Ratings Recap: FM Insurance, AMI (NZ), MISR, Greenlight Re Ireland

October 8, 2010

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A+’ (Superior) and the issuer credit rating (ICR) of “aa” of UK-based FM Insurance Company Limited (FMI), both with stable outlooks. The affirmation of the ratings reflects FMI’s “excellent stand-alone risk-adjusted capitalization and the support received from its parent, Factory Mutual Insurance Company, in the form of extensive reinsurance protection and a policy level financial guarantee,” Best explained. “For 2010, FMI is expected to report an overall profit, although at a lower level than in 2009, due to a higher frequency of natural catastrophe losses and lower investment income. FMI’s future earnings continue to be subject to volatility due to exposure to large losses within the property account.” Best added that the “volatility has been demonstrated in recent years, with weak performance in 2006-2008, followed by an excellent result in 2009.
Through its membership of the FM Global Group (FM Global), FMI has a distinctive business profile as a leading insurer of ‘highly protected risks’ within the commercial property market. FMI is an important part of this group as it serves FM Global’s clients outside of North America. The group benefits from providing professional property engineering expertise and loss prevention services to its clients, as well as from using its extensive risk management expertise in its underwriting.”

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of New Zealand’s AMI Insurance Limited, both with stable outlooks. The ratings reflect AMI’s “strong risk-based capitalization and its track record of a good underwriting performance,” said Best. It also “recognizes the company’s good business profile underpinned by its extensive branch network across New Zealand, with a specialization in personal lines insurance (automobile, dwelling and contents).” Best added that AMI’s capitalization “remains strong and supportive of its current ratings. The company has been able to absorb the impact of the volatile capital markets on its investment portfolio and increase its surplus, which is in line with its ongoing business growth. The underwriting, investment and reinsurance risks are well supported by the company’s superior risk-adjusted capitalization as evidenced by Best’s Capital Adequacy Ratio (BCAR). Prospectively, AMI’s risk-based capital will remain sound given its anticipated premium growth and investment profile.” Best noted that in the fiscal year ended June 30, 2010, “AMI experienced the best underwriting performance of the last decade. Premium income increased by 12.8 percent on a yearly basis to NZD 341 million (approximately US$237 million), while the underwriting margin improved to 7.9 percent (the highest over the most recent five-year period). The combined ratio somewhat improved due to an increase in premium rates and more favorable claims experience.” Best said it believes that the company’s underwriting profitability “will remain favorable through 2011, despite an expected higher combined ratio relative to the 2010 level.” As offsetting factors Best cited AMI’s upward trend in its expense ratio and the challenge to improve its investment yields going forward. On an absolute basis, the operating expenses have been increasing over the past two years due to information technology system implementation costs and increasing employee benefit expenses. In addition, due to the general subdued interest rate environment, AMI could be challenged to generate investment yields in line with its expectations over the near term.”

A.M. Best Europe – Ratings Services Limited has removed from under review with negative implications and affirmed the financial strength rating (FSR) of ‘B+ +’ (Good) of Egypt’s Misr Insurance Company. However, Best also announced that it has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+”, and has assigned a negative outlook to both ratings. Best then added that it has withdrawn the ratings of Misr, assigning an NR-4 (Company Request) to the FSR and an “nr” to the ICR. Best explained that the “rating actions reflect the limited information available at this stage and uncertainty regarding the prospective capital position and operating performance (particularly dictated by compulsory motor) of Misr, which is likely to remain under pressure. Currently, Misr (and related group insurance entities) are undergoing a significant restructure, following the regulatory requirement of Egyptian Insurance Law, which obliges companies to separate the life and non life portfolio effective from 1 July 2010. An extension has been granted by the regulator to separate entities by January 2011.”

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” to Greenlight Reinsurance Ireland, Ltd. (GRIL), both with stable outlooks. The ratings of GRIL are based on its “excellent risk-adjusted capitalization, experienced management team and the disciplined implementation of its business plan,” Best explained. The ratings also recognize the company’s “exceptional enterprise risk management program as it aggressively manages risks on both sides of the balance sheet.” As offsetting factors Best noted “the start-up nature of the company, writing business in the European Union and the leverage resulting from an investment portfolio that is primarily composed of publicly traded equity securities. GRIL operates as an Ireland-domiciled reinsurer writing a combination of global property, casualty and specialty reinsurance business primarily through the broker market. The company follows stringent underwriting and risk management guidelines as does its affiliate, Greenlight Reinsurance, Ltd. (Greenlight Re).” Best added that while GRIL’s capital footprint entails 100 percent common equity with no use of debt, it is “somewhat concerned with the asset risk represented by its equity-based investment portfolio. Mitigating this concern is the absence of financial leverage, the partially hedged nature of the investment portfolio, the experience of the investment manager, the reasonable asset performance experienced by Greenlight Re during a difficult equity market in 2008 and the low underwriting leverage contemplated in GRIL’s business plan.” In addition best explained that its rating approach involves “assessing GRIL’s risk correlations across the enterprise by subjecting its capitalization to concurrent adverse events. The company’s robust risk-adjusted capitalization withstands substantial amounts of strain when subjected to these various stress scenarios.” Best said it would continue to closely monitor GRIL’s underwriting and asset risks and its progress against the business plan used to assess the assigned ratings.

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