Ratings Recap: Sunderland Marine, Heddington, Bosna Re

June 9, 2014

A.M. Best has removed from under review with developing implications and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of UK-based Sunderland Marine Mutual Insurance Company Limited (SMMI) and has assigned a stable outlook to both ratings. “The rating actions follow the completion of a merger on 28 February 2014 between SMMI and The North of England Protecting and Indemnity Association Limited (NEPIA),” Best explained. The transaction took place following receipt of the necessary regulatory approvals, as well as agreement from SMMI and NEPIA members. SMMI subsequently became a wholly owned subsidiary of NEPIA, with new and existing policyholders benefiting from an unconditional guarantee provided by NEPIA.” Best indicated that the “merger of these two long-established international marine insurers should lead to a number of business synergies, which are ultimately expected to support the business profile and future operating performance of SMMI. In particular, SMMI is likely to benefit from being part of a larger group, with access to a wider client base.” Best also said the rating actions “reflect SMMI’s improving technical performance and risk-adjusted capitalization, as well as the company’s strong stand-alone business profile. In 2013, SMMI generated a technical loss of £715,000 [$1.2 million], but this was a marked improvement compared with the losses reported in 2011 and 2012. The company’s risk-adjusted capitalization continued to strengthen during the year, and remains supportive of the current rating level.” In conclusion Best said: “Positive rating actions may arise if the merger with NEPIA leads to notable strengthening of SMMI’s business profile and operating performance. A material deterioration in risk-adjusted capitalization or unexpected poor operating results may result in negative rating actions.”

A.M. Best has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a+” of Bermuda-based Heddington Insurance Limited, both with stable outlooks. “The ratings reflect Heddington’s superior capitalization, consistently positive operating results and the role it plays as a captive insurance company of Chevron Corporation,” Best said. As a partial offsetting factor Best cited “Heddington’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low frequency but high severity. This is somewhat mitigated by the captive’s good loss history supported by strong investment income and parental support provided by high yield loans to affiliated companies. Heddington has sufficient capital resources to meet its underwriting related obligations, as measured by Best’s Capital Adequacy Ratio (BCAR). Best also said the “ratings are based on the consolidated results of Heddington. The ratings further recognize the company’s strong enterprise risk management controls and underwriting expertise, the loss controls included in the structuring of insurance coverages offered by Heddington, as well as the cost effective manner in which those services are delivered. Heddington also gains from Chevron’s global scope, which provides it with a favorable geographic distribution of assumed risks.” In addition Best’s report noted: “In its role as a captive insurer, Heddington, along with Iron Horse Insurance Company [See National] (another active Chevron captive), currently provides broad and competitive global insurance products for Chevron and its subsidiaries. The insurance needs of Chevron are supplied through these captives (where appropriate) and the commercial market. Heddington and the other Chevron captives provide comprehensive coverage above Chevron’s internal retentions, while Heddington’s reinsurance is placed through a corporate wide plan with the world’s leading providers of capacity, resulting in a diversified and balanced distribution of reinsurers. Heddington’s ratings are stable, and there is a small likelihood that positive rating actions could take place within the next 12 to 24 months based on its stand-alone characteristics. However, negative rating actions may result from material loss of capital that does not support the company’s ratings and/or its profile is diminished within Chevron.”

A.M. Best has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” of Bosna Reosiguranje d.d. Sarajevo (Bosna Re), based in Bosnia and Herzegovina (BH), both with stable outlooks. The ratings reflect Bosna Re’s “adequate risk-adjusted capitalization, consistently solid operating results and dominant position within its domestic market,” Best said. As partial offsetting factors Best cited Bosna Re’s “relatively high exposure to illiquid equity investments and underwriting concentration with a small number of cedants. The ratings also consider Bosna Re’s exposure to the weak economic conditions in its core market, BH. The report also indicated that “Bosna Re’s capital adequacy, as measured by A.M. Best, continues to be constrained by its investments in private associates, which represent 44 percent of consolidated shareholders’ funds at year-end 2013. Despite this factor, Bosna Re’s risk-adjusted capitalization is expected to remain at a supportive level, owing to modest growth prospects in the near term, given the depressed economic environment in BH.” The report also noted that “Bosna Re’s operating results weakened in 2013, due to a decline in the combined ratio to 99 percent, compared to 94 percent produced in the previous year. Bosna Re’s technical performance reflected an increase in net claims activity following a restructuring in its reinsurance program, which resulted in a rise in loss retention levels for some lines of business.” Best indicated, however, that it “expects Bosna Re’s prospective earnings to remain solid as the company maintains its cautious underwriting strategy.” The report also pointed out that “Bosna Re is the dominant reinsurer in BH, with a market share of around 85 percent. The company’s strong competitive position is protected by the high barriers to entry into the BH market through regulatory constraints and associated costs of operating in a small market. Bosna Re also benefits from long-standing relationships with its cedants, some of which are also its shareholders. In 2013, approximately 55 percent of gross written premiums were derived from its top three shareholders.” Best said it “recognizes Bosna Re’s exposure to the weakened economic and political conditions in BH, but believes that the company’s dominant profile will provide a safeguard against any adverse effects on its solid rating fundamentals.” The report concluded that there “are no positive pressures underpinning Bosna Re’s rating. Negative rating actions could occur if sustained weakening in Bosna Re’s underwriting performance results in the deterioration of risk-adjusted capitalization. Additionally, further decline in the economic environment in BH could negatively affect Bosna Re’s ratings.”

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