Ratings Recap: Gulf, Unity Re, Connaught, Macau

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘C++’ (Marginal) from ‘B’ (Fair) and issuer credit rating (ICR) to ‘b’ from of ‘bb+’ of Gulf Insurance Limited, which is based in Trinidad, and has placed both ratings under review with negative implications. Concurrently, Best withdrew the ratings due to the company’s request to no longer participate in Best’s interactive rating process. All of the rating actions (including the under review status) “reflect the deterioration in Gulf’s balance sheet as a result of the write off of a significant portion of the receivable from its parent, Gillani Limited, as well as the possibility for further write offs of the remaining balance and the potential negative impact on Gulf’s operations,” Best explained. “Furthermore, given the February 2011 debt repayment default by Gillani Limited, concerns persist relative to the group’s limited financial flexibility, level of financial leverage and ownership’s continuing inability to address the enhancement of its capital structure.”

A.M. Best Europe – Rating Services Ltd. has assigned a financial strength rating of ‘B+’ (Good) and an issuer credit rating of ‘bbb-‘ to Russia’s Unity Reinsurance Company Ltd. , both with stable outlooks. The ratings reflect Unity Re’s “leading position in the Russian reinsurance market, strong capitalization and consistent financial results,” said Best. As partial offsetting factors Best cited the company’s “exposure to market and credit risks associated with repurchase agreement (repo) transactions and Unity Re’s relatively small size compared to international standards. Unity Re is a leading reinsurer operating in Russia and the Commonwealth of Independent States’ (CIS) countries. However, Best also noted that despite its relatively small size by international standards, Unity Re’s “gross written premiums grew by 9.4 percent in 2010 to RUB 1.025 billion [$32.18 million] (before cancellations), estimated to represent around 5 percent of the local reinsurance market. Unity Re’s portfolio of cedants includes most of the largest local insurance companies. Unlike most competitors; its portfolio of risks excludes captive business and financial schemes,” Best said. Unity Re’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is “strong and supportive of rapid premium growth. During 2010, the company started to get actively involved in repo transactions. However, the additional credit risk charges resulting from the increased bond exposures linked to these operations have been matched by an internal capital generation of RUB 200 million [$6.282 million] and a conservative profit retention policy.” Best added that it believes that capitalization is “likely to remain stable, subject to Unity Re maintaining the quality of its financial performance, as well as a similar conservative profit retention policy. Close monitoring of the risks stemming from repo activities is also crucial in maintaining stability. Unity Re’s technical profitability in 2010 improved significantly, especially for its property (over 67 percent of the company’s total business) and motor business (over 15 percent). With a combined ratio of 74 percent in 2010 and 80 percent average over the last five years, Unity Re has been growing rapidly without deteriorating the quality of its portfolio.” Best also indicated that it believes that “further expansion into other territories (such as CIS countries) and a likely increase in retention levels may have a negative impact on Unity Re’s profit margins. Nevertheless, Unity Re still has significant room to maneuver, as well as to operate successfully with higher combined ratios. After heavy losses in the Russian stock market in 2008, Unity Re moved away from shares into fixed income investments. The company’s active involvement in repo transactions since 2010 has increased its exposure to asset risks, whilst at the same time, providing a tool to enhance its investment performance. The company’s investment results during the last two years have shown less volatility than in the past. Going forward, however, Best is of the opinion that Unity Re needs to follow strict guidelines in respect to the size of its future repo transactions.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of ‘bbb-‘ of Guernsey-based Connaught Insurance Company Limited, the captive insurance company of Thomas Greg & Sons Limited, a security printing specialist based in Colombia. The outlook for both of the ratings is stable. Best then withdrew the ratings due to the company’s request to no longer participate in its interactive rating process. The rating affirmations reflect Connaught’s “large reduction in capital base in 2011 due to a substantial dividend payment; although, maintaining a level of risk-adjusted capitalization supportive of the current ratings,” said Best. Despite its restricted business profile and potential volatility of underwriting results, the company has “historically maintained an excellent underwriting performance,” best continued. “In 2010, Connaught had a low level of claims; which was a typical feature for the company in the past few years. Return on equity improved to 12.7 percent from 9.5 percent in 2010, and liquidity remained excellent with the majority of investments held in cash and deposits.”

A.M. Best Co. has affirmed the financial strength ratings of ‘A-‘ (Excellent) and issuer credit ratings of ‘a-‘ of Macau Insurance Company Limited (MIC) and Macau Life Insurance Company Limited (MLIC), both domiciled in Macau. The outlook for both of the ratings is stable. Best explained that the rating affirmations for MIC reflect its “favorable investment earnings and improved risk-adjusted capitalization on a consolidated basis. The ratings also recognize management’s efforts in strengthening the company’s claims management. MIC has maintained a track record of positive investment returns over the past five years, mainly supported by a stable level of interest income and revaluation gains from investment properties. Net investment yield (excluding unrealized gain and property revaluation gain) was 2.3 percent for 2010 (2.0 percent for 2009), whereas adjusted net investment yield (including unrealized gain and property revaluation gain) improved to 5.0 percent for 2010, from 3.4 percent for 2009. Although MIC increased its investments in local properties in 2011, cash and bonds investments (52 percent of total investments for 2010) will continue to dominate the company’s investment portfolio and generate a stable stream of interest earnings for MIC going forward. MIC’s consolidated risk-based capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), has improved and remains supportive of its current ratings. The company maintains a conservative level of net premium leverage at 0.25 times and it is expected to remain at a similar level, in view of the subdued premium growth anticipated over the next three years. A one-off outstanding claims provision was made after a comprehensive reserve review of MIC’s motor portfolio in 2010. In addition, the company has recruited a new claims manager to streamline its claims settlement process. Due to the initiatives taken by management in 2010, MIC expects the loss experience in its motor and employees’ compensation (EC) portfolios to improve under a more efficient claims management process going forward.” As a partial offsetting factor Best cited “MIC’s deteriorating underwriting profitability. MIC experienced unfavorable underwriting performance in 2010, mainly due to a decline in the level of premiums earned for the year, in addition to the timing mismatch on a lower premium earned and claims incurred from an EC contract that expired at the beginning of the year.” Best added that it believes it “will be a challenge for MIC to maintain a stable business volume owing to the cyclical nature of its construction-related business and competitive market conditions. The rating affirmations for MLIC recognize its strengthened risk-adjusted capitalization and product development supported by its affiliated company, Dah Sing Life Assurance Company Limited (DSLA). MLIC’s risk-adjusted capitalization improved in 2010, primarily as a result of the continued full retention of its operating earnings.” Best said it believes the company’s risk-based capital is likely to remain solid to support its prospective investment and business risks over the near term. Starting in 2009, MLIC began to rebuild its business portfolio through the deployment of DSLA’s products. The company will maintain this strategy going forward, in light of the effectiveness in the implementation and product distribution of its existing bancassurance channel. These positive rating factors are partially offset by MLIC’s weakened market presence in Macau’s life insurance market and the challenge to grow its pension business under the keen competition within this designated market. While the Guaranteed Saving Products portfolio continues to run off, growth in other key products is less favorable than expected. Hence, MLIC’s market share continued to decrease in 2010 and is expected to remain stagnant in the foreseeable future.”