Ratings: Allianz (Italy), Hatherley, Jamaica, China Ins. (Singapore), Arab Orient

June 2, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating (ICR) of “aa” of Allianz S.p.A. (Italy), both with stable outlooks. The ratings reflect the enhancement received from the implicit support of Allianz S.p.A.’s parent company, Germany’s Allianz Societas Europaea. Other factors include “Allianz S.p.A.’s excellent consolidated risk-adjusted capitalization and strong operating performance,” said best. “An offsetting factor is the declining business position in life and, to a lesser extent, non-life. Allianz S.p.A. has a very good business position in Italy, ranking among the top three insurance groups both in life and non-life. However, in 2008 the company performed worse than the market average in terms of written premiums in both segments. In the life segment, statutory premiums declined by 37 percent, mainly due to the dropped demand for linked products following the crisis in the financial markets and partly mitigated by the increasing demand for traditional products (accounted premiums increased 9 percent). Allianz S.p.A. suffered also from the weak performance of Financial Advisors and, to a greater extent, the “volatile” Bancassurance distribution channel.” Best said it expects Allianz S.p.A. to strengthen its distribution channels in order to improve agent and customer retention and stabilize bancassurance income. In the non-life segment, 2008 premiums decreased by around 9 percent. Allianz S.p.A.’s non-life business is mainly concentrated on motor, primarily Motor Third Party Liability (MTPL), which has been affected by new regulatory changes and a decline in car registrations. Together with increasing competition, these factors have eroded the company’s average premium rates. However, despite market challenges both in life and non-life, Allianz S.p.A. has realized a good operating performance in both segments, reporting a ROE of around 8 percent.

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based Hatherley Insurance Ltd., a captive of JPMorgan Chase & Co., both with stable outlooks. The ratings reflect Hatherley’s strong risk-adjusted capitalization, excellent liquidity and conservative operating strategy. Best also pointed out that the ratings consider the company’s important role it plays within JPMorgan Chase, as a single parent captive for the group’s casualty insurance programs. As part of JPMorgan Chase, Hatherley also benefits from the group’s extensive risk management and business continuity programs, as well as its substantial financial flexibility. Partially offsetting these positive rating factors are Hatherley’s variable operating results in recent years. Best noted that Hatherley is well capitalized as reflected in its moderate underwriting leverage and excellent risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR). Hatherley’s exposure to large losses is manageable as its highest loss per occurrence is capped. The company also has excellent liquidity with a large cash position and assets mostly invested in short-term fixed deposits. Hatherley’s surplus was boosted by exceptional retained earnings in 2006, related in part to a loss portfolio transfer (LPT) following JPMorgan Chase’s merger with the former Bank One. In 2005, Hatherley assumed a portfolio of risks from a former Bank One captive, and the reserves from the LPT have developed favorably since then, allowing Hatherley to benefit from reserve releases. Additionally, effective May 30, 2008, Bear Stearns’ companies were added to Hatherley’s programs. Summing up Hatherley’s performance, Best said it “has been variable but favorable on a five-year average basis. The company’s losses in 2004 and 2005 were largely attributable to exceptional items. In those years, Hatherley significantly increased its incurred but not reported reserves due to conservatism associated with the Bank One merger and a large LPT. In 2004, the company also recognized a large asset impairment charge from an unquoted investment. Nevertheless, as reserve development has been more favorable than anticipated, Hatherley released some reserves in 2006 and recorded exceptional earnings. JPMorgan Chase has observed a significant improvement in loss patterns since the merger due to the better risk diversification and profile of exposures, as well as improved claims management by JPMorgan Chase and its third-party administrator.” Best expects the company to register strong earnings in 2008.

