Ratings Roundup: BEST RE, SALAMA, Adamjee, Lonpac

September 24, 2010

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Tunisia’s BEST RE, both with stable outlooks.The ratings of BEST RE reflect its “significant importance to its ultimate parent, SALAMA Islamic Arab Insurance Company (P.S.C.) of the United Arab Emirates [See below], Best explained. The ratings also indicate BEST RE’s “solid business position, strong financial performance, excellent risk-adjusted capitalization upon receipt of an anticipated $50 million capital injection planned for the fourth quarter of 2010, as well as the benefits of operating in a more regulated environment as the company is planning to relocate its operations to Labuan, Malaysia.” Best also said it believes that BEST RE’s business profile is “well diversified both geographically and in terms of lines of business written. Gross written premiums are likely to increase at a rate of 18 percent-20 percent in 2010, which is similar to growth in the prior period. Prospectively, the company is seeking to continue expansion of business in its traditional markets of the Far East, Middle East, Gulf Cooperation Council and Northern Africa, as well as taking advantage of the potential growth in life products in these territories.” In addition the reinsurer is poised to “post strong overall earnings with pre-tax profits of $10-11 million in 2010 (BEST RE posted pretax profits of $ 8.7 million in 2009 and $ 5.6 million for the first half of 2010).” In Best view the Company’s “overall earnings are likely to remain heavily influenced by consistently high technical results, and its combined ratio is anticipated to remain stable at 91 percent.” According to A.M. Best’s risk-adjusted capital model, BEST RE’s capitalization will remain in line with the current rating level as it is set to receive an additional $50 million in capital from SALAMA.” As an offsetting factor, Best cited “the company’s rapid level of growth, which could place a strain on capitalization in future periods. In the medium term.” Nonetheless Best believes that BEST RE’s capitalization will “remain stable as its projected future earnings will be able to sustain the planned level of dividend payments, although any significant deviation from the company’s business plan may have a detrimental effect.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of United Arab Emirates-based SALAMA Islamic Arab Insurance Company (P.S.C.), both with stable outlooks. The ratings of SALAMA reflect its “solid business profile, improved profitability and strong risk-adjusted capitalization,” Best explained. “SALAMA benefits from a geographically well-diversified business portfolio. It is continuing its expansion of business in Saudi Arabia, where it owns 30 percent of a start-up operation and through its subsidiary, BEST RE, is targeting the development of life business in Southeast Asia. SALAMA is still focused on property (39 percent) and motor (16 percent), but the growth of its life business remains a key objective.” Best also noted that “SALAMA’s 2009 results show that it has successfully recovered from the turbulence it suffered in the Middle Eastern stock markets in 2008. Pre-tax profits rose to AED 101 million ($27.7 million) from a loss of AED 4.5 million ($1.2 million) in the previous year as a result of a combined ratio at 92 percent and significant investment income of AED 52 million, which was driven by strong realized gains.” In the medium term Best expects the “company’s combined ratio to remain stable and for investment returns to remain positive, albeit, at a slightly reduced level due to the one-off nature of the gains in 2009. SALAMA’s excellent risk-adjusted capitalization has strengthened to previous levels as a result of the retained earnings in 2009. In future periods, capital requirement from premium growth, forecast at 15 percent-30 percent annually for the next two years, may lead to a decrease in risk-based capitalization, although this is expected to remain supportive of the current ratings.”

A.M. Best Europe – Rating Services Limited has commented that the ratings of Pakistan’s Adamjee Insurance Company Limited “are unchanged following the Pakistan floods.” Best said that in its opinion “Adamjee’s capital position is sufficiently strong to withstand the hit of a single catastrophe event and can absorb the current level of losses arising from the floods. The initial estimates provided by the company as at September 2010 are a net loss of PKR 200 million ($2.4 million) and gross loss of PKR 3 billion ($35.5 million), compared to a capital and surplus of approximately PKR 11 billion ($130 million) at June 2010.” In addition Best noted that the exposures mainly arise from “property and crop insurance, which are adequately protected through Adamjee’s solid reinsurance arrangements mainly consisting of recognized international reinsurers that mitigate its credit risk.” Best also indicated that the impact on performance also “remains within the bounds of the current ratings.” Going forward, Best said it would “continue to closely monitor the impact on Adamjee’s capital position and operating performance when further information becomes available.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Malaysia’s Lonpac Insurance Bhd, both with stable outlooks. The ratings reflect Lonpac’s “ability to maintain favorable underwriting performance, regardless of the competitive operating environment in its core marketplace,” Best explained. The ratings also “recognize the company’s efforts to improve efficiency and productivity and to reduce its investment risk.
Lonpac’s combined ratio remained below 80.0 percent over the past five years reflecting its disciplined underwriting practice. In the meantime, the company persists in improving its efficiency and productivity to conserve high policy renewal rates.” Best pointed out that Lonpac also has “reduced its investment risk through significant disposal of its investment in Public Bank Bhd during fiscal-year 2009, which represented 3.9 percent of the company’s total assets as at the end of December 2009, compared to 12.4 percent in 2008.” As offsetting factors, Best cited “the continued pressure on Lonpac’s capitalization and the competitive landscape in its core operating market. High dividend payout and aggressive premium growth have slowed the company’s expansion of surplus relative to premium, which lowers Lonpac’s Best’s Capital Adequacy Ratio. The continuous practice of the current dividend payout policy and high premium growth will continue to pressurize Lonpac’s risk-adjusted capitalization.” Best also expects that the “emergence of stronger players in Lonpac’s core marketplace would further soften the operating environment.

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