Ratings Recap: Tapiola, Congregational, Asian Re, Int’l. Energy, Leadway

September 22, 2010

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a” of Finland’s Tapiola General Mutual Insurance Company (also known as Keskinainen Vakuutusyhtio Tapiola). The outlook for both ratings is stable. Best said the ratings of Tapiola General reflect its “strong consolidated risk-adjusted capitalization and excellent business profile as the leading mutual insurer in Finland. These strengths are partially offset by the company’s adequate but volatile underwriting performance.” Best also noted that Tapiola General’s “risk-adjusted capitalization remains strong and supportive of the current ratings. The company has been able to absorb the impact of the financial crisis on its investment portfolio and to increase its surplus in line with the ongoing expansion of its business through improved profitability and prudent earnings retention in 2009. Also, Tapiola General’s balance sheet strength is enhanced by its substantial claims equalization reserve (€557 million [$770.6 million] at year-end 2009), which the company is required to keep at a level consistent with its risk profile and solvency requirements, in accordance with Finnish insurance regulations.” Best also indicated that it expects Tapiola General’s “underwriting performance to improve as the company continues to refine its risk-selection criteria and increase its operating efficiency. Technical results, however, will remain under pressure due to competition in the Finnish non-life sector, which limits insurers’ ability to raise premium rates. In 2009, Tapiola General recorded profits of €84.4 million [$112.7 million] before taxes and provisions to the claims equalization reserve, as opposed to a pre-tax loss of €53.5 million [$71.4 million] in 2008. The company’s combined ratio (before correcting for the unwinding of discount in reserves for annuity benefits) improved to 105.1 percent from 111.6 percent due to more favorable loss experience. In addition, in 2009 Tapiola General benefited from more favorable conditions in financial markets, which led to total investment income (including net capital gains) of €112 million [$149.6 million], up €98 million [$131 million] from the previous year. Tapiola General continues to benefit from an excellent business profile as the largest mutual insurer in Finland. Following several years of expansion, the company’s market share is close to 20 percent, corresponding to €675 million [$901.4 million] in gross premiums written in 2009.” Best added that it “expects Tapiola General’s premium income to increase by approximately 2.5 percent in 2010, supported by higher premium rates and a modest uplift in the volume of business written. The company continues to benefit from additional revenues and cross-selling opportunities offered by its banking subsidiary, Tapiola Bank Ltd, which specializes in retail banking services and housing mortgage lending.”

Standard & Poor’s Ratings Services has revised its outlook on U.K.-based non-life insurer Congregational & General Insurance PLC to positive from stable. S&P also affirmed its ‘BB+’ counterparty credit and insurer financial strength ratings. “The outlook revision reflects Congregational & General’s return to profitability ahead of our expectations,” explained credit analyst Tatiana Grineva. “This enabled the company to rebuild its capital faster to a level where it can continue to operate and expand, thus supporting its competitive position and financial flexibility.” S&P added that in its opinion, the ratings on Congregational & General “continue to be constrained by its marginal competitive position and limited financial flexibility, while its capital base in absolute terms remains small.” S&P said it believes the ratings “are underpinned by its robust competitive position within its core, but very small, niche commercial property market, and by the improving operating performance. As its operating performance improves, so do its capitalization and financial flexibility, and that enables the company to expand and improve its competitive position going forward. We view the company’s competitive position as marginal. This reflects our view of the personal property account, which is Congregational & General’s largest book of business (about 70 percent of the overall gross premium income). We believe capitalization has improved to a good level following a co-insurance agreement with Hiscox in 2009 and disposal of the equity portfolio at the end of 2008. In March 2009, Congregational & General’s parent made a capital injection of £500,000 [$781,933] by issuing noncumulative, nonredeemable preference shares. In our opinion, this increased the company’s capacity to underwrite business, although we treat it as debt. Capital remains small in absolute terms, however, and may be vulnerable to significant operational losses.” S&P also explained that the positive outlook reflects its expectation that Congregational & General “will continue to deliver profitable performance throughout the 2010 and 2011 financial years and continue to rebuild its capitalization and financial flexibility. We also anticipate that the company will maintain its low financial risk tolerance. The ratings could be raised if the company continues to demonstrate good and stable operating performance, with a net combined ratio below 97 percent and return on revenue of more than 10 percent. This would enable it to increase its capital over the next 18-24 months to sufficient and resilient levels in excess of those likely to be required under the Solvency II directive, which is a fundamental review of the capital adequacy regime for the European insurance industry. It would also allow it to improve its financial flexibility and subsequently competitive position despite ongoing difficult economic conditions. The ratings could come under downward pressure if financial risk tolerance were to increase or the company’s capital or operating performance were to reduce.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Thailand’s Asian Reinsurance Corporation, both with stable outlooks. The ratings reflect Asian Re’s “stable risk-adjusted capitalization, conservative and liquid investment portfolio and strong premium growth,” said Best. The ratings also recognize the “unique organizational structure and the immunities and privileges granted by country members to the Corporation. Asian Re’s risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), has remained stable over the past four years, which was primarily due to the continuous capital injection by its new associate members since 2006. Although Asian Re’s underwriting risk is anticipated to increase due to further expansion into overseas markets, the Corporation’s current risk-adjusted capitalization is adequate to support its forecasted premium growth. Asian Re has a conservative investment portfolio. As at December 31, 2009, the Corporation invested 97 percent of its invested assets in cash and deposits.” In addition Best noted that “Asian Re’s gross premiums written (GPW) increased by 15.9 percent and 40.0 percent in 2009 and 2008, respectively. According to the Corporation’s business forecast, it aims to achieve 11 percent-15 percent premium growth in the coming three years. The high premium growth rate demonstrates the Corporation’s ability to secure new business outside its core markets.” As offsetting factors Best cited Asian Re’s “relatively small underwriting capacity, deteriorated underwriting performance and unfavorable loss reserve development. Asian Re’s combined ratio deteriorated to 103.8 percent and 105.3 percent in 2009 and 2008, respectively, from below 100 percent in previous years. The deteriorated combined ratio was attributed to claims from India, Indonesia and the Philippines. If the underwriting profitability remains poor going forward, it will have a negative impact on the stability of the ratings. Asian Re relied on the reported claim amounts from its ceding companies to set aside the outstanding reserves and added 5 percent of the outstanding reserves as incurred but not reported (IBNR).” Best added that the “estimated loss ratio over the loss development years had exhibited an increasing trend, and the increases were, in general, more than the 5 percent IBNR. A.M. Best is of the opinion that adverse development for previous underwriting years could negatively impact Asian Re’s capitalization in the future.”

