Ratings Roundup: Hyundai, Al Fajer Re, Jordan

December 3, 2009

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and the issuer credit rating (ICR) of “a-” of South Korea’s Hyundai Marine & Fire Insurance Co., Ltd. (HMFI) both with stable outlooks. “The ratings reflect the company’s favorable operating performance and capitalization,” said Best. “Over the past five years, HMFI has maintained its operating ratio of 95 percent. In fiscal year 2008, the company’s overall combined ratio stood at 102.9 percent, which is a 2.5 percentage point deterioration compared to the previous year. This is due mainly to the increase of the upfront commission payment to general agents to support the rapid growth in long-term insurance. The expense ratio rose to 27.2 percent in fiscal year 2008, from 22.3 percent in fiscal year 2007. The expense ratio is expected to stabilize as the sales growth from general agents slows down and the in-force business grows. The loss ratio stood at 75.8 percent, which is a two percentage point improvement year on year. HMFI’s average investment income ratio over the past five years was 8.2 percent. With the fixed income oriented investment strategy, the company has maintained stable and favorable investment income. More than 80 percent of the company’s investment assets are allocated in fixed income assets as at the end of March 2009. In fiscal year 2008, HMFI’s local solvency margin ratio improved by 25 percentage points year on year to 190.8 percent, mainly due to the continuous accumulation of retained earnings and unrealized gains from real estate asset revaluation. At fiscal year-end 2008, the company reported KRW 1,154 billion of adjusted capital and surplus, which includes catastrophe reserves. Based on HMFI’s three-year business plan, its capitalization as measured by Best’s Capital Adequacy Ratio and the local solvency margin ratio is expected to improve gradually. As at the end of fiscal year 2011, the company’s local solvency margin ratio is expected to be above 210 percent.” As offsetting factors, Best cited “the weakening competitive advantages in the claims adjustment of the motor line.”

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Kuwait’s Al Fajer Retakaful Insurance Company KSCC, and has assigned the ratings a stable outlook. Best said the ratings “reflect the company’s strong risk-adjusted capitalization and its improved corporate governance. Offsetting factors are the lower than expected business growth and profitability.” Best also noted that on June 18, 2009 it had downgraded the ratings of Al Fajer Re and placed them under review with negative implications. “The rating action was reflective of the lack of management controls over the investment strategy and the high exposure (around 30 percent) of the company’s total investments to The Investment Dar (TID), which defaulted in May 2009,” Best explained. “Since that time, Al Fajer Re has implemented corrective actions to improve its enterprise risk management and corporate governance concerning its investments activity. More clear and prudent investment guidelines and limits have been established, and the new corporate governance structure (including the new role of chief investment officer) enhances the level of management involvement and responsibility in the company’s asset management, which will be tested going forward. Neither Al Fajer Re nor its ultimate parent company, Dubai Group, has exposure to Dubai World group entities’ debt. Improvements also have been achieved by TID and Global Investment House (the second shareholder of Al Fajer Re) in their respective debt restructuring plans.” Best said that in its view, “Al Fajer Re’s risk-adjusted capitalization and liquidity position on a combined basis are (and expected to remain) strong and supportive of the current ratings. Capital preservation benefits also from the new prudent investment strategy, which limits the investment concentration as well as the exposure to corporate securities and equity. On a stand-alone basis, the policyholders’ fund is further protected by a trust deed of KWD 25 million (half of the paid capital), in addition to the Qard Hassan (interest free loan) provided by the shareholders to cover participants’ losses. The economic crisis and shrinking business opportunities hit Al Fajer Re’s reinsurance portfolio and, in Best’s opinion, the company’s gross written contributions are unlikely to grow by 40 percent as projected in 2009-2010 (despite its ability to maintain almost entirely the business susceptible to the June downgrade of its ratings).” On the technical profitability side, some major storms that occurred in 2009 in Central and Eastern Europe and Turkey are likely to impact the company’s year-end combined ratio, which Best expects to remain above 100 percent. On the non-technical side, in Best’s view, “the new conservative strategy restrains the potential return from investment.”

A.M. Best Co. has assigned a financial strength rating (FSR) of ‘B++’ (Good) and an issuer credit rating (ICR) of “bbb” to Jordan Insurance Company Plc (JIC). The outlook for the FSR is stable, while the outlook for the ICR is positive. The ratings of JIC reflect its “strong level of risk-adjusted capitalization, robust underwriting performance and established business profile in the Jordanian insurance market,” Best explained. “An offsetting factor is the company’s investment strategy, which gives rise to volatile investment performance. The positive outlook reflects the prospective measures taken by JIC to improve its investment profile, in addition to developing its risk management framework.” Best added that in its opinion, “JIC’s prospective risk-adjusted capitalization is expected to remain strong, benefiting from improved profitability and good earnings retention. Additionally, JIC is supported by a comprehensive reinsurance program with highly rated companies on both treaty and facultative placements, predominantly led by Munich Reinsurance Company. Given JIC’s strict underwriting guidelines and prudent risk control measures, the company has experienced robust underwriting results across all lines of business, with consistently improving technical profits of approximately JOD 4.7 million ($ 6.8 million) in 2008, supported by an excellent combined ratio of 75 percent. Conversely, JIC has an investment strategy that gives rise to volatile investment performance, with significant concentration (in excess of 50 percent at year-end 2008) of investments in equity markets.” Best also said it recognized that “JIC is taking measures to adopt a more prudent approach to investment risk management in order to create a balanced portfolio. Despite JIC’s variable investment performance, the company has reported investment returns of 16 percent in 2008, benefitting from JOD 5.8 million ($ 8.3 million) from realized gains on equity. Furthermore, JIC has established a strong market position in Jordan with a diversified portfolio for both non-life and life insurance, accounting for 9 percent of gross market premiums. Moreover, the company benefits from further diversification through its regional branches in United Arab Emirates and Kuwait.

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