A.M. Best Co. has affirmed the financial strength rating of B++ (Very Good) of Egyptian Reinsurance Company (Egypt Re).
The affirmation reflects the maintenance of excellent risk-adjusted capital adequacy and improved portfolio diversification; however, weak underwriting performance continues to exert downward pressure on earnings. The outlook is stable.
Excellent risk-adjusted capital adequacy – Risk-adjusted capital is considered excellent and continues to benefit from strong earnings retention. Adjusted capital has increased consistently (9.4 percent on a five-year compound annual basis) to EGP 768.1 million (USD 165.9 million) in 2002. Operating leverage is marginal. A.M. Best believes there is potential for reserve deficiency in third-party motor business due to adverse market-wide trends. However, any reserve strengthening is likely to be a gradual process and is not expected to impact the current rating level.
Portfolio diversification – Gross premiums increased by 4 percent in 2002 to EGP 358.8 million (USD 77.5 million) due to strong growth (49 percent) in the non-compulsory Egyptian and international (18 percent) portfolios. A.M. Best expects comparative growth in 2003 as Egypt Re continues to leverage its long-established relationships in the domestic and regional markets to negotiate larger lines on its clients’ existing proportional treaties. Significantly, the company has extended coverage to non-proportional lines in 2002 and after quoting several programmes, has taken a lead position on several placements in the market. A.M. Best views as positive the company’s transition during the deregulation of the market – Egypt Re has maintained approximately a 36 percent share of all premium ceded in Egypt in 2002 – and is progressing towards its goal of becoming a leading reinsurer in the Arab region.
Downward trend in earnings – Net income is expected to fall by a further EGP 10 million (USD 2.1 million) in 2003 to approximately EGP 50 million (USD 10.8 million). Strong, although declining, earnings have been dependent upon robust investment income to offset weak underwriting performance in the last three years as a result of the sustained low rating environment and continued adverse performance of certain classes.
Although pricing remained flat for the majority of classes at renewal 2003, there was a substantial correction in renewing large international energy risks; A.M. Best expects a minimum 10 percent improvement in the 2003 loss ratio (103.6 percent in 2002). Whilst the long tail on discontinued third-party motor business is expected to represent a drag on underwriting performance going forward, lower interest rates and investment returns will place greater emphasis on more disciplined underwriting. This will be a key focus of the rating going forward.
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