Ratings Recap: ECIC, Century (Guam), Al Fajer Re

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of UK-based Electrical Contractors’ Insurance Company Limited (ECIC), both with stable outlooks. ECIC’s risk-adjusted capitalization is “likely to remain excellent in 2011 and through 2012, supported by retained earnings and a move to a more conservative investment portfolio,” said Best. As an offsetting factor Best cited ECIC’s “high reliance on third-party reinsurance, particularly quota share agreements, with the company having ceded approximately 50 percent of gross premiums written in 2010. However, this proportion is expected to reduce to 40 percent in 2011, diminishing the company’s exposure to increased reinsurance rates and to credit risk.” Best added that despite challenging market conditions in the United Kingdom, “a good underwriting performance is anticipated for the company in 2011, with a combined ratio between 50 percent and 60 percent. ECIC has a strong underwriting record, which is underpinned by an excellent knowledge of its core market. In 2010, the company produced an excellent combined ratio of 33 percent, supported by favorable reserve development. ECIC’s prospective investment performance is expected to be less volatile than in the past after a reallocation of a proportion of investments from equities to high quality fixed income securities during 2010 and improved oversight of investment managers’ performance.” In addition the report noted that ECIC “has a good niche business profile providing insurance to electrical and mechanical building services contractors and other specialist construction professionals in the United Kingdom. The company benefits from its relationship with its parent, the trade organization The Electrical Contractors’ Association, which provides access to a large membership base. Distribution is primarily via a network of brokers across the United Kingdom and has been enhanced by a new electronic trading platform.”

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘B+’ (Good) and issuer credit rating (ICR) to “bbb” from “bbb-” of Century Insurance Company (Guam) Ltd. (CIC Guam), and has also affirmed the FSR of ‘B+’ (Good) and ICR of “bbb-” of Century Insurance Co., Ltd. (CIC Saipan) of the Northern Mariana Islands. The outlook for all of the ratings is stable. The ratings for CIC Guam “recognize the significant improvement in the company’s Best Capital Adequacy Ratio (BCAR) stemming from the capital infusion from its immediate holding entity, Tan Holdings Corporation (THC),” Best explained. “To support the business growth of CIC Guam, Tan Holdings infused fresh capital in June 2010, which doubled the company’s paid-up capital and subsequently significantly improved the company’s risk-based capitalization. The ratings for CIC Saipan reflect its leading position in its local non-life market with a market share of 35 percent and its adequate risk-adjusted capitalization, as measured by BCAR.” In addition Best noted that both ratings “also acknowledge the prudent investment strategy and efforts by management to enhance both companies’ enterprise risk management. CIC Guam and CIC Saipan share the same management team.” As offsetting factors Best cited “the significant amount of overdue insurance receivables from both companies’ strategic partner, a high expense ratio and an unfavorable geographic concentration of risks in terms of catastrophe exposures. The strategic partner is the single distribution channel of CIC Guam and the major premium contributor of CIC Saipan. The initial agreement with the partner has led to a significant amount of overdue insurance receivables, putting a strain on the growth of the admitted assets and surplus and pressuring management to decrease the level of overdue receivables from its strategic partner. The expense ratio remains high for CIC Guam and CIC Saipan, standing slightly below 60 percent despite management’s initiatives to reduce spending. Going forward, management is expected to continue to tighten its expenditure control. Additionally, somewhat offsetting the favorable rating factors of CIC Saipan is its volatile underwriting performance. CIC Saipan has recorded volatile underwriting results over the past five years as premium size has been reduced and acquisition costs have been maintained at a high level. As the economy in Saipan is expected to continue to be unfavorable in the near term, the underwriting performance will remain unstable in the near term.”

A.M. Best Europe – Rating Services Limited has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Kuwait’s Al Fajer Retakaful Insurance Company K.S.C. (Closed) (Al Fajer Re). Best explained that its ratings for Al Fajer Re are based on its “strong level of risk-adjusted capitalization for the combined Shareholder and Retakaful Fund and an improving business profile, which is in line with Best’s expectations.” The negative outlook is “a result of a weaker than anticipated level of risk-adjusted capitalization within the Retakaful Fund and Al Fajer Re’s weak overall underwriting profitability, Best explained. In addition Best indicated that although it considers that Al Fajer Re’s business profile “remains well diversified and is developing in accordance with the company’s current business plans, exposure to the 2011 Japanese earthquake has added approximately 14 percentage points to the company’s loss ratio and pushed its expected combined ratio to 114 percent for the financial year ending March 2011. Excluding exposure to the Japanese earthquakes, Al Fajer Re’s performance was in line with its recent business plans.” The reinsurer has also “taken corrective actions to improve underwriting results,” and best said it anticipates “an improved level of profitability in future years with Al Fajer Re targeting underwriting profits for the first time in 2012.” Best also believes that Al Fajer Re’s “level of risk-adjusted capitalization has deteriorated in recent years as a result of weak underwriting results and provisioning for troubled investments.” In Best’s opinion, the “level of risk-adjusted capitalization within the company’s combined Shareholder and Retakaful Fund remains strong.” However, Best also pointed out that the “level of risk-adjusted capitalization within Al Fajer Re’s stand-alone Retakaful Fund has deteriorated to a more marginal level. Available capital has been reduced by around 50 percent after investment provisioning and underwriting losses, while a growing insurance portfolio and higher than expected outstanding claim reserves have driven up capital requirements. Risk-adjusted capitalization within the Retakaful Fund is supported by a trust deed amounting to half of Al Fajer Re’s paid capital, in addition to the Qard Hassan (an interest-free loan) provided by the shareholders to cover participants’ losses.” In Best’s opinion, Al Fajer Re’s “application of a more prudent investment strategy is likely to assist in preserving capital over the longer term, with free funds placed in bank deposits. Nevertheless, a significant proportion of Al Fajer Re’s financial assets are issued by The Investment Dar (TID), which defaulted in May 2009. Recently, TID’s debt restructuring plan was approved by the Kuwaiti authority, providing more clarity and somewhat reducing uncertainty with regards to these assets.”