Ratings Recap: Grupo Nacional, BEST RE, Triple-S, Arab Re, Int’l. Energy, Asian Re

September 17, 2009

A. M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Mexico’s Grupo Nacional Provincial, S. A.(GNP). Best said the “ratings reflect GNP’s leading position in the Mexican insurance market, its diversified business profile and solid risk-based capitalization. The ratings also reflect the company’s integral role within the group of companies owned by the Bailleres family, collectively known in Mexico as Grupo Bal.” Best explained that it had revised the outlook based on GNP’s “elevated underwriting leverage for its current business profile and inconsistent operating and net earnings in recent years.” The report also noted that GNP is the largest domestic insurance company in Mexico as measured by direct premiums written. The company operates as a composite insurer of life and non-life business with core business segments in life, health and automobile coverage. GNP’s underwriting strategy and expense management have historically resulted in variable operating earnings by business segment. However, investment performance continues to be solid with a focus on asset liability matching techniques in order to minimize mismatch exposures, particularly in its life segment. “Although fully supportive of its current rating level, GNP’s risk-adjusted capitalization has trended downward as a result of inconsistent earnings and elevated underwriting leverage,” Best continued. “In addition, GNP continues to report significant underwriting losses in key business segments and relies heavily on its investment income for its overall earnings.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Tunisian reinsurer BEST RE, both with stable outlooks. “The ratings of BEST RE reflect its significant importance to its ultimate parent, SALAMA Islamic Arab Insurance Company (P.S.C.) (SALAMA),” Best explained. “The ratings also reflect BEST RE’s strong business position, consistently improving financial performance and improving strong risk-adjusted capitalization, with an expected 2009 capital increase of $50 million from the parent.” Best also indicated that it believes BEST RE’s business profile is “diversified geographically through business renewals, and gross written premiums (GWP) are likely to increase at a lower rate for 2009 by approximately 25 percent with a more subdued increase of around 12 percent in 2010. Prospectively, the company is seeking to further expand its business in Eastern and Southern Africa as well as provide client support in those markets with a view to enhancing its position in its main markets. The growth plans have been adjusted in light of the economic slowdown and soft market conditions.” Best added that it believes BEST RE has consistently achieved strong overall earnings with “pre-tax profits of $10.6 million in 2008, which are expected to increase annually in the range of 25 percent-26 percent in 2009. Earnings growth is expected to accelerate to above 48 percent in 2010 as costs savings are expected to be achieved through tighter controls of management expenses.” In Best’s opinion, “BEST RE’s risk-adjusted capitalization, although still strong, declined in 2008 but is likely to improve from 2009 onwards mainly due to the lower adjusted business growth plans in the medium term and the proposed capital injection of $50 million in 2009 and 2011 from SALAMA. This is essential to cushion any increase in underwriting risk from the business plans, with the risk-adjusted capitalization being restored to a stronger position.”

A.M. Best Co. affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Triple-S Propiedad, Inc. (TSP) of San Juan, Puerto Rico, both with stable outlooks. “The ratings reflect TSP’s excellent capitalization, solid operating profitability and well established market presence within Puerto Rico,” said Best. “The company continues to report favorable operating results driven by increasing levels of investment income and profitable underwriting results. Additionally, TSP benefits from the strong brand name recognition of its sister company, Triple-S Salud, Inc. (TSS), which has the largest share of managed care companies within Puerto Rico.” However, TSP’s geographic concentration of risk, competitive operating environment and above average underwriting expense ratio should be considered as offsetting factors. With all business written in Puerto Rico, the company remains exposed to frequent and severe weather-related events, as well as judicial and regulatory concerns. Best also noted that last June it had affirmed the FSRs of ‘B++’ (Good) and ICRs of “bbb+” of TSS and Triple-S Vida, Inc., as well as the ICR of “bb+” of the holding company, Triple-S Management Corporation (TSM), all with stable outlooks.

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating (ICR) of “bbb-” of Lebanon-based Arab Reinsurance Company S.A.L. Best explained that the positive outlook reflects Arab Re’s “continued resilient operating performance while consistently growing its business profile, maintaining a strong capital position and developing its risk management framework.” In Best’s opinion, Arab Re continues to produce “a robust operating performance, with pre tax profits of $9.5 million in 2008, stemming from both underwriting and investment activities during difficult market conditions.” The report added that despite increased competition in Arab Re’s main markets, Best still expects “the combined ratio of 98 percent to decrease through Arab Re’s stricter underwriting guidelines and measures to improve non-performing business. Furthermore, Arab Re is supported by a conservative investment strategy, enabling the company to maintain its resilient performance.” In Best’s view, Arab Re’s prospective capital position is expected to remain strong over the next two years and can absorb its high dividend payments in the short term, with adequate strategies in place to ensure capital remains strong. In addition Best noted that the Company is in the process of establishing its risk management framework, all of which Best said it “views as positive developments for the company.” In Best’s opinion, Arab Re remains a relatively small company in terms of premium base when compared to global reinsurers operating within the same markets. Despite facing significant competition, Best expects Arab Re to continue to improve its market visibility and reputation in its key markets.