A.M. Best Europe – Ratings Services Limited has downgraded the financial strength rating to ‘C++’ (Marginal) from ‘B’ (Fair) and the issuer credit rating to “b+” from “bb+” of Nigeria-based International Energy Insurance plc (IEI), and has placed the ratings under review with negative implications. “The downgrades and under review status are a result of both deteriorating risk-adjusted capitulation and a lack of compliance with A.M. Best’s reporting requirements,” said the report. “A large overall loss in 2009 had a significant negative impact on the company’s level of risk-adjusted capitalization. IEI’s weak overall performance in 2009 was a result of a high level of operating expenses, provisions for doubtful debts and investment losses.” In addition Best noted that IEI’s lack of cooperation with its rating requirements has led Best “to seriously doubt the strength of the company’s prospective business plans. With cooperation from IEI, A.M. Best hopes to resolve the under review status within a matter of weeks. However, if compliance issues persist, a further negative rating action is likely within the near future.”

A.M. Best Europe – Ratings Services Limited has affirmed the financial strength rating of ‘B-‘ (Fair) and the issuer credit rating of “bb-” of Nigeria-based Leadway Assurance Company Limited, both with stable outlooks. The ratings reflect Leadway’s “adequate risk-adjusted capitalization, marginally decreasing overall earnings and a resilient business profile in the Nigerian market,” said Best. The rating agency added that in its opinion, “Leadway’s current and prospective risk-adjusted capitalization is adequate and supports the company’s business plan. Following a significant decline in the previous year, capitalization continued to decrease marginally in 2009 due to further unrealized losses.” Best added that the “weakening capital position partly reflects the risk-taking profile of the company’s investment strategy. Leadway’s shareholder funds, which are heavily invested in equities, declined by 5 percent to NGN 11.7 billion ($78 million) in 2009.” Although, Leadway’s capitalization “remains adequate for its current rating level,” Best believes that its investment strategy is “unlikely to switch to less volatile asset classes in 2010, resulting in continued exposure of its capital to potential volatility.” Best also indicated that “Leadway’s financial performance marginally decreased in 2009 over 2008 with net income after tax reducing by 10 percent to NGN 1 billion ($6.5 million) in 2009. Increased write-offs, unrealized losses and provisions for bad debts as well as a drop in investment income could not be offset by an increased technical performance of the non-life book in 2009. The improved technical performance was driven by an improvement in the claims ratio to 33 percent from 56 percent in 2008 due to the absence of large losses as experienced in 2008. Overall, the combined ratio improved to 53 percent from 78 percent in 2008.” Best said it believes that the investment performance is likely to remain subdued in 2010 due to Leadway’s significant equity holdings, which include approximately NGN 3.2 billion ($21 million) in unquoted securities at year-end 2009. Leadway benefits from a robust business profile in non-life retail lines in the Nigerian market, with access to larger commercial risks related to the oil and gas industry, as well as a growing life insurance book. In 2009, total gross and net premiums increased by 24 percent and 22 percent, respectively. Growth was strongly supported by the company’s non-life book, which went up across all lines by 25 percent to NGN 24.8 billion ($165 million). Prospectively, Leadway is likely to experience a moderate decline in gross premiums in 2010, before the company returns to growth in 2011.”

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