Ratings Recap: Cattolica, Ghana Re, Al Ittihad, Grafton, RCHL

December 22, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of Italy’s Societa Cattolica di Assicurazione – Societa Cooperativa. Both ratings gave negative outlooks. Best said the ratings reflect its “expectation of consistent improvement in non-life underwriting performance.” The negative outlook reflects Best’s concerns that “Cattolica’s growing capital position, based on third quarter 2009 results is mainly from improvement in the available for sale (AFS) reserves, which is still subject to capital markets volatility.” Best also indicated that some “concerns remain that the business profile in life may further decline and affect the overall group position, and this may impact financial performance going forward.” However, Best also said, “Cattolica’s non-life underwriting performance is expected to show steady improvement in 2009 mainly due to the decline in frequency for motor third party liability claims. Based on third quarter 2009 results, there is likely to be a 1 percent-2 percent improvement in the loss ratio, leading to a decline in the combined ratio of the same magnitude from 99.4 percent in 2008 to 97 percent-98 percent for the 2009 year end, with a stable expense base. Overall earnings continue to be impacted by lower investment income. This is partially mitigated by the strong fair value gains on the financial instruments in the life portfolio, which comes through the income statement on the back of gradual markets recovery.” In addition Best said it believes that “risk-adjusted capitalization is likely to improve despite the shift towards traditional products with minimum guarantees. This takes into account the positive fair value adjustments to be expected on the bond portfolio from the fall in interest rates, which acts to increase the regulatory solvency margin of Cattolica at above average level when compared to other market competitors. Over 2008, Cattolica’s competitive position was impacted by AXA’s strategy in both life and non-life sectors. Nevertheless, Cattolica’s partnership with Banca Popolare Di Vicenza continues to strengthen and provides more growth opportunity in both the life and non-motoring business. Premiums from the consolidation of BCC Vita into the group are also likely to reduce the premium gap with Cattolica’s closest competitor, AXA. However, the company’s refocus on guaranteed products in order to reduce dependence on index-linked products penalized by stock market trends places more emphasis on long-term business growth. This strategy may still potentially harm Cattolica’s market share should other competitors take more aggressive measures to book the majority of the anticipated increase in premiums in the Italian life market through savings in the Class 1 policies over the medium term. At half-year 2009, life premiums for the whole market showed strong likelihood of resumption in growth, with an expected year on year increase of 10 percent compared to 2008.”

A.M. Best Co. has affirmed the financial strength rating of ‘B’ (Fair) and the issuer credit rating of “bb+” of Ghana Reinsurance Company Limited, both with stable outlooks. “The ratings reflect the company’s “strong risk-adjusted capitalization and investment performance,” said Best. But it also said that the “increasing pressure on business growth prospects due to the anticipated reduction in the level of support from compulsory business cessions, and the negative effect this is likely to have on Ghana Re’s underwriting performance,” is an offsetting factor. “The company’s high level of indebtedness by cedants is also an area of concern. Ghana Re’s risk-adjusted capitalization was supported by the transfer of GHC 12 million [$8.373 million] of profit to capital in 2008, to mitigate impact on capital of adverse equity value and currency movements.” Best said it “considers the current risk-based capitalization level to be strong and supportive of the company’s business growth targets over the short to medium term.” However, the rating g agency also believes that Ghana Re’s business growth prospects “will come under some pressure in the short term, following the withdrawal from the local market in 2008 of compulsory sessions that obliged local insurers to cede 20 percent of all business written to Ghana Re. In 2008, approximately 60-65 percent of the company’s gross premiums originated from compulsory sessions. Nonetheless, the company is alleviating this by strengthening its presence in markets outside of Ghana.” Best added that while it the regional expansion is likely to suppress the drop in sales volumes, “this introduces additional uncertainty in the quality of business written, although this is partially offset by the increased flexibility in business acceptance decisions. In addition, the level of commission payable on the new business is expected to be higher than that payable under the legal cession framework; thus, Best anticipates some reduction in underwriting profit in the medium term. In line with other reinsurers in this market, Ghana Re continues to have a high level of insurance debtors on its balance sheet. In 2008, the amounts owed to Ghana Re by ceding companies increased to GHC 36.6 million [$25.54 million] (GHC 24.9 million [17.374 million] in 2007), reflecting reinsurers’ limited flexibility in addressing the problem. Ghana Re’s efforts to reduce the debts include tightening its conditions of cover and increasing its provision for bad debts (75 percent increase in 2008). The increased provision, however, is putting additional pressure on the company’s expense ratios, which are already an area of concern owing to the high commission rates in the market.”

