Ratings Recap: SAC Re, ZEP-RE, IRB-Brasil, Malaysian Re, Bahrain National

December 12, 2013

A.M. Best Co. has commented that the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based S.A.C. Re, Ltd. are unchanged and the ratings remain under review with negative implications, until the anticipated closing of Hamilton Insurance Group, Ltd.’s (a Bermuda holding company) acquisition of SAC Re. On December 9, 2013, Hamilton Insurance Group, Ltd. announced that it entered into a definitive agreement to acquire SAC Re. Best said it “recognizes that signing of the definitive agreement is a positive development for SAC Re, and should the transaction close as expected it will fully resolve the reputational risks previously identified.” However, Best also indicated that it “still needs to complete its evaluation of the new business plans as well as the new investment strategy. The transaction is expected to close prior to December 31, 2013, subject to Bermuda Monetary Authority approval and other closing conditions.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of IRB- Brasil Resseguros S.A. (IRB), both with stable outlooks. “The ratings reflect IRB’s strong business profile in the Brazilian reinsurance market, solid overall financial performance and excellent risk-adjusted capitalization,” Best explained. “Since the reinsurance market opened in Brazil, IRB holds the largest market share by a wide margin, despite intense competition. In recent years, as the Brazilian reinsurance market has transitioned to a more open market, IRB has enacted various initiatives to maintain market share and to position itself for expansion outside of Brazil and Latin America. IRB has completed its privatization in recent months, when the Brazilian government reduced its stake in IRB and ceased to be its sole controlling shareholder. This restructuring should provide IRB with enhanced agility and efficiency. Overall, IRB continues to have a unique and strong position in the growing Brazilian (re)insurance market, along with its defined strategy and experienced personnel to execute its business plans.” Best also said it “recognizes that IRB continues to be in a state of transition and will closely monitor this phase of its development. Rating factors that could cause an upgrade to IRB’s ratings and/or revise the outlook to positive include maintenance of a strong risk-adjusted capital coupled with a strong operating performance.” As partial offsetting factors Best cited the “sustained and significant competitive market pressures on IRB as more reinsurance companies enter the Brazilian market each year, as well as potentially new or altered regulatory requirements, which may or may not be favorable to the company. The aforementioned challenges and other rating factors, which could lead to a downgrading of the ratings and/or a revision of the outlook to negative include a material loss of capital, whether it is driven by investment losses or underwriting losses, increased volatility with regards to operating performance relative to other market participants or a material decline in the company’s risk-adjusted capital if, for example, premium growth is pursued in a manner that strains its claims paying ability.” Best observed that in “Latin America, Brazil offers the largest (re)insurance market. It has the largest population in South America and is among the 10 largest economies in the world by gross domestic product. Currently, Brazil has a low insurance penetration and a favorable economic environment, which represents significant growth potential, making it an attractive place for (re)insurance companies. In Brazil, reinsurance companies fall into three categories depending on a company’s participation and financial commitment: ‘local,’ ‘admitted’ and ‘occasional.’ IRB is a ‘local’ reinsurance company and up until 2007, when the Brazilian reinsurance market was opened to international reinsurance companies, it was privy to a long-standing monopoly. IRB has predominately operated as a property/casualty reinsurer with a small amount of life business.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Kenya’s ZEP-RE (PTA Reinsurance Company) (ZEP-RE), both with stable outlooks. ZEP-RE’s ratings “reflect its strong risk-adjusted capitalization, solid and consistent operating performance and established competitive position within its regional reinsurance market,” said best. “Several anticipated capital injections, coupled with a good retention of earnings in 2013, are expected to sustain risk-adjusted capitalization at a sufficiently strong level to support a projected annual rise in gross written premium of approximately 20 percent in the near term. Operating results for 2013 are expected to remain solid, albeit lower than the pre-tax profit of $11.7 million reported in 2012. Net earnings as at the third quarter of 2013 decreased by 33 percent to $8 million due to ZEP-RE’s exposure to a high incidence of large single risk losses. Nonetheless, a more benign claims environment during the fourth quarter of 2013 and higher investment income, driven by an expanded asset base, are expected to support ZEP-RE’s overall performance for the full year.” In addition best described ZEP-RE as having a “good competitive standing in the southern and eastern regions of Africa is enhanced by its privileged access to business. Although ZEP-RE is entitled to accept 10 percent of all treaty business ceded in some of its markets, the company is not unduly reliant on these cessions to support its expansion.” In conclusion Best said: “Upward rating pressure could occur if ZEP-RE continues to demonstrate profitable growth over the long term whilst maintaining risk-adjusted capitalization at a supportive level. A decline in the company’s financial profile, either through a deterioration in operating results, quality of its retrocessionaires and/or weakening risk-adjusted capitalization could result in negative pressure on ZEP-RE’s ratings. Additionally, an erosion in the economic conditions and business environment in the countries where ZEP-RE operates could negatively impact the ratings.”

