A.M. Best Co. has affirmed the financial strength rating of “B++” (Very Good) and the issuer credit rating of “bbb+” of Luxembourg domiciled Electro Re S.A., the reinsurance subsidiary of France’s Alcatel Group, with a stable outlook.
“The rating action reflects Electro Re’s strong risk-adjusted capitalization and improved underwriting performance. An offsetting factor is Electro Re’s aggressive investment strategy, which could lead to potential volatility in the company’s investment performance,” said Best. “Electro Re’s prospective risk-adjusted capitalization is likely to remain strong during the next two years, supported by the continuation of the retention of profits in the form of equalization reserves, a comprehensive three-year retrocession program and stabilization in net written premiums at approximately at their current level,” the rating agency added.
Best also said it “believes that the company’s combined ratio is likely to be good and expects it to stabilize at approximately 80 percent in 2006 and 2007, consistent with the 79.6 percent in 2005. The low combined ratio is due to Alcatel’s divestiture of loss-prone businesses in recent years and the rise in deductibles in the original policies, which together improved Electro Re’s claims frequency. A.M. Best forecasts that during 2006 and 2007, the investment return, including realized gains and losses but excluding unrealized capital gains, is likely to remain modest, in line with the low 2.2 percent level in 2005 due to significant unrealized gains. A.M. Best believes that Electro Re’s investment strategy increases the potential volatility of its investment performance as a high proportion of the investment portfolio comprises equities (27 percent), although capital gains could be realized to smooth the overall operating performance in the event of investment volatility.”
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