Ratings Roundup: Central Re, Amedex, Arab Orient

July 27, 2009

A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Taiwan’s Central Reinsurance Corporation. Best explained that the “revised outlook reflects the adverse impact of the current economic turmoil on the company’s profitability and adjusted capital and surplus. Central Re’s adjusted capital and surplus decreased by 7.4 percent in 2008 due to realized and unrealized capital losses. Part of the realized capital losses relating to several structured notes investments in one single company was written off.” In addition Best indicated that the “ratings also reflect Central Re’s stable underwriting performance, dominant market position in the reinsurance industry in Taiwan and strengthening market presence in overseas markets. Central Re has maintained profitable and stable underwriting results, with its combined ratio falling within the 88 percent-97 percent level in the past five years. Given that Taiwan is a catastrophe-prone country, Central Re’s stable and consistent underwriting performance has demonstrated its prudent underwriting controls and risk management practices. In recent years, Central Re has directed resources to expand its market presence in overseas markets. The company’s gross premium written of its overseas portfolio increased by 15 percent and 30 percent in 2007 and 2008, respectively. However, Central Re is challenged by increased competition in the overseas markets by other established reinsurers in Asia. The company’s ability to build a meaningful operational scale with profitability in the overseas markets will be proven over time. In addition, as the sole domestic reinsurer, Central Re has continued to maintain a dominant presence in the reinsurance market in Taiwan.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B-‘ (Fair) from ‘B’ (Fair) and the issuer credit rating (ICR) to “bb-” from “bb+” of Bermuda-based Amedex Insurance Company, and has revised the outlook for the FSR to negative from stable; the outlook for the ICR remains negative. Best said that the downgrade reflects its “concerns with its modest risk-adjusted capital position and recent large operating losses. The weak capitalization, ‘relative to the company’s ratings’ recognizes the high level of intangible assets (deferred acquisition costs [DAC]) relative to capital. Losses have been incurred as Amedex-Bermuda has continued to write down DAC related to recent issue year universal life policies.”In addition Best indicated that the negative outlook reflects its “concern for the potential for additional DAC write downs and further operating losses.” However, Best also noted that “Amedex-Bermuda’s capitalization has been stabilized through capital contributions by its ultimate parent, The British United Provident Association Ltd.” Finally, Best said it has withdrawn the ratings and assigned a category NR-4 (Company Request) to the FSR and an “nr” to the ICR. “These rating actions are at the request of management to be withdrawn from A.M. Best’s interactive rating process. Effective August 2008, Amedex-Bermuda ceased writing new business and has put the business into run off.”

Standard & Poor’s Ratings Services has affirmed its ‘A’ long-term counterparty credit and insurer financial strength ratings on UAE-based non-life insurer Arab Orient Insurance Co. (PSC). S&P has also removed the ratings from CreditWatch, where they had been placed on May 13, 2009. The outlook is stable. “We originally placed the ratings on Arab Orient on CreditWatch with negative implications owing to our concerns about the deterioration in the Dubai economy and the impact of this on the company’s owner, the Al-Futtaim Group,” explained credit analyst Nigel Bond. “Following a review of the group’s credit strength, we do not believe that any change in the ratings on Arab Orient is warranted, as there is negligible likelihood of the group requiring financial support from its insurance subsidiary,” he added. S&P said its ratings on Arab Orient “reflect the company’s strong capitalization and consistently very strong and stable earnings, accompanied by prudential asset management with very strong liquidity. Management is a positive rating factor through its prudential risk discipline. These factors are partially offset by Arab Orient’s high use of reinsurance and the concentration risk from banking counterparties. The stable outlook reflects our expectation that Arab Orient will maintain strong capitalization and very strong earnings. The investment profile will remain highly liquid and prudentially focused on bank deposits in securely rated banks. The competitive position will remain at least strong in the UAE, and the franchise will expand into neighboring regions in the medium term with the active support of the Al-Futtaim Group. Negative rating action would be prompted should Arab Orient’s capitalization and earnings track record deteriorate materially, either through its own actions or those of its parent. Positive rating action is highly unlikely over the rating horizon.”

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