Ratings Recap: Continental Re, Best Meridian, Al Fajer, Caisse Centrale Re

June 22, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Nigeria’s Continental Reinsurance Plc, both with stable outlooks. “The ratings reflect Continental Re’s insufficient although improving risk management and insufficient security within the company’s retrocession panel, in addition to the unstable economic and political environment of the company’s core market,” said Best. “Mitigating factors are the company’s robust risk-adjusted capitalization and strong operating performance.” Best added that it considers Continental Re’s current level of risk management to be insufficient; however the rating g agency also, indicated that it “believes that the company is on track to accomplish material improvements within the next two years. Security within the company’s retrocession panel is expected to improve in each of the next two years. Continental Re’s currently unsophisticated reserving methodologies, which although in line with local regulatory requirements, are being improved and are likely to be at a level in line with international standards within two years.” Best also anticipates that “newly recruited experienced staff, including a qualified actuary along with new technical software will allow Continental Re to capture more reliable data on its business and generate a greater understanding of risks such as accumulation and catastrophe exposure.

A.M. Best Co. has upgraded the financial strength rating to ‘B++’ (Good) from ‘B+’ (Good) and issuer credit rating to “bbb” from “bbb-” of Cayman islands-based Best Meridian International Insurance Company SPC (BMIIC), and has revised its outlook on the ratings to stable from positive. Best has also affirmed the FSR of ‘B++’ (Good) and ICR of “bbb+” of Florida-based Best Meridian Insurance Company. The outlook for both ratings is stable. “The rating actions on BMIIC are based on the strength and commitment of its parent, BMI Financial Group, Inc. (BMI), a privately held holding company based in Coral Gables, Florida and BMIIC’s consistent profitability, net premium growth and adequate level of risk-adjusted capital,” Best explained. However, BMIIC’s “limited business profile” is an offsetting factor. “The affirmation of BMIC’s ratings reflect its well-established marketing presence and cultural knowledge in the Caribbean countries, its trend of profitable operating results among its core lines of business and favorable risk-adjusted capitalization,” Best continued. “Partially offsetting these factors are the company’s business concentration risk in its individual accident and health segment, its exposure to business risk in certain Caribbean countries and volatility in its statutory earnings performance over the past five years.”

A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-‘ (Excellent) and the issuer credit rating (ICR) to “bbb+” from “a-” of Kuwait’s Al Fajer Retakaful Insurance Company KSCC, and has kept the ratings under review with negative implications. Best explained that the “downgrades and under review status with negative implications of Al Fajer Re reflect the lack of management controls over the investment strategy in the first year of the company’s operation. A large portion (around 30 percent) of the company’s total investments is placed with The Investment Dar (TID), (a Kuwaiti investment company) which has defaulted in May 2009. Best also indicated that in its opinion “there was both lack of controls and weak corporate governance on the investment side of business in the first year of Al Fajer Re’s operation. This translates into a partial failure of the company’s enterprise risk management (ERM). Following the departure of the Managing Director in September 2008, the investment committee is only comprised of members from the main shareholders with the senior management of Al Fajer Re not having investment input. Al Fajer Re’s investment policy, which allowed for the very high concentration of investments in one single issuer (30 percent), is currently suspended and until further notice funds upon maturity are being placed with regional banks offering governmental guarantees.” Best added that, “despite the new investment strategy being very conservative,” it “believes that there is a risk of concentration in certain banks, as there are not a large number of Shariah compliant banks. Despite the company’s effort to implement new measures for the control of investments going forward,” Best also believes that this is “likely to take some time to be put in place and start showing results.”

A.M. Best Co. has affirmed the Financial Strength Rating of ‘A++’ (Superior) and the Issuer Credit Rating of “aa+” of France’s Caisse Centrale de Reassurance (CCR) with a stable outlook. “CCR’s ratings continue to reflect its superior risk-adjusted capitalization, which is supported by the company’s highly conservative earnings retention policy and the backing of the French State,” said Best. “CCR provides unlimited reinsurance cover for natural catastrophe, terrorism and other exceptional risks with the explicit support of the French State, its sole shareholder, in the form of an unlimited stop-loss guarantee. Additionally, the company writes some conventional reinsurance business not covered by the State guarantee and normally limited to approximately one third of overall premium income.” Best added that it “anticipates that CCR’s operating performance will continue to be driven by the lines of business covered by the State guarantee.” Despite the high volatility of the guaranteed lines, Best explained that, in its opinion, “the impact of a catastrophic event on the company’s earnings can be absorbed by CCR’s equalization reserve and, should the latter be insufficient, by the unlimited State guarantee.” Best also expects technical ratios for the smaller open market account to remain weaker than for the guaranteed business. In 2008, CCR recorded another year of strong results with an after-tax profit of €725 million [$1.073 billion] and a combined ratio of 43.7 percent (€640 million [$886 million] and 47 percent, respectively, in 2007). The report also notes that “CCR occupies a unique position as the main reinsurer of natural catastrophe risks underwritten in France”, which best expects will continue, as it provides reinsurance “cover for perils that would otherwise be uninsurable. A.M. Best also believes that CCR will retain a modest profile for open market business, with this account continuing to be incidental to the company’s main strategic mission.”

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