Ratings: NIPPONKOA, Russian Re, Lemma, Lakeside Re, Inter Hanover

December 18, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of Hong Kong-based NIPPONKOA Insurance Company (Asia) Limited, both with stable outlooks for both ratings is stable. “The ratings reflect NIPPONKOA Asia’s conservative investment portfolio, consistently profitable operating result and strong risk-adjusted capitalization,” said Best. “The company is a subsidiary of NIPPONKOA Insurance Company, Ltd (NIPPONKOA Insurance), and the ratings also reflect NIPPONKOA Asia’s benefit in enjoying the parental support in relation to sales, underwriting and reinsurance capacity.” Best also noted that “NIPPONKOA Asia’s operating performance has been profitable over the past five years, with an operating ratio that averaged 66.6 percent during 2004 to 2008. Despite the company recording an increase in operating expenses and lower investment earnings in 2008, its operating result remained sound, with the operating ratio standing at 68.0 percent in 2008, compared to 52.2 percent in 2007. NIPPONKOA Asia has maintained a highly liquid and prudent investment portfolio.” With 98 percent of its total invested assets held in cash and short-term bank deposits and bonds as at August 31, 2009, Best said it “expects that its investment yield will remain stable, acting as a buffer to support the potential volatility in the operating result as a consequence of the continued shrinkage in its book of businesses going forward.” In addition Best noted that the Company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), “has been strong, given the continuous contribution of its favorable operating earnings and high retention of operating profit. The company maintained stable net premium leverage at 26 percent in 2008. Going forward, in anticipation of a lower premium growth in the coming two years, the company’s risk-adjusted capitalization will remain sound. A partially offsetting factor includes NIPPONKOA Asia’s ability to sustain its future underwriting profit, given the continuous downward pressure on its business growth.” Best singled out NIPPONKOA Asia’s fronting business in the Philippines, which was transferred to Nipponkoa Singapore in April 2009. “Additionally, most of the company’s fronting business in China gradually will be transferred to Nipponkoa (China), which started operations in August 2009, from 2009 and onward. A.M. Best expects that the shrinkage in NIPPONKOA Asia’s insurance portfolio will steadily exacerbate its underwriting profitability going forward, although it has taken various measures in sourcing its new business.”

A.M. Best Co. has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Russian Reinsurance Company, JSC, both with stable outlooks. Best explained that the “ratings reflect the company’s small size, as this poses a challenge especially since it operates in a highly competitive operating environment. However, Russian Re’s operating performance will improve in 2009, and the company benefits from good risk-adjusted capitalization. Russian Re’s gross written premiums (GWP) are likely to show moderate growth over the next year and reach RUB 450 – 480 million [$14.68 to $15.66 million]. This is relatively small by international standards, and the company is met with significant challenges in growing its domestic market presence as it faces intensified competition from both local and international reinsurers. Its strategy to expand internationally with a focus in the Middle East and North African markets, as well as in selected markets of the Commonwealth of Independent States, is likely to start bearing fruits from 2010, despite the fact that these are target markets for other emerging markets’ reinsurers.” Best said it “believes that Russian Re’s pre-tax profits are likely to remain relatively stable over the next couple of years following the deterioration in 2008, which was driven by the challenging economic conditions and the resulting increase in combined ratio. Russian Re’s combined ratio is likely to be in the mid-90 percent range, as the claims ratio improves slightly due to the lack of attritional losses that impacted performance in 2008 when the company suffered from a series of these losses. Investment yield is likely to remain a robust 5 percent-6 percent, which is particularly impressive given the company’s conservative investment portfolio.” The rating agency also indicated that it believes “Russian Re’s risk-adjusted capitalization will remain strong as the impact of the moderate premium growth is supported by the company’s non-dividend policy. Retained earnings are likely to be augmented by the reduction of the corporate tax rate in Russia from 24 percent to 20 percent. Financial flexibility is very good for a company of Russian Re’s size, given the significant participation of international professional insurers in the company’s shareholding and the lack of financial leverage.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” of Ukraine’s Lemma Insurance Company. Best said its action “reflects the uncertainty surrounding the future of Lemma’s banking subsidiary, Zemelnyi Bank, and the potential impact of the financial crisis in the Ukraine.” Although best added that “Lemma continues to have a good business profile and strong risk-adjusted capitalization.” Best explained that “during 2009, Zemelnyi Bank was placed under regulatory supervision and capital was injected by the central bank.” Best said it “believes that whether or not the bank returns to the ownership of Lemma, it will result in a significant impact on Lemma’s financials in the form of capital losses (as it is currently carried at a small discount of its book value on Lemma’s accounts) or the repayment of the central bank funding. This normally would have a short-term impact on Lemma’s financial performance, given the company’s typically robust investment performance. However, the impact of the economic recession of the Ukrainian market is likely to affect Lemma’s business profile and its investment performance during the next 18 months.” In addition Best noted that “Lemma continues its international expansion as its domestic business continues to decline under the impact of the financial crisis. The company’s consolidated premiums have remained relatively stable despite the significant decline in financial risks insurance, which was the company’s main product line until 2007.” Best added that it “believes Lemma will show moderate levels of growth in the next couple of years as the decline in the local market is arrested and the international portfolio continues to grow,” and it “expects the company to return to combined ratios of below 100 percent in 2009 and 2010, following the poor performance emanating from the financial business in 2008.” Best also “believes that Lemma’s risk-adjusted capitalization is likely to remain at a strong level in the next few years as a result of full earnings retention, combined with stable volumes of risks assumed and increased risk diversification. The company’s significant exposure to reinsurance recoverables from an unrated affiliate and high exposure to non-public equities are part of its business model and have been factored into the rating.”

Standard & Poor’s Ratings Services has assigned its ‘BB-‘ issue-level rating to the notes exposed to losses from earthquakes in California to be issued by Lakeside Re II Ltd., a special-purpose Cayman Islands exempted company, licensed as a Class B insurer in the Cayman Islands. S&P noted that “all of its issued and outstanding share capital will be held under a declaration of trust for certain charitable purposes by Wilmington Trust (Cayman), as share trustee.” S&P added that “Zurich American Insurance Co., Zurich Insurance Co. Ltd., or any other affiliated entity that might be added as a ceding insurer from time to time will be the insurance company ceding the covered risks to Lakeside Re II.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a+” of the UK-based International Insurance Company of Hannover Limited (Inter Hannover), a subsidiary of Hannover Rueckversicherung AG (Hannover Re). The outlook for both ratings remains stable. Best said that in its opinion, “Inter Hannover’s stand-alone risk-adjusted capitalization remains robust. Despite strong gross premium growth, underwriting risk has reduced in 2009 due to an increase in business ceded to Hannover Re, which now reinsures most of Inter Hannover’s business through quota share agreements. In addition to this reinsurance support, the ratings factor Inter Hannover’s importance to Hannover Re as a source of primary insurance business. A positive pretax profit is expected in 2009, albeit lower than the £3.4 million [$5.47 million] reported in 2008, in part due to lower business retention.” Best added that “despite reserve strengthening for Inter Hannover’s delegated authority business, the company’s combined ratio is likely to improve (2008: 97 percent) as a result of an increase in commission income in line with the increase in ceded business. Investment income from the company’s conservative investment portfolio is likely to be modest, reflecting the low interest rate environment. Inter Hannover has a good business profile, supported by its links with Hannover Re. Underwriting at Inter Hannover is now integrated within Hannover Re’s business unit structure. The company writes large commercial single risks through its London and Scandinavian offices, as well as delegated authority business, which includes small commercial and personal lines business written primarily through European agencies and brokers.”

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