Ratings Roundup: Consumer Services, B&B

July 19, 2010

A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-‘ (Excellent) and the issuer credit rating to “bbb” from “a-” of New Zealand’s Consumer Insurance Services Limited (CISL), both with stable outlooks. The ratings reflect CISL’s” consistent operating profitability and consider the reorganization within Fisher & Paykel Finance Holdings Limited (F&P Finance) and its impact on CISL’s financial prospects and business profile,” Best explained. “F&P Finance’s reorganization of its business has enabled CISL to capture a higher gross premium written from credit insurance as well as from the warranty business. Gross premium written in 2010 increased to NZD 12.5 million [US$8.822 million] from NZD 6.1 million [US$4.305 million] in 2009, due predominantly to the company underwriting a book of warranty business that it previously administered.” Best added that the growth in premium has “effectively enabled CISL to spread its costs over a larger premium base and has improved expense measures. CISL’s consistent operating performance is supported by a good underwriting margin, relatively stable claims experience and improving expense measures. A change in underlying consumer preference and strong competition had exerted pressure on the company’s revenue; however, CISL has simplified products and streamlined operations of its suite of insurance and warranty products to deliver market competitive products at market competitive prices.” Best said it anticipates that “premium growth will continue in the near term.” As offsetting factors best cited “concerns regarding the ongoing weak credit status of CISL’s ultimate parent, declining risk-adjusted capitalization and the high dividend payout requirement. The increase in underwriting risk resulting from substantially higher premiums written has led to a decrease in CISL’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). Nonetheless, CISL’s capital and surplus strengthened moderately on an absolute basis and increased to NZD 11.6 million [US$8.185 million] in 2010, compared to NZD 11.3 million [US$7.974 million] as at the previous year end. Further deterioration in risk-adjusted capitalization has been forecast; however, this is currently not a major concern as CISL has demonstrated a willingness to contribute capital when the need arises.” In addition Best noted that since “CISL was released from the Fisher & Paykel Finance Limited charging group in 2004, it has been required to pay a minimum dividend of 90 percent of its annual earnings. The five-year average dividend payout ratio has exceeded 100 percent, greatly limiting CISL’s surplus growth.” Best said it “remains cautious about the profitability of the warranty business and will continue to monitor the amount of capital retained to support the company’s new underwriting initiative. The ongoing weak credit status of CISL’s ultimate parent is seen as a potential risk to CISL’s financial standing. The financial strength of the rated entity on a stand-alone basis is considered adequate. However, as growth capital is sourced from affiliate companies that currently have a weak credit profile, the ratings of CISL were adjusted to reflect this.”

A.M. Best Co. has downgraded the financial strength rating to ‘C’ (Weak) from ‘C++’ (Marginal) and the issuer credit rating to “ccc+” from “b+” of Belarus-based B&B Insurance Co., OJSI (B&B). The outlook for the financial strength rating is stable, and the outlook for the issuer credit rating has been revised to negative from stable. Best said the ratings reflect the company’s “weak and deteriorating capitalization, high operating leverage and poor underwriting results in 2008 and 2009. The rating agency pointed out that B&B’s “already weak capitalization has deteriorated due to a loss after tax in 2008 and rapid growth in gross written premium (30 percent-40 percent per annum) in recent years. Capitalization will continue to be negatively impacted if the company’s business volumes continue to grow at a similar rate in the future.” However, Best said the company was profitable in 2009, and management expects this to continue in 2010, which is a mitigating factor, “along with a reduction in the level of growth in gross written premium. If achieved, this could help improve B&B’s future capitalization. The need to collateralize significant new reinsurance acceptances has led to a sharp increase in external borrowings. Operating leverage now stands at 130 percent of B&B’s capital and surplus.” Best said it believes that “this position is unlikely to improve as the company plans to continue writing these lines in the future. B&B’s underwriting results showed a loss in both 2008 and 2009 as a result of the weakening Belarusian ruble and general deterioration.” Best also indicated that it believes that the company’s “technical performance in 2010 is likely to remain variable, and the combined ratio is expected to improve to approximately 100 percent.”

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