Ratings Recap: Insurance Barbados, Grupo Nacional, Delvag

June 30, 2014

A.M. Best has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Insurance Corporation of Barbados Limited (ICBL), both with stable outlooks. Best said the “ratings reflect ICBL’s solid capitalization, leading market presence in its domestic market, favorable earnings in recent years and its affiliation with Bermuda-based BF&M Limited, its majority owner, which is publicly traded on the Bermuda Stock Exchange. ICBL is publicly traded on the Barbados Stock Exchange.” Best also noted that the company is the leading property/casualty insurer in the Barbados market, and has for the most part, “achieved favorable underwriting results in recent years through prudent risk selection and underwriting discipline. Underwriting profitability has been augmented by consistent levels of investment income, and this has enabled the company to continue to enhance its capitalization. In addition, ICBL’s affiliation with BF&M Limited affords it access to the organization’s resources, including financial services, investment management expertise and information technology. As partial offsetting factors Best’s report cited the “geographic concentration of ICBL’s business in Barbados and the increasingly competitive market in which it operates. Furthermore, concerns persist relative to a prolonged economic contraction, the country’s widening fiscal deficit and its declining fiscal reserves as reflected in the downgrading of the sovereign ratings of Barbados. ICBL, like other regional insurers, has significant exposure to catastrophic losses. The company manages this risk through the utilization of reinsurance to limit its catastrophe exposure to a manageable level and protect its surplus against frequency of events.” Best concluded that while the “ratings of ICBL are stable, factors that could contribute to rating enhancement include sustained improvement in underwriting performance and a continued strong overall profitability. Factors that could lead to negative rating actions include significant loss of market share; continued decline in the company’s underwriting profitability and substantial deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR).”

A.M. Best has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Mexico’s Grupo Nacional Provincial, S.A.B. (GNP), both with stable outlooks. “The rating actions reflect GNP’s leading position in the Mexican insurance market, recent improvements in the operating results of the auto segment, its diversified business profile and historically profitable overall operating performance,” Best explained. “GNP also maintains a conservative valuation policy reserve and high adequacy level of capital according to Mexican regulations.” In addition best noted that its ratings of GNP “also recognize its supportive risk-adjusted capitalization and consistent growth in embedded valued and improved lapse experience. GNP’s embedded value has grown consistently over the review period, and together with growth in its appraisal value, is reflective of contributions to shareholder value of existing and future new business.” As partial offsetting factors Best cited “GNP’s continued elevated underwriting leverage to stockholder’ equity, its volatile underwriting and net earnings performance by segment in recent years.” The report also noted that “GNP is the largest domestic insurance company in Mexico as measured by direct premiums written. The company operates as a composite insurer of life and non-life business with core business segments in life, health and automobile coverage.” In conclusion Best’s report said that the rating agency “believes GNP’s ratings are well positioned in the near-to medium-term, based on its current financial strength and risk management profile. Potential positive rating triggers would include sustained improvement in GNP’s underwriting results in conjunction with the expected improvements in Mexico’s regulatory environment. Possible negative rating triggers could include deterioration in the company’s underwriting results, and consequently, a decline in its risk-based capitalization.”

A.M. Best has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit ratings of “a” of Delvag Luftfahrtversicherungs-AG (Delvag) and its subsidiary, Delvag Rueckversicherungs-AG (Delvag Rueck), the insurance captive of Germany’s Deutsche Lufthansa-AG (Lufthansa), its ultimate parent. The outlook for all ratings is stable. Best said its ratings for Delvag “reflect its strong risk-adjusted capitalization and robust operating performance,” as well as its captive structure; noting that these positive rating factors are “further reinforced by a profit and loss absorption agreement provided by Lufthansa.” Best said the “ratings of Delvag Rueck benefit from a full rating enhancement to the level of Delvag’s ratings, reflecting the reinsurer’s strategic importance to the Delvag group, its integration with the parent company in terms of business strategy and management, as well as the profit and loss absorption agreement between both companies.” The report also indicated that “prospectively, Delvag’s risk-adjusted capitalization is expected to remain very strong. Whilst an existing profit and loss absorption agreement with its parent, Lufthansa, limits the potential for earnings retention, it offers protection for Delvag’s balance sheet and consequently for Delvag Rueck. Delvag Rueck’s risk-adjusted capitalization remains stable, strengthened by its equalization reserve and silent claims reserve.” The report also noted that “operating results for 2014 are expected to remain robust, albeit somewhat lower than the pre-tax profit of €19.9 million [$27.175 million] reported in 2013. However, the company’s disciplined underwriting approach and comprehensive reinsurance program are expected to result in continuously stable claims levels going forward. In 2013, Delvag Rueck reported a pre-tax profit (after the equalization reserve transfer) of approximately €500,000 [$682,780], compared to €100,000 [$136,556] in 2012. In conclusion Best said: “Positive rating actions are unlikely at present. Negative ratings actions would arise from a significant deterioration in risk-adjusted capitalization, and/or a prolonged weakening in the operating performance of either Delvag and/or Delvag Rueck. Additionally, any deterioration in the financial strength of Lufthansa could lead to negative rating actions for Delvag and Delvag Rueck.”

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