A.M. Best Co. has assigned a financial strength rating of ‘B+’ (Good) and an issuer credit rating of “bbb-” to Lebanon’s Al Ittihad Al Watani (L’Union Nationale) Societe Generale d’Assurances du Proche Orient sal, both with stable outlooks. Best said the ratings of Al Ittihad reflect its “improving capital position, robust underwriting performance and good business profile. Offsetting factors include its weak investment strategy and underdeveloped risk management framework.” Best explained that “Al Ittihad is a Lebanese-based insurer with branches in the United Arab Emirates and Kuwait, concentrating mainly on motor and medical business.” Best expects the company to “continue to grow within its key markets, between 10 percent-15 percent in each of the next two years, with gross premiums written expected to be in excess of LBP 110 billion ($75 million).” In Best’s opinion, Al Ittihad’s capital position is supportive of the current ratings, given the lower asset risk following the disposal of significant private investments and full earnings retention.” Best also indicated that “prospective risk-adjusted capitalization is largely dependent on Al Ittihad’s future investment strategy. It is important for Al Ittihad to adopt prudent investment management to ensure capital remains strong. Additionally, Al Ittihad is supported by a solid reinsurance program, with low catastrophe risk due to regional diversification.” Furthermore, in Best’s opinion, “Al Ittihad needs to strengthen its risk management framework to ensure risks are monitored and controlled effectively.” Best noted that Al Ittihad’s financial performance “has been good, with pretax profits of $5 million in 2008, derived from robust underwriting performance. The company has experienced solid underwriting results for both life and non life business, with technical profits of $5.85 million in 2008.” Consequently Best “expects Al Ittihad’s combined ratio to remain below 90 percent over the next two years. Conversely, Al Ittihad’s investment performance has been weak (with returns consistently below 4 percent), given its historic concentration in private equity and real estate assets.”

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” to Grafton (Europe) Insurance Company Limited, which is based in Malta. The outlook for both ratings is stable. The ratings reflect Grafton’s “proposed innovative solutions aimed at improving the capital efficiency of insurance captives,” best explained. However the “potential lack of financial flexibility in an adverse claims development environment and the implementation risks associated” with this strategy are seen as offsetting factors. Best said it ” believes that Grafton’s business model “identifies an untapped market opportunity for the niche insurance captive industry (specifically liability risks). Grafton’s proposed solution is expected to provide capital relief to captives and their parent groups through the use of innovative solutions and the release of the captives’ run-off liability insurance portfolios.” In Best’s opinion, Grafton is also “likely to take advantage of being the first participant in its market and having the support of internationally recognized third parties. Best also indicated that the “run-off nature of the insurance portfolios to be targeted and the prudent margins expected to be included in the pricing process are likely to reduce the volatility of results. Grafton’s initial capital injection amounts to £50 million (app. $80 million). Grafton also has put into place a 50 percent quota share agreement and an adverse development cover with a top rated international reinsurer (National Indemnity Company) that supports the company’s risk-adjusted capitalization minimizing its credit risk.” Best said it expects Grafton to maintain its capitalization levels comfortably above the minimum required to support the ratings assigned under a pessimistic scenario. Nevertheless, given the implementation risks associated with start-up companies and the fact that under exceptional adverse claims circumstances, the company’s financial flexibility could be severely restricted, Grafton will be under considerable A.M. Best scrutiny as it strives to meet its business plan.

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit rating on Russia-based Renaissance Capital Holdings Ltd. (RCHL) to ‘B’ from ‘B+’. S&P also affirmed its ‘B’ short-term rating. The outlook is negative. “The rating action reflects our view that RCHL’s financial flexibility has reduced as a consequence of the squeezed cash flow generation in the current difficult market conditions, as well as its reduced access to cash flows from its subsidiaries because of the group’s recent ownership change,” explained credit analyst Elena Romanova. RCHL is a Bermuda-registered holding company that owns a 50 percent stake in a complex group of companies with leading positions in Russia in brokerage, investment banking, and advisory. These various entities are based in the U.K., the U.S., Cyprus, Russia, Ukraine, Kazakhstan, and Africa. “Our ratings have been historically based on the creditworthiness of RCHL and its subsidiaries (the group). However, in July 2009, RCHL completed the sale of a 50 percent stake (minus 1/2 share) of its former 100 percent subsidiary Renaissance Financial Holdings Ltd. (RFHL; not rated), which controls almost all its investment banking business, to ONEXIM Group (not rated),” said S&P. “ONEXIM is one of Russia’s largest private investment funds, with a focus on mining, energy, real estate, and financial services. This new ownership structure implies that RCHL’s access to cash flows from the various operating entities has reduced and is less predictable than in the past.” As a result S&P pointed out that “RCHL’s business contracted two-fold from June 30, 2008, to Sept. 30, 2009, while profits dropped by more than 70 percent, due to deteriorated financial markets. Equity sales and trading and brokerage services provide more than 80 percent of the group’s operating revenues, highlighting revenue concentration. The liquidity position of the group has normalized and capitalization has strengthened following a $500 million capital injection by Onexim into RFHL in October 2008. This ownership change reduced RCHL’s access to cash generated by the group’s operating entities and consequently its ability to service its debt. In 2010, RCHL has to repay over $50 million of non-related-party debt. On a positive note, a recent $150 million exceptional dividend was paid to Onexim and RCHL (on pro-rata basis). The latter will use these funds to repay debt to related companies beyond the consolidated scope of RCHL. Romanova explained that the “negative outlook reflects our expectations that RCHL’s business and financial profile will continue to be pressurized by the deteriorated operating environment. We expect financial markets to remain subdued in the foreseeable future, which should continue to constrain the company’s business development and revenue flows.” S&P added that it could ” take a negative rating action if the group’s financial performance weakened materially or if RCHL’s liquidity position deteriorated significantly. An outlook revision to stable would require a marked improvement of the operating environment and demonstration that the group’s performance allows a satisfactory upstream of dividends and cash to RCHL.”

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