A.M. Best Co. has assigned a financial strength rating of ‘B’ (Fair) and an issuer credit rating of “bb+” to International Energy Insurance plc (IEI), which is based in Nigeria, and has assigned stable outlooks to both ratings. “The ratings and outlook reflect IEI’s strong business profile within Nigeria, good expected financial performance and strong risk-adjusted capitalization,” said Best. The rating agency added that it “expects IEI’s net premium income to grow by approximately 12 percent to around NGN 3.0 billion by year-end 2008. In A.M. Best’s opinion, IEI is well placed to achieve significant growth whilst retaining high renewals, owing to its standing in the market, sizeable branch network and strong relationships with distributors. IEI has a diversified product offering, including motor, fire, accident, workmen’s compensation, marine and oil and gas insurance. Whilst the company is a market leader in each of these classes of business, going forward it is positioning itself to grow its energy business as niche by taking advantage of recent government policy to grow the Nigerian insurance industry. The company’s strong capitalization means capital is not likely to be a limitation in the growth and maintenance of business.” In addition Best said it “believes that IEI’s financial performance will continue to be strong, with combined ratios of around 85 percent, following IEI’s stable historical performance over the last three years. Reflecting IEI’s prudent underwriting approach, loss ratios are expected to remain low, though historical expense ratios have been somewhat higher than industry averages following IEI’s recruitment drive. However, the expense ratio is expected to improve over the next few years as the company grows its portfolio. The bulk of the business written in the Nigerian market tends to be very short tail, with little scope for significant claims to be settled more than 18 months from commencement of coverage, and A.M. Best believes that this further reduces pricing risk and reserving uncertainty as well as earnings volatility. In line with the rest of the Nigerian insurance industry, IEI has gone through a recapitalization exercise in order to take full advantage of government policy aimed at increasing the participation of local insurers in the industry. In A.M. Best’s opinion, IEI is likely to maintain strong risk-adjusted capitalization during the next few years in order to position itself for new business growth. A.M. Best believes that whilst current capitalization is strong, it needs to be monitored as the company pursues its growth strategy. However, given the prevailing economic climate, A.M. Best believes that business growth is more likely to be gradual. In addition, IEI’s new business growth is expected to emerge from the oil and gas sector, which is likely to expand gradually over the next two to three years.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Thailand’s Asian Reinsurance Corporation with stable outlooks. “The ratings reflect Asian Re’s adequate risk-adjusted capitalization, conservative and liquid investment portfolio and improved expense ratio,” said Best. “The ratings also recognize the unique organizational structure and the immunities and privileges granted by its country members to the Corporation.” Best added that “Asian Re has strengthened its capitalization since 2006 when the Corporation reformed its membership structure and invited new associate members to inject new capital. The Corporation’s capital and surplus increased by 3.7 times over the past three years to $50.4 million as at December 31, 2008. The Corporation’s risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio, deteriorated slightly due to an increase in underwriting risks in 2008, although it is adequate to support the current ratings. Asian Re has a conservative investment portfolio. As at December 31, 2008, the Corporation invested 97 percent of its invested assets in cash and deposits. Asian Re’s expense ratio has consistently improved over the past five years, as a result of a lower commission ratio and a decrease in underwriting management expenses. The expense ratio improved to 38.1 percent in 2008 from 44.8 percent in 2004.” As offsetting factors, Bes cited “Asian Re’s relatively small underwriting capacity, intense competition in the Asian reinsurance market and unfavorable loss reserve development.” In addition Best explained: “Although Asian Re’s capital level has strengthened in recent years, its underwriting capacity remains relatively small as compared to other regional reinsurers in Asia. Regardless, Asian Re’s aim to achieve 15 percent premium growth in the coming three years, along with its ability to secure profitable new business outside its core markets, remains to be seen. Asian Re relied on the reported claim amounts from its ceding companies to set aside the outstanding reserves and added 5 percent of the outstanding reserves as incurred but not reported (IBNR).” Best also noted that the estimated loss ratio over the loss development years had “exhibited an increasing trend, and the increases were, in general, more than the 5 percent IBNR.” In Best’s opinion “that adverse development for previous underwriting years could negatively impact Asian Re’s capitalization in the future.”

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