Ratings Roundup: Misr, Kenya Re, Alliance, Aurigen

October 28, 2009

A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-‘ (Excellent) and the issuer credit rating to “bbb+” from “a-” of Egypt’s Misr Insurance Company, and has revised its outlook on both of the ratings from stable to negative. “The downgrade reflects a decline in risk-adjusted capitalization impacted by a reduction in revaluation reserves due to unfavorable equity markets,” Best explained. “Additionally, while technical performance has improved during financial year 2009, Misr remains under pressure to maintain its combined ratio below 100 percent. Offsetting these factors is Misr’s excellent profile and leading position in the Egyptian insurance market.” Best added that in its view, “Misr’s risk-adjusted capitalization has decreased during financial year 2009, mainly stemming from a significant reduction in its fair value investments reserves, resulting from falling equity prices.” Best also indicated that it “expects Misr’s prospective capital position to be reliant on the level of earnings distribution, which has been high at 75 percent of profits. Furthermore, Misr’s prospective capital position needs to remain strong in light of future restructuring, legislative changes and projected growth plans. The company is supported by a strong reinsurance program, in particular on its riskier insurance lines, which are placed with high quality reinsurers.” The rating agency nonetheless pointed out that “Misr’s operating performance has remained good with pre tax profits of EGP 943 million ($172 million) in financial year 2009.” Bes said it “expects prospective profitability to be reliant on investment income, despite improved technical performance in financial year 2009. Misr’s underwriting performance has historically suffered from adverse performance on compulsory motor business. While rates have improved and claims have been capped, future underwriting performance is expected to be influenced by motor.” Best also believes prospective profitability continues to remain under pressure, with higher expenses expected in the next two years. Additionally, life business continues to produce robust underwriting profitability, with technical profit of EGP 48 million ($8.7 million) in financial year 2009. The company has consolidated its position as the leading insurer for both life and non-life insurance, with a market share of gross premiums of 35 percent and 55 percent, respectively. Misr continues to improve its profile with a lower concentration of compulsory motor business.”

A.M. Best Co. has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating (ICR) of “bbb-” on Kenya Reinsurance Corporation Limited, both with stable outlooks. The ratings reflect the company’s “strong prospective risk-adjusted capitalization and good market position,” said best. “Offsetting factors include a weak level of enterprise risk management, declining underwriting profitability and a high concentration of real estate investment.” In addition Best noted that “Kenya Re’s strong level of risk-adjusted capitalization is supported by a high relative level of capital and surplus.” Best said it “believes that future retained earnings are likely to sufficiently support projected premium growth rates of between 10 percent and 20 percent over the next two years, without any additional external capital support.” Best also pointed out that “Kenya Re maintains a strong position within its domestic market, which accounts for around 70 percent of the company’s premium income. The company benefits from an 18 percent compulsory cession of all treaty business written within Kenya. This compulsory cession is, however, due to terminate at the end of 2010.” As a result, Best has concluded that the “potential loss of legal cessions brings about a degree of uncertainty with regards to the company’s prospective business profile.” In Best’s opinion, Kenya Re’s “current level of risk management is weak. The company does not employ any formalized modeling tools to assess its catastrophe exposure, which is reflected by an unsophisticated assessment of its probable maximum loss (PML).” Best is also concerned that Kenya Re’s management is “not able to actively monitor other risk metrics, such as credit exposure. Despite a significant improvement in the quality of outwards retrocession over the past few years, Kenya Re maintains a portion of low (non-investment grade/vulnerable) or non-rated reinsurers in its outwards reinsurance panel. In 2009 this figure accounts for around one quarter of all retrocessional exposure and has marginally increased when compared to 2008.” The performance of Kenya Re’s general technical account has deteriorated gradually over recent years. A loss ratio of 32 percent achieved in 2005 has gradually deteriorated to 50 percent in 2008 and is matched by a similar decline in combined ratio, from 73 percent to 95 percent over the same period. However, Best did state that this “current level of operating performance” is still in line with the current rating level. Looking into 2009 and 2010, Best said it “anticipates that competitive market conditions will continue to add pressure to the company’s underwriting performance. Additionally, A.M. Best harbors some concerns at the high level of outstanding debtors within the company’s balance sheet, which could potentially result in write-offs and add further pressure to the company’s technical performance.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Dubai, UAE-based Alliance Insurance (PSC) both with stable outlooks. Best said the ratings “reflect the company’s strengthened liquidity, resilient underwriting performance and strong risk-adjusted capitalization. This is partially offset by high reinsurance dependence on the non-life segment, as is typical with other regional insurers.” Best noted that “Alliance has an excellent risk-adjusted capitalization that factors a strong capital and surplus base and positive results from a high focus of assets in fixed income bank deposits. Alliance’s strong capitalization is able to absorb further volatility exposure from its limited equity portfolio.”Best added that going forward it believes “Alliance’s risk-adjusted capitalization is sustainable given reduced planned overall new business growth at 10 percent, compared to 2008 levels, with still strong profit margins. For 2009, A.M. Best expects the non-life combined ratio to remain stable at approximately 67 percent as in 2008 from lower inflationary pressures, with an expected annual growth of around 10 percent in 2011 in technical profits. On the life side, Alliance’s technical results are expected to fall in 2009 by around 6 percent to AED 19 million ($5.2 million), with more moderate gains in net investment income expected due to a more conservative investment portfolio. Life technical results are likely to rise again from 2010, with the increase in net earned premiums coupled with a slowdown in the increase in technical provisions from lower levels of new business (10 percent in 2009 and 2010 against 16 percent in 2008).” Best also indicated that it “believes that Alliance’s gross written premium is likely to grow by approximately 10 percent to AED 335 million ($91 million) in 2009 through the region’s growth potential in insurance penetration and slow expected resumption in economic growth in 2010.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Aurigen Reinsurance Company of Toronto and Aurigen Reinsurance Limited of Bermuda (collectively known as Aurigen). The outlook for all of the ratings is stable. “The ratings of Aurigen are based upon the start-up nature of the operation, which is focused on the Canadian life reinsurance marketplace and adequate capitalization, offset by a first-year operating loss,” Best explained. “Over the past year, the Canadian life reinsurance market has experienced some volatility in conjunction with the economic environment. Despite the global economic challenges, Aurigen successfully completed its first significant reinsurance transaction and has indicated that it is gaining traction in concluding additional transactions. It recent years, the Canadian reinsurance market has become increasingly concentrated. While A.M. Best continues to view Aurigen’s business plan as favorable, it may be difficult for Aurigen to foster new relationships in an established market. Best remains concerned with the uncertainties surrounding the successful execution of Aurigen’s business plan, as well as its lack of operating history. In addition, A.M. Best believes Aurigen may potentially need to reach out to the capital markets or have an initial public offering to raise capital if growth outpaces projected levels.

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