Ratings Recap: Skandia, Al Fajer Re

July 29, 2010

A.M. Best Co. has affirmed the financial strength rating of ‘A ‘(Excellent) and issuer credit ratings of “a” of Sweden’s Skandia Insurance Company Ltd. and Skandia Life Assurance Company Limited (Skandia UK), the main subsidiaries in Old Mutual plc’s Nordic and Wealth Management business units of Old Mutual plc’s long-term savings division. The outlook for all ratings is stable. The ratings for Skandia Sweden and Skandia UK reflect “both companies’ business profile, resilient financial performance and excellent risk-adjusted capitalization,” said Best. In addition Best said it believes that both companies have “maintained their business profile throughout 2009 despite the market turbulence in the previous year. Skandia Sweden, through its own operations and that of its wholly owned subsidiary, the mutual Skandia Liv, has retained its position as the number one life assurance provider in Sweden. Despite the economic turmoil in the United Kingdom, Skandia UK has remained the leader in the UK platform market and a moderate-sized player in the life insurance market as a whole. An offsetting factor is the depressed demand for unit-linked products in the current economic environment.” Best considers that both companies have demonstrated financial resilience in difficult market conditions. Both the legal entity, Skandia Sweden and its consolidated Old Mutual plc’s reporting division, Nordic, have remained profitable in 2009. Although on an International Financial Reporting Standard (IFRS) adjusted operating profit before tax basis, Nordic’s profits fell by 32 percent to SEK 737 million ($101.6 million) in 2009. This has been driven by lower interest rates affecting asset values, resulting in unrealized losses, and reducing net interest income from its banking subsidiary, Skandiabanken. Skandia UK has also retained profitability, albeit at a reduced level. Best noted that Wealth Management, the reporting division to which Skandia UK belongs, “has experienced a fall in adjusted pre-tax profits of 29 percent to £106 million [$165.24million]. The division has benefitted from increased mutual fund sales, which have been partially offset by a decline in demand for more traditional products with customers still wary of equity market uncertainty.” Best said it expects a moderate improvement in results for both entities and divisions in 2010 as market confidence returns.” Best also believes that “both companies have an excellent level of risk-adjusted capitalization. Skandia Sweden has seen an improvement from 2008 through the retention of earnings, whereas Skandia UK has seen a partial decrease through the payment of a dividend. Both companies are expected to maintain this level of capitalization for the foreseeable future.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Kuwait’s Al Fajer Retakaful Insurance Company KSCC (Al Fajer Re), both with stable outlooks. The ratings reflect the company’s “strong risk-adjusted capitalization and the ongoing implementation of a more prudent, capital-preserving investment strategy as well as advancement in corporate governance and enterprise risk management concerning its investment activity,” said Best. “An offsetting factor is the poor technical performance, with underwriting profitability unlikely in the near future.” Best said that in its opinion Al Fajer Re has a “strong risk-adjusted capitalization on a combined basis, supportive of the current and prospective business. On a stand-alone basis, the policyholders’ fund is further protected by a trust deed amounting to half of the paid capital, in addition to the Qard Hassan (an interest-free loan) provided by the shareholders to cover participants’ losses.” Over the last year, Al Fajer Re has been implementing a more prudent investment strategy aiming at the preservation of its capital. As part of that strategy, all the proceeds from the investments at maturity, as well as all other free funds, are placed in bank deposits. Best expects the company to continue to pursue this approach in the near future. Nevertheless, approximately 25 percent of Al Fajer Re’s overall financial assets are issued by The Investment Dar (TID), which defaulted in May 2009. TID’s debt restructuring plan envisages the full repayment of the outstanding debt over a period of five years. TID’s plan has been agreed to by more than 80 percent of the creditors, but it is not in the execution phase yet, while TID has filed for legal protection under Kuwait’s Financial Stability Law in order to make the plan binding on all creditors. Nevertheless, even in the event of partial recoverability of TID’s investments, Al Fajer Re’s risk-adjusted capitalization remains strong. Regarding Global Investment House (the second shareholder of Al Fajer Re), which defaulted in December 2008, its debt restructuring plan has been agreed to by the lending banks and is being implemented. In Best’s opinion, Al Fajer Re has a “poor underwriting performance, as the combined ratio has remained in the range of 105 percent-110 percent during the first two years of operation. According to the preliminary financial accounts for the financial year ended March 2010, Al Fajer Re reported approximately $5 million of technical losses $6.1 million losses at March 2009), with major claims in Central and Eastern Europe and the Far East.” In Best’s view, technical profits are unlikely earlier than 2012-2013. On the non-technical side, the more prudent investment strategy implemented implies limited, albeit steady, investment returns. Notwithstanding, non technical profitability remains exposed to potential additional impairments of TID’s investments or devaluation of the residual financial assets not held in bank deposits.”

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