Best Downgrades Egypt’s Al Chark

A.M. Best Co. announced that it has downgraded the financial strength rating (FSR) to” B++” (Very Good) from “A-” (Excellent) and the issuer credit rating (ICR) to “bbb” from “a-” of Egypt’s Al Chark Insurance Company. The outlook on both ratings has been revised to stable from negative.

“The rating actions reflect Al Chark’s weakened risk-adjusted capitalization and its poor underwriting performance,” said Best. “The ratings reflect Al Chark’s prominent business position in the Egyptian market and very good investment return.”

Best said it “expects that Al Chark’s prospective risk-adjusted capitalization will be commensurate with the current rating following a significant deterioration at year end June 2005. This was the result of a 55 percent reduction in the fluctuation reserve to partially fund the reserve strengthening in 2005 relating to the Motor Act (compulsory motor) business. ” It also believes that the “concentration of the company’s investment portfolio in Egypt exposes the company to a high level of credit risk.”

Best forecasts that the company’s “loss ratio is likely to be approximately 80 percent in 2006, compared to 131.7 percent in the previous year. The weak loss ratio in the previous year is due to a strengthening of reserves for compulsory motor insurance for the 2005 and prior underwriting years, as well as an increased claims frequency in this segment. In A.M. Best’s opinion, the company’s operating expense ratio is likely to remain high at the 2006 year-end (2005:48.8 percent), as the company’s high management expenses are not likely to reduce significantly.”

Best also said it “anticipates that the investment return at the 2006 year-end will likely be very good—in line with the 9.2 percent (including realized and unrealized gains/losses) at year end 2005—as a result of high domestic interest rates, although investment returns will remain the main driver of the bottom line profit.”

The rating agency “believes that Al Chark will maintain its profile as a prominent life and non-life insurer in Egypt, since the company benefits from the ‘preferred insurer’ status for many public sector companies. A.M. Best forecasts that the company’s gross written premiums at year end 2006 will remain in line with the EGP 834 million (USD 145 million) at year end June 2005 as the company benefits from a large domestic distribution network.”