Ratings Recap: Eni Insurance, Gulf Re

August 13, 2013

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Eni Insurance Limited (EIL), which is based in Dublin, Ireland, both with stable outlooks. EIL is the sole captive of Eni S.p.A., an Italian multinational gas and oil company with operations in more than 80 countries. Best said the rating affirmations of EIL “reflect its strong risk-adjusted capitalization, its comprehensive reinsurance program as well as its good, albeit relatively volatile, financial performance. An offsetting rating factor remains EIL’s consistently high fixed income exposure to peripheral European sovereign bonds.” In addition Best noted that “EIL’s risk-adjusted capitalization is expected to remain strong in 2013, despite the introduction of large dividend payments to Eni in 2012. Future variable dividend payments, expected to be at the high end of after-tax earnings, will most likely prevent a significant improvement of EIL shareholders’ funds in the medium term. However, continuous reductions in the capital requirements relating to EIL’s credit and reserve risk exposures are expected to absorb the stagnation of shareholders’ funds. The credit exposure is expected to decline due to the run-off of a book of business that is linked to a reinsurance panel of lower quality, and it is anticipated that the reserve risk will decrease as a result of expected continuous reserve releases. In addition, EIL maintains a comprehensive reinsurance program with a strong panel of reinsurers, which is expected to continue to provide good protection to its balance sheet in the event of large losses. Nevertheless, a weakness to EIL’s balance sheet strength remains the high exposure to fixed income assets invested in peripheral European sovereign bonds.” Best described EIL’s underwriting performance as having “remained at a stable level in 2012 with a combined ratio of 73.2 percent, despite large single losses in its property lines during the year.” In conclusion Best said that it “expects overall earnings to remain good, but they are likely to remain subject to volatility, due to the impact of large underwriting losses and the potential strong movements in unrealized capital gains stemming from EIL’s fixed income exposure to peripheral European sovereign bonds. Positive rating actions are unlikely at this time. Negative rating actions could occur if EIL’s underwriting profitability were to trend negatively going forward and/or a significant deterioration of its risk-adjusted capitalization were to occur linked to no evidence of support from Eni to boost the latter. In addition, if the captive’s importance as a risk management tool were to be reduced within the group then negative rating pressure would arise.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of United Arab Emirates-based Gulf Reinsurance Limited, both with stable outlooks. The ratings for Gulf Re “reflect its excellent risk-adjusted capitalization and strong shareholder support. An offsetting factor is its volatile underwriting performance,” Best explained. “Gulf Re’s risk-adjusted capitalization remains excellent, benefiting from low underwriting leverage and a conservative investment strategy. Gulf Re’s capital and surplus reached $216 million by year-end 2012, supported by full earnings retention, with no dividends expected to be paid until shareholders’ equity reaches $400 million.” In addition Best noted that the “support received by Gulf Re from its joint ultimate parents, Gulf Investment Corporation G.S.C. (GIC) and Arch Capital Group Ltd. (ACGL), has been essential to the success of the enterprise and is likely to remain important to its strategic plan. The existing joint venture agreement between GIC and ACGL has been extended until 2016.” Best indicated that “Gulf Re’s underwriting performance in 2012 was negatively affected by two large losses, resulting in a $5.4 million technical loss, raising its loss ratio to 72 percent (2011: 54 percent). Greater stability in underwriting performance is likely to be achieved as Gulf Re’s profile expands, providing better ability to absorb one-off losses and efficiencies within its expense base. Since inception in 2008, positive overall earnings have been largely dictated by Gulf Re’s conservative investment policy providing a steady return on invested assets. Positive rating pressure is unlikely at this time. However, negative rating pressure may arise from further underwriting losses,” Best said in conclusion.

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