re additional geographic diversification, it is accepting risks in relatively new markets.” Best said it would “continue to monitor Patria Re’s experience with these contracts for any adverse developments. Furthermore, reinsurance pricing has begun to deteriorate and could potentially effect rates in Patria Re’s core markets.” In conclusion the report said: “Positive rating triggers include continued strong underwriting performance and overall profitability and/or an upgrading of Mexico’s country risk tier rating. Factors that may lead to negative rating actions include an outsized catastrophic loss or a sustained decline in underwriting profitability, significant deterioration in risk-adjusted capitalization and/or a downgrading of Mexico’s country risk tier rating.”

A.M. Best Europe – Rating Services Limited has downgraded the financial strength rating to B- (Fair) from B++ (Good) and the issuer credit rating to “bb-” from “bbb” of Arabia Insurance Cooperative Company (AICC), based in Saudi Arabia. Best has also removed both ratings from under review with negative implications and assigned a negative outlook. “The rating downgrades reflect the significant deterioration in AICC’s risk-adjusted capitalization during the first half of 2013, following large underwriting losses and the cancellation of a substantial reinsurance contract,” Best explained. “In the second quarter of 2013, AICC reported an overall loss of SAR 43.5 million (US$11.6 million), equal to 26 percent of its reported capital and surplus as at year-end 2012. Additionally, AICC cancelled a proportional reinsurance contract mid-year, which was expected to provide material capital relief and partially offset its high level of underwriting leverage. Given the scale of AICC’s losses in the first half of 2013, it is unlikely that underwriting profits alone will be sufficient to replenish its capital in the short term, and the company may need to seek alternative options in order to alleviate capital pressures. Moreover, the deterioration in AICC’s risk-adjusted capitalization raises significant concerns over its risk management practices.” Best also said the negative outlook reflects its “uncertainty over AICC’s prospective risk-adjusted capitalization. If the company is unable to demonstrate that its risk-adjusted capitalization will be maintained at a fair level over the medium term, the ratings are likely to be further downgraded. Upward rating pressure could arise if AICC is able to materially improve its risk-adjusted capitalization.”

A.M. Best Asia-Pacific Limited has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb” to New Zealand’s Provident Insurance Corporation Limited (PICL), both with stable outlooks. Best said the “ratings reflect PICL’s balance sheet strength and business profile. PICL has been capitalized with NZD 10 million [US$7.86 million]. No dividends will be paid during PICL’s initial five years of operation, which helps to absorb the expected capital drain during the company’s start-up period and benefits its balance sheet strength, as measured by Best’s Capital Adequacy Ratio (BCAR).” The report also explained that “PICL’s business profile benefits from the support of several affiliated car dealerships, which helps to secure expected premium revenue growth.” As an offsetting factors Best cited the “potentially higher than expected premium growth from PICL’s affiliated car dealerships during its start-up period. Particularly, during this start-up period, earnings and capital growth will lag risk growth due to the delayed earnings pattern of PICL’s core mechanical warranty product. Hence, higher than expected premium growth could result in an unexpected strain to PICL’s BCAR. The delayed earnings pattern also means that it will take time for the company to evaluate its underwriting profitability as well as effectively execute any corrective actions. Projected capital growth relies significantly on income being derived from non-underwritten products. A lower than expected level of such income would result in a lower than expected path for PICL’s BCAR.” In conclusion Best said: “At this time, any upward movements to PICL’s ratings are unlikely. However, a significant deterioration in PICL’s risk-adjusted capitalization and negative deviation from its business plan could result in downward pressures on the ratings.”

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