Ratings Recap I: Coachman/SGI, Ceska, Indus. Alliance, Polish Re, Jasindo

January 30, 2009

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘B’ (Fair) and issuer credit rating (ICR) to “bbb” from “bb+” of Canada’s Coachman Insurance Company, and has revised the outlook to stable from positive. Best concurrently affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of SGI CANADA (SGI), as well as the FSR of ‘B++’ (Good) and ICR of “bbb+” of SGI CANADA Insurance Services Limited (SCISL). In addition Best affirmed the FSR of ‘B++’ (Good) and ICR of “bbb” of SCISL’s majority owned subsidiary, The Insurance Company of Prince Edward Island (ICPEI). The outlook for these ratings is stable. All of the companies are subsidiaries of SGI. “Coachman is a niche automobile writer in Ontario, and is a wholly owned subsidiary of SCISL,” Best explained. “The rating upgrades are reflective of Coachman’s excellent risk-adjusted capitalization, improved profitability and the explicit financial support of SGI. These positive rating factors are partially offset by Coachman’s exposure to the volatile Ontario automobile market, strong competitive market pressure, rising claims cost inflation and volatility in the investment markets. However, the company has shown excellent profitability ratios over the last few years and benefits from operational support and reinsurance protection from SGI. The rating affirmations of SGI, SCISL and ICPEI are reflective of their relative risk-adjusted capitalization, modest leverage positions, historical profitability and business profiles within their respective markets. These companies’ face challenges that are similar to Coachman’s in addition to risks associated with expansion into new territories and a trend of more frequent and severe weather-related events across Canada. However, SGI provides both internal and external reinsurance to help protect surplus and provide capacity.”

Standard & Poor’s Ratings Services has raised its long-term counterparty credit and insurer financial strength ratings on Czech-based Ceska pojistovna a.s. (Ceska) to ‘A+’ from ‘A’. S&P also raised its rating on Ceska’s Czech koruna 500 million (about €17.9 million – $19.2 million), five-year, fixed-coupon senior unsecured bond to ‘A’ from ‘A-‘. The outlook for the ratings is stable. “The upgrade reflects Ceska’s robust operating performance in the currently difficult operating environment, as well as its quick and successful implementation of its parent’s revised corporate structure and strategy,” explained credit analyst Johannes Bender. S&P also noted that the “ratings on Ceska are supported by those on its ultimate parent Italy’s Assicurazioni Generali SpA (Generali; AA/Negative/–). Ceska’s immediate parent, Generali PPF Holding (not rated), is 51 percent owned by Generali and 49 percent owned by the PPF Group (not rated). We consider Ceska to be strategically important to Generali because of its pivotal role in executing Generali PPF’s strategy in the Czech Republic (A+/Stable/A-1) and the rest of Central and Eastern Europe,” S&P added. “We therefore factor three notches of implied group support into the ratings. Ceska has a strong competitive position in the Czech Republic, based on its market leadership in life assurance, pensions, and non-life products. Its operating performance is strong. The company’s underlying earnings continue to outperform the Czech market, thanks to its strong competitive position, and are reflected in a net combined ratio of 85 percent, a return on embedded value of 19.6 percent, and a return on equity (ROE) of more than 30 percent.”

Standard & Poor’s Ratings Services noted that Canadian insurer “Industrial Alliance Insurance and Financial Services Inc.’s (Industrial Alliance; TSX: IAG; A+/Stable/–) announcement that its year-end results would be negatively affected by weak equity markets, a credit charge for nonbank asset-backed commercial paper (ABCP), and reserve strengthening would not affect the ratings or outlook. In total, these items would equate to about three quarters of earnings,” S&P added. “The most significant of these items was the charge taken to strengthen individual life insurance reserves to reflect the very low long-term re-investment interest rate assumptions, and the sharp decline in the value of stocks backing these very long-term liabilities. Despite these charges, Industrial Alliance’s capital adequacy ratio remains at the upper end of its targeted range. Its current leverage and fixed charge capacity provides Industrial Alliance with the flexibility to raise further regulatory capital if required. The company’s segregated fund risk remains manageable. With the exception of nonbank ABCP, asset quality remains intact, and Industrial Alliance has limited exposures to the “in-the-news” names or sectors.”

Standard & Poor’s Ratings Services has raised its insurer financial strength and counterparty credit ratings on Polskie Towarzystwo Reasekuracji S.A. (Polish Re) to ‘BBB’ from ‘BBB-‘. S&P also removed the ratings from CreditWatch, where they had been placed with positive implications on Sept. 8, 2008. The outlook is stable. “This reflects one notch of group support in the ratings following the successfully completed acquisition of the company by Fairfax Financial Holdings Ltd. (BB+/Stable/–; main operating companies are rated BBB+/Stable/–),” said the bulletin. “On Jan. 20, 2009, the Canadian group Fairfax completed the acquisition of 100 percent of Polish Re’s shares,” explained credit analyst Miroslav Petkov. S&P also indicated that, although Polish Re is not regarded as strategically important to the Fairfax group under S&P’s group rating methodology criteria, the new ‘BBB’ ratings, nevertheless, include one notch to denote implied group support. “The outlook is stable and we expect Fairfax to provide capital when required to support Polish Re’ business growth, with operational support also displayed notably through investment management being entrusted to the new parent group,” Petkov added.

A.M. Best Co. has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb” to PT Asuransi Jasa Indonesia (Persero) (Jasindo), with stable outlooks. “The ratings reflect Jasindo’s solid track record of operating performance, sound liquidity, diversified short-tailed insurance book and sound overall operating profitability,” said Best. “The ratings also acknowledge the company’s market presence in Indonesia and initiative in expanding its personal lines book. Jasindo is entirely owned by the government of the Republic of Indonesia. Given its long operating history, the company has accumulated a diversified book of business. In addition to using the conventional intermediary channels, Jasindo disseminates its risk products through banking institutions as well as direct channels, which include 50 branch offices and 39 sales representative offices spread throughout Indonesia and one overseas branch office in Labuan, Malaysia. Jasindo achieved an average premium growth of 14.3 percent over the past five years from 2003 to 2007, notwithstanding a slight premium contraction in 2007. With its leading position in aviation, energy and marine hull, the company has captured more than 10 percent market share, ranking it second in the Indonesian non-life market.”

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