Ratings Recap: Sunderland Marine, ZEP-RE

November 13, 2009

A.M. Best Co. has affirmed the financial strength rating of A’- (Excellent) and issuer credit rating of “a-” of the UK-based Sunderland Marine Mutual Insurance Company Limited (SMMI), both with stable outlooks. Best said it expects SMMI’s risk-adjusted capitalization “to strengthen during 2009, supported by an increase in retained earnings and a material reduction in investment risk. In 2008, SMMI’s risk-adjusted capitalization was adversely impacted by significant realized and unrealized losses on equities. The company has subsequently, substantially de-risked its investment portfolio through the sale of its equity holdings.” In addition best noted that it expects SMMI “to report a pre-tax profit of approximately £3.5 million [$5.836 million] in 2009 (2008: £10.7 million [$17.84 million] loss). Rates for SMMI’s specialist lines of aquaculture, fishing vessels and inland marine have improved, following the withdrawal of several market participants.” Best indicated that this is likely to support a modest improvement in the underwriting result in 2009, “from a small loss of £343,000 [$571,819] in 2008. Additionally, net investment income of approximately £3.5 million [$5.836 million] (excluding realized gains or losses) is anticipated. The reallocation of the company’s investment portfolio to cash and bonds is expected to reduce prospective performance volatility.” In Best’s opinion, SMMI maintains “a strong business profile in its specialist markets. SMMI forms long-term relationships with its clients, leading to a very high business retention rate, in excess of 95 percent in 2008. The company has a network of international offices in the United States, Canada, Australia and New Zealand. SMMI also has subsidiaries in South Africa and the Netherlands, as well as a reinsurance subsidiary in Bermuda.”

A.M. Best Co. has revised the outlook to positive from stable and has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Kenya’s ZEP-RE (PTA Reinsurance Company). “The ratings reflect ZEP-RE’s improving risk-adjusted capitalisation, good underwriting performance and its robust risk management framework,” best explained. However the rating agency cited “its developing business profile” as an offsetting factor. In Best’s opinion, ZEP-RE’s risk-adjusted capitalisation has strengthened, as the decline in the level of support from earnings in 2008 was offset by the issuing of additional share capital ($6.6 million). Best said the positive outlook reflects its expectation that “the current underwriting performance will be sustained, and that the risk based capital position will remain robust as the company pursues its growth objectives. ZEP-RE’s underwriting profits increased to $4.0 million in 2008 ($1.0 million in 2007).” Best estimates that the company’s underwriting performance will remain at this broad level in the next three years, “although the combined ratio is expected to increase slightly to 93 percent (88 percent in 2008).” However, Best also projects “improved longer-term financial performance as premium growth of approximately 13 percent per annum is augmented by stronger underwriting and enhanced investment performance.” Best said it “believes the considerable progress that the company’s management has made in developing its risk management framework will further enhance the scope for stronger operational performance in the longer term.” ZEP-RE mainly concentrating on the COMESA market, where it has established itself as an important reinsurer. Best believes ZEP-RE will continue to strengthen its operations in the African reinsurance market,” growing between 10 percent-15 percent in each of the next two years, with gross premiums written in excess of $55 million.”

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