Ratings Roundup: Farmers Mutual (N.Z.), Shore Re, NGI

June 16, 2010

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating to “a” from “a-” of New Zealand’s Farmers’ Mutual Group (FMG or the group) and its subsidiary, FMG Insurance Limited (FMGIL), and has revised its outlook on the ratings from positive to stable. The ratings of both FMG and FMGIL reflect the group’s “improvement in operating profitability and its strong risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR),” said Best. “The ratings also acknowledge the shift in strategic focus by management over the past three years, which drove the improvement in the underwriting margin.” Best noted that after experiencing FMG’s first operating loss over the past decade in fiscal year 2009, it “achieved net earnings of NZD 19.3 million [US $13.4 million] in fiscal year 2010, the highest net earnings reported since 2001. The reversal of the group’s negative operating performance was predominantly due to improving underwriting profitability and notable gains from investment managed funds. The group’s operating ratio was 77.2 percent in fiscal year 2010, compared to its five-year average operating ratio of 85.7 percent.” Best also pointed out that “despite the weather-related losses that impacted FMG’s underwriting performance over the past three years, it recorded an underwriting profit in fiscal year 2010 and achieved a combined ratio of 93.0 percent. The re-emergence of the underwriting profitability was primarily supported by moderate loss experience, an improvement in operating efficiency and steady rate increases.” Best also said it expects that the “group’s stability in operating profitability will be supported by its expansion in the underwriting margin. The group’s risk-adjusted capitalization, calculated on a consolidated basis, notably improved in fiscal year 2010, primarily due to its strong operating profitability and corresponding surplus accumulation. FMG’s risk-adjusted capital position continued to reflect its conservative underwriting leverage and overall balance sheet strength.” In addition Best said it anticipates that the “group’s risk-adjusted capitalization will continue to strengthen in the near term, primarily due to its stable underwriting profile, conservative asset mix and consistent growth in capital and surplus.” As offsetting factors Best cited the group’s “potential exposure to weather-related losses and catastrophic perils, which may lead to volatility in the operating performance.” Best also noted that “similar to other general insurers in New Zealand, FMG is exposed to weather-related losses and catastrophic perils. Risk aggregation from large and frequent weather-related losses had partially led the group’s loss ratio to vary from 58.4 percent to 73.3 percent over the past five years. Although the group’s catastrophe reinsurance program partially limits its event exposure, A.M. Best remains cautious about FMG’s potential exposure to risk aggregation.”

Standard & Poor’s Ratings Services has assigned its ‘BB’ and ‘BB+’ preliminary ratings to the Class A and Class B notes, respectively, to be issued by Shore Re Ltd. S&P noted that “Shore Re is an exempted company that will be licensed as a Class B insurer as of the initial issuance date in the Cayman Islands. HSBC Bank (Cayman) Ltd., as share trustee, holds all of Shore Re issued and outstanding shares in trust for charitable or similar purposes. The ceding reinsurer is Munich Reinsurance America Inc. (AA-/Stable/–). Munich Re America will be responsible for the premium payments due under the retrocession agreement in place between it and Shore Re. Covered losses will not be directly linked to Munich Re America’s exposure in the covered area (Massachusetts). Rather, they will be based on the losses of the Massachusetts Property Insurance Underwriting Assn. (MPIUA). Ultimate net losses will be calculated on a per-occurrence basis and will reflect the actual paid losses (including loss reserves, if applicable, and a loss-adjustment expense factor of 6.0 percent. The Class A notes will cover approximately 33.3 percent (subject to revision) of losses between the attachment level of $600 million and the exhaustion level of $900 million. The Class B notes will cover a to-be-determined percentage of losses between the attachment level of $900 million and the exhaustion level of $1.20 billion.”

A.M. Best Co. has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb+” to National General Insurance Company (P.S.C) (NGI), which is based in the United Arab Emirates, and has assigned a stable outlook to both ratings. The ratings reflect NGI’s “very good risk-adjusted capitalization and technical profitability,” said Best. “NGI is planning an aggressive and rapid growth strategy to strengthen its competitive position, which may put pressure on the company’s technical profitability.” In addition Best explained that NGI provides a “well-diversified range of insurance products, catering to both general and life insurance needs in the UAE insurance market. Main lines of business are medical, motor and accident, although the segment of group and individual life businesses are increasing. NGI’s gross written premiums, which amounted to AED 403 million ($110 million) in 2009, are projected to grow at least 20 percent per annum over the next two years. This growth is mainly due to the expansion of the medical and life business, which is expected to be supported by the joint venture with the international insurer, Aviva plc, launched in 2009.” Best added that in its opinion, NGI’s “strong risk-adjusted capitalization will remain supportive of the projected premium growth.” Best added that it also believes the company “benefits from a good capital base, which offsets the risks embedded in the company’s investment portfolio, namely the volatility of equities and the devaluation of property investments in the UAE. NGI’s reported capitalization is more conservative than that of other insurers with a life business, due to the lack of soft elements of capital in the form of deferred acquisition costs. In 2009, NGI’s general insurance business reported a very good combined ratio of 80 percent, confirming its satisfactory technical performance in recent years; although, it did deteriorate if compared to the 76 percent combined ratio reported in 2008.” However, Best also indicated it believes that “NGI’s competitive position is still limited, also considering that the business entirely originates from the UAE.” In addition Best said it “acknowledges the company’s continuous business growth in recent years and believes that NGI has the potential to further enhance its business profile leveraging the partnership with Aviva. Nevertheless, in A.M. Best’s view, the projected premium growth and current and expected level of competitiveness in the UAE insurance market may put pressure on NGI’s technical profitability in the near future.”

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