Ratings: Sunderland Marine, Continental Re, Abu Dhabi Ins., Oman Ins.

August 17, 2010

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of the UK-based Sunderland Marine Mutual Insurance Company Limited (SMMI), both with stable outlooks. Best said it anticipates an improvement in SMMI’s consolidated risk-adjusted capitalization during 2010, supported by an increase in shareholders’ funds from £43.7 million [$68.12 million] as at year-end 2009. In addition Best noted that the company “has put in place a 25 percent quota share agreement on its protection and indemnity (P&I) and hull accounts, which reduces its exposure to underwriting risk.” Best said SMMI is likely to report “a small technical profit in 2010,” following a loss of £700,000 [$1.053 million] in 2009. Modest rate strengthening for certain lines of business in the company’s core marine portfolio and for its aquaculture business is expected to support an improvement in underwriting performance. Prospective investment results are expected to be “less volatile than in the past, owing to the sale of substantially all of the company’s equity holdings during 2009. In 2010, a solid net investment yield is anticipated, albeit lower than the 6 percent achieved in 2009 (including realized and unrealized gains).” Best also indicated that SMMI has a “strong business profile as a specialist insurer of fishing vessels, coastal vessels and aquaculture risks. The company’s excellent knowledge of its core markets and risk management capabilities support a high level of client retention. Business is underwritten in a broad range of territories, which include the United States, the UK, continental Europe and Australasia.”

A.M. Best Co. has affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb+” of Nigeria’s Continental Reinsurance Plc, both with stable outlooks. The ratings reflect a “robust risk-adjusted capital position, good underwriting results and an improving level of risk management,” Best explained. “An offsetting factor is insufficient security within the reinsurance panel for most lines of business.” Best added that it has witnessed a “significant strengthening of Continental Re’s risk management procedures over the past eighteen months, and it is anticipated that these developments will become embedded within the company’s decision-making processes over the coming years. Continental Re’s level of risk-adjusted capitalization is likely to remain robust in 2010, despite expectations of further growth in premium income. Robust capitalization is supported by a high absolute volume of capital, which was injected into the company in 2007 following market-wide recapitalization within Nigeria.” Best noted, however, that although the “average credit quality of Continental Re’s outwards reinsurance program has been improving over recent years,” Best believes that there is still a “significant exposure to unrated or insecurely rated retrocessionaires on programs covering fire, marine/aviation and motor/accident risks, which together account for around 90 percent of Continental Re’s premium income. Continental Re has in place a new reinsurance program for its energy risks, which is supported by a reinsurance panel of good credit quality. Continental Re has experienced a good level of underwriting performance throughout a period of sustained premium growth. In 2009, Continental Re achieved an overall combined ratio of 82 percent.” Best said it anticipates there will be “some deterioration in combined ratio as the book of business grows, with the combined ratio remaining somewhere in the region of 85 percent. Although being addressed, the large volume of outstanding premium debtors remains an issue.”

A.M. Best Co. has assigned a financial strength rating of ‘A’ (Excellent) and an issuer credit rating of “a” to Abu Dhabi National Insurance Company (ADNIC), which is based in the United Arab Emirates. The outlook on both ratings is stable. The ratings reflect ADNIC’s “superior risk-adjusted capitalization, its strong business position in the United Arab Emirates (UAE) insurance market and robust financial performance,” said Best. “ADNIC is the second-largest insurer in the UAE with an estimated market share of 16 percent among the local insurers. The company experienced strong growth during 2009 when its premiums grew by 16 percent, while the market as a whole grew by a more modest 5 percent. The increased growth rates were a result of the introduction of new products and increased sales in medical expenses business. Best believes that ADNIC is likely to experience growth rates of 15 percent-20 percent annually during the next two years as it continues its expansion of its distribution network and focuses on increasing sales of personal lines of business. Net premiums are likely to increase by 20 percent-25 percent during the same period as the company increases its retention.” In addition Best indicated that ADNIC has “strong and consistent technical performance with combined ratios below 75 percent.” Best also believes, however, that the company’s combined ratio is “likely to increase and stabilize at around 85 percent to 90 percent in the medium term. The change in the company’s methodology of calculating unearned premium reserves (UPR) will have a one-off impact on the claims ratio in 2010. Furthermore, the increase in retention is likely to increase the company’s expense ratio, which has typically been negative due to profit commissions. Investment income is likely to remain in single digits given that the largest portion of ADNIC’s invested assets is in cash deposits.” Best believes that ADNIC’s excellent risk-adjusted capitalization will “be retained despite the increased retention and the resultant increase in capital requirements. Capital and surplus, which had declined in 2008, recovered during the last year and the company benefits from a very strong underwriting leverage of 50 percent (gross written premiums over capital and surplus). The current reinsurance program provides the company with significant balance sheet and earnings protection, while the increases in retention of more volatile lines of business are likely to be minimal.”

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of United Arab Emirates-based Oman Insurance Company (PSC) (OIC), but has assigned them a negative outlook. The ratings reflect OIC’s “excellent underwriting performance and leading business position in the United Arab Emirates (UAE) insurance market,” Best stated. The company’s “exposure to variability of the company’s prospective risk-adjusted capitalization, also in relation to the still high concentration of the financial assets portfolio,” is an offsetting factor. Best explained that the negative outlook reflects the “increased control that Mashreqbank psc (the major shareholder of OIC, with 63-65 percent of shares) has over OIC following the appointment of the new board. Mashreqbank has a lower rating than OIC, and until now it had no representation on the insurance subsidiary’s board. However, the new seven-person board includes two direct representatives plus one non-executive director of Mashreqbank, and one additional representative of Mashreqbank’s main shareholders.” Best explained that in it opinion “this reduces the level of independence of OIC. Furthermore, future decisions involving the board, such as dividend distribution or investment strategy, could add downward pressure to OIC’s risk-adjusted capitalization.” which Best believes is adequate at the present time, “but exposed to a potential deterioration to a level not supportive of the company’s current ratings. OIC remains one of the leading local insurers in the UAE (with a market share in the range of 15 percent). OIC has a good product diversification for both non-life and life businesses, whereas it is also pursuing geographical diversification, expanding its operations to Qatar and Oman. ” In Best’s opinion, OIC’s underwriting profitability is excellent with technical profits increased to AED 317 million ($87 million) in 2009, while the non-life combined ratio improved to 71 percent. On the non-technical side, the devaluation of real estate investments impacted the net result, which decreased to AED 190 million ($52 million), though it remains very good.” Best also indicated that it believes that the company’s risk profile “remains overexposed to investment risk, specifically market risk, due to the high, albeit decreasing, concentration in equity investments (accounting for approximately 50 percent of OIC’s overall financial assets).”Best acknowledges that the company is moving in the right direction rebalancing its portfolio toward less volatile assets; however, Best said it “expects this process to be completed in approximately two to three years, while the company’s risk-adjusted capitalization remains exposed to the volatility of capital markets.”

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