A.M. Best Asia-Pacific Limited has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Malaysian Reinsurance Berhad. Best said the ratings “reflect Malaysian Re’s strengthened risk-adjusted capitalization, consistently favorable operating performance and well-established presence in the Malaysian reinsurance market. Malaysian Re has recorded healthy growth in its capital and surplus over the past five years, largely due to its profitable operating results. The company’s risk-adjusted capitalization has also strengthened, as measured by its regulatory capital adequacy ratio (CAR) and Best’s Capital Adequacy Ratio (BCAR). Malaysian Re has consistently posted positive earnings over the past 10 years, as a result of its robust performance in both underwriting and investment activities. Despite the losses from Thailand flooding, underwriting results have improved in the past three years. Malaysian Re has established a dominant position in the domestic reinsurance market during its 40 years of operation. The company has captured around 60 percent of the reinsurance accepted premium in Malaysia over the past five years alone.” As offsetting factors Best noted the “potential termination of voluntary cession (VC) arrangement in the near term and the competitive regional reinsurance market.” Bes explained that although Malaysian Re “is less reliant on VC business than before, the potential termination of this business in 2016 still exerts some pressure on the company’s premium income. With recent consolidation activities and the emergence of foreign insurers in the Malaysian non-life market, it has become more difficult for Malaysian Re to secure business from the market players. Also, given the competitive landscape of the regional reinsurance sector, it remains a challenge for Malaysian Re to further enhance its presence in overseas markets. Future positive rating actions could occur if Malaysian Re is able to further strengthen its business profile in the regional reinsurance market while maintaining its sound risk-based capitalization and strong operating results. Conversely, downward rating pressure could occur if there is a material deterioration in the company’s operating performance or risk-adjusted capitalization level.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of’ B++’ (Good) and issuer credit rating of “bbb+” of The Bahrain National Insurance Company BSC (c) (bni), both with stable outlooks. The ratings reflect bni’s” robust operating performance, strong level of risk-adjusted capitalization and leading domestic franchise,” Best said. “In 2012, bni maintained a robust level of technical profitability with a reported loss ratio of 60.0 percent (2011: 52.9 percent). Based on 2013 interim results, the company is likely to report a higher loss ratio at year end, reflecting increased claims activity on its motor book of business. Nevertheless, bni is on course to report a good technical profit for the full year 2013. Despite the company’s high dividend payout ratio, risk-adjusted capitalization is expected to remain strong.” As partial offsetting factors best cited the “limited growth potential for bni in the Bahraini market, given increasing competition from both traditional and takaful companies. In order to increase its domestic and regional presence, the company is currently considering several acquisition targets. Positive rating actions could occur if bni is able to successfully execute its expansion plans whilst maintaining good operating performance and strong risk-adjusted capitalization. Negative rating actions could occur due to a deterioration in underwriting performance or a material fall in risk-adjusted capitalization. Additionally, a deterioration in the company’s business profile could place downwards pressure on the ratings.

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