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Jamaica International Insurance Company Limited (JIIC) with stable outlooks. Best said the rating actions reflect JIIC’s favorable capitalization, historical profitability and financial flexibility as a result of the support and commitment of its parent, GraceKennedy Limited (GK Group), one of the leading business conglomerates in the region. GK Group is publicly traded on the Jamaica, Trinidad, Barbados and Eastern Caribbean stock exchanges. Historically, JIIC has reported consistent earnings as a result of its conservative operating strategies and steady investment income. Consequently, the company has been able to consistently enhance its capital position, and it continues to maintain adequate risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR). As an integral member within the GK Group’s financial services, JIIC enjoys strong parental support and commitment as evidenced by past capital contributions and its stated willingness to make additional funds available should the need arise. However, Best noted that “JIIC’s lack of geographic diversification, the continuing challenges in the Jamaican macroeconomic environment and the high cost of reinsurance due to JIIC’s dependence on reinsurance for earnings and surplus protection from catastrophic events” should be considered as offsetting factors…

Standard & Poor’s Ratings Services today raised its long-term financial strength rating and counterparty credit rating on Singapore-based China Insurance Co. (Singapore) Pte. Ltd. (China Insurance) to ‘BBB+’ from ‘BBB’. The outlook is stable. “The rating upgrade reflects China Insurance’s underwriting improvement in recent years, which exceeded our expectation, and its good capitalization,” said S&P. The rating also reflects our expectation that China Insurance’s underwriting performance will remain satisfactory despite the slower economy. However, these strengths are counterbalanced by the highly competitive nature of Singapore’s non-life insurance industry and China Insurance’s relatively small size though niche position within the Singapore marketplace.
“China Insurance’s financial profile remains good amid 2008’s investment turmoil,” noted credit analyst Connie Wong. The strong combined ratio of 84 percent in 2008 (95.3 percent in 2007) is evident of management’s pursuit of prudent reserving and underwriting practices. The ratings also reflect the company’s focus on pricing adequacy while growing its top-line gradually. “However,” Wong added, “we anticipate some deterioration in its underwriting position although we expect it to remain satisfactory overall; this reflects heightened risks from its immigration bonds business, which is sensitive to the economic downturn.” China Insurance had increased its reserving for its bonds portfolio by end 2008. In our view, the company’s capitalization remains good, despite an impairment loss of Singapore dollars (S$) 7.1 million (US$4.94 million). We expect China Insurance’s sound capitalization, supported by adequate reinsurance and reserving, to mitigate the heightened loss possibilities and potential reduction in top-line from marine businesses. Wong also indicated S&P expects “the company’s growth to be moderate in 2009, supported by its good distribution and claims network.” Like its peers, China Insurance’s motor portfolio is unprofitable. However, the company’s pursuit of risk pricing had led to a lower-than-industry-average loss ratio of 77.6 percent at end 2008. The outlook on the rating for China Insurance is stable. For 2009, we expect the company’s underwriting result to remain satisfactory, despite deterioration, coupled with good capitalization.

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Jordan’s Arab Orient Insurance Company. Best said the ratings reflect Arab Orient’s strong risk-adjusted capitalization, leading business position in its domestic market and good operating performance. However, the company’s “significant reliance on reinsurance given its low retention levels,” is an offsetting factor. Best explained that the change in outlook to positive reflects the company’s continued improving risk-adjusted capitalization, combined with its ability to consistently grow its business while improving underwriting profitability. Arab Orient’s prospective risk-adjusted capitalization is expected to remain strong over the next two years, with sufficient retained earnings to support its strategic business plan, with projected growth of up to 20 percent per annum. Best also indicated that further planned capital increases would alleviate credit risk pressure in the event of large losses, given Arab Orient’s low retention levels. In addition Best said it “believes that Arab Orient has a very good business position in Jordan, establishing itself as a market leader with an approximate 9.7 percent share of gross premiums written in 2008. The company’s portfolio reflects local market characteristics, with approximately 65 percent of gross premiums written dominated by medical health care and motor risks. Arab Orient’s operating performance has been good, with pre-tax profits of JOD 2.8 million (USD 4.0 million) in 2008, compared to JOD 1.9 million (USD 2.7 million) in 2007, arising from improved underwriting profitability. The company reported combined ratios below 90 percent and modest returns on investments given current economic conditions.”

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