Ratings Roundup: ASSA, Eurasia, Sung Hung Kai Properties

April 5, 2010

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Panama City-based ASSA Compania de Seguros, S.A., both with stable outlooks. The ratings reflect ASSA’s “excellent capitalization, favorable operating results and strong presence in the Panama market,” said Best. “ASSA provides a diversified product mix of both property/casualty and life/health products targeting local markets. The company’s current business mix is approximately 60 percent property/casualty and 40 percent life/health. Each operating segment benefits from the company’s established risk management systems and procedures, along with strong reinsurance programs for most lines of business.” Best concluded that as a result, “ASSA’s combined ratio (including both segments) averaged 87 percent over the past five years, while risk-based capitalization remains fully supportive of the current ratings and outlook.” Best also noted that ASSA is ultimately owned by Grupo ASSA, S.A., a publicly traded holding company on the Panama stock exchange. Grupo ASSA’s other major holdings include La Hipotecaria Inc., a mortgage company in Panama, and Banco de Finanzas, S.A., a bank in Nicaragua. “Grupo ASSA’s complementary holdings offer ASSA opportunities for cross selling, strategic partnerships and expansion into other areas of Central America.,” said Best. However, ASSA’s “risk concentration in a geographically limited insurance market, along with operating in a country that Best considers to have an elevated level of country risk,” should be considered as offsetting factors. “Furthermore, Grupo ASSA’s financial and banking subsidiaries in the region also operate in countries considered to have elevated levels of country risk, which presents an added element of risk to the total enterprise.” Best also indicated that it is “concerned that potential underperformance or issues at Grupo ASSA’s subsidiaries could potentially increase dividend demands at ASSA.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating (ICR) of “bbb” of Kazakhstan’s Eurasia Insurance Company JSC, both with stable outlooks. Best said the ratings reflect Eurasia’s “strong level of risk-adjusted capitalization and good competitive position within its local insurance market. Offsetting factors include the company’s deteriorating underwriting performance and pressures from the affiliated bank.” In Best’s analysis of Eurasia’s immediate parent company, Eurasia Financial Company (EFC), draws attention to “a significant exposure to the local Kazakh banking sector through EFC’s ownership of Eurasia Bank, which is regarded to be of vulnerable credit quality.” Best said it considers that actions taken by Eurasia mitigate this exposure to some extent; however, if additional capital is at some stage required, it is unlikely to be provided by the immediate parent, EFC.” In Best’s opinion, Eurasia is “likely to maintain a strong level of risk-adjusted capitalization over the next two years. Eurasia’s relatively high level of capital and surplus is supported by the continuing retention of profits; however, Eurasia is exposed to reinsurers of a vulnerable or unknown credit quality in it’ outwards reinsurance program and the struggling banking sector, via debt security investments. Eurasia has maintained a strong local business position within Kazakhstan as the largest writer of insurance/reinsurance premiums. Over recent years the company has diversified into the international reinsurance business.” Best also noted that it considers that, “while this reduces the company’s concentration on the local Kazakh market, it also increases the company’s exposure to markets for which it has less experience. Eurasia’s overall earnings were highly dependent on investment returns and foreign exchange gains in 2009, with the company’s underwriting performance worsening for the second successive year.” Best added that it “considers that Eurasia’s combined ratio, despite deteriorating, will remain at a good level of below 90 percent.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Hong Kong’s Sun Hung Kai Properties Insurance Limited (SHKPI), both with stable outlooks. The ratings reflect SHKPI’s “consistently profitable operating results and its largely improved risk-based capitalization as a result of the disposal of a substantial portion of its private equity investments during the year. Being a wholly owned subsidiary of Sun Hung Kai Properties Limited, SHKPI is able to gain distribution support by leveraging the brand name of its parent and to access the large client base within the group and its affiliates.” In addition Best noted that “SHKPI’s operating performance has been favorable as demonstrated by its solid underwriting results and historically strong investment performance. Over the past five years through fiscal year 2009, the company’s average operating ratio was 18 percent. As at year-end June 2009, SHKPI’s net earnings increased by about 37 percent to HKD 149 million (US$19 million), driven by a large improvement in its investment earnings from the sale of private equity investments, despite a decrease in its underwriting earnings over the year. SHKPI’s risk-based capitalization, as measured by Best’s Capital Adequacy Ratio, improved greatly in fiscal year 2009 after the elimination of a significant level of its private equity investments during the year.
As at December 2009, about 57 percent of the company’s total invested assets were held in cash, 21 percent in bonds, 15 percent in properties, 6 percent in listed equities, and the remaining assets were held in unlisted securities. Although the company’s capital position reflects its conservative net premium leverage and improved investment risk profile, it is expected that the decelerated growth in underwriting and investment income, along with the existing dividend payout practice, would slow down SHKPI’s surplus growth in fiscal year 2010.” As an offsetting factor, Best cited the “consistent softening in premium rates in the employees’ compensation (EC) business, which will continue to induce underwriting volatility for SHKPI. The company experienced weaker underwriting profitability for the first half of fiscal year 2010, mainly as a result of the higher frequency in reported claims in its EC business. Going forward, given the prevailing soft market conditions and the unfavorable claims experience in the EC segment, SHKPI’s ability to sustain its historical level of underwriting earnings remains to be seen.”

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