Ratings: Gulf Re, Heddington, Cooperativa Seguros, Contractors Bonding (NZ)

A.M. Best Europe – Rating Services Limited has revised the outlook to stable from negative and affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of the United Arab Emirates Gulf Reinsurance Limited. Best explained that its ratings for Gulf Re continue to “reflect its excellent prospective risk-adjusted capitalisation, supportive shareholders and selective underwriting.” As offsetting factors Best cited the company’s “relatively small size compared with competitors and the developing state of the company’s enterprise risk management (ERM).” Best said the “revised outlook reflects Gulf Re’s attainment of key targets in its new business plan.” In addition the ratin g agency noted that the outlook for Gulf Re’s ratings “had been revised to negative in May 2010 amidst concerns over the company’s ability to execute its business plan with respect to business growth and the incoherence of its longer-term targets.” However in Best’s opinion, these concerns “have been well addressed, with Gulf Re drafting a new detailed five-year business plan in July 2011, with clearly defined targets and granularity in analysis and assumptions. Furthermore, the company has attained goals set out in the plan over the past year.” Best added that it expects Gulf Re “to continue with this progress going forward, and thus the outlook has been revised to stable.” From Best’s viewpoint Gulf Re’s “prospective risk-adjusted capitalisation remains excellent, benefiting from the company’s relatively low risk profile given its limited exposure to natural catastrophes, low credit risk on its outward retrocession programmes and conservative investment strategy. Best considers Gulf Re to have abundant capital to support any foreseen growth over the next two years.” Best also said it “believes the support received by Gulf Re from its joint ultimate parents, Gulf Investment Corporation (GIC) and Arch Capital Group Ltd. (ACG), has been essential to the success of the enterprise to date and is likely to remain important going forward.” As a result Best noted that it “views positively the extension to the joint venture agreement, which commits GIC and ACG to Gulf Re into 2016.” Best said it “considers Gulf Re’s risk selection to be sound, something borne out by the company’s solid and improving loss ratios. Having exceeded business plans for the second half of 2010, Gulf Re recorded technical profitability in the first two quarters of 2011.” Best also believes the company is “now well poised to deliver marginal technical profits for the full year, surpassing management’s plan to break even on its technical account. Gulf Re continues to grow at a steady pace and should reach its planned gross written premiums of $42.5 million for 2011. Nevertheless, the company remains fairly small in size compared with its competitors.” In Best’s opinion, Gulf Re “benefits from a capable and experienced management team that has implemented best practices throughout the company with the support and expertise of ACG. However, ERM remains in a developing stage with the company continuing to work on a more sophisticated risk framework.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Bermuda-based Heddington Insurance Limited, both with stable outlooks. The ratings reflect Heddington’s “superior capitalization, consistently positive operating results and the role that it plays as a captive insurance company of Chevron Corporation,” said Best. As a partial offsetting factor Best cited “Heddington’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low frequency but high severity.” However, Best also induicated that this is “somewhat mitigated by the captive’s good loss history supported by very strong investment income and parental support provided by high yield loans to affiliated companies. Heddington has sufficient capital resources to meet its underwriting related obligations, as measured by Best’s Capital Adequacy Ratio (BCAR). The ratings are based on the consolidated results of Heddington.” Best added that the ratings “further recognize the company’s strong enterprise risk management controls and underwriting expertise and loss controls offered in the structuring of insurance coverages offered by Heddington, as well as the cost effective manner in which those services are delivered. Heddington also gains from Chevron’s global scope, which provides it with a favorable geographic distribution of assumed risks.” Best observed that in its role as a captive insurer, “Heddington along with Iron Horse Insurance Company (another active Chevron captive) currently provide broad and competitive global insurance products for Chevron and its subsidiaries. The insurance needs of Chevron are supplied through these captive operations where appropriate and the commercial market. Heddington and the other Chevron captives provide comprehensive coverage above Chevron’s internal retentions, while Heddington’s reinsurance is placed through a corporate wide plan with the world’s leading providers of capacity, resulting in a diversified and balanced distribution of reinsurers.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit ratings (ICR) to “a-” from “a” of Cooperativa Seguros Group and its operating member, Cooperativa de Seguros Multiples de Puerto Rico (CSM), and has revised its outlook on the ratings to stable from negative. Best has also revised the outlook to stable from negative and affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of CSM’s separately rated subsidiary, Real Legacy Assurance Company, Inc. The rating actions relative to CSM “reflect the adverse reserve development reported by the company on recent accident years, which were driven by sinkhole losses in Florida and the resulting weakening in its underwriting performance,” Best explained. However, Best also said that despite these concerns, the “outlook reflects CSM’s strong capitalization and the implementation of management initiatives intended to reduce operating expenses. The outlook also recognizes the additional reinsurance, which provides some protection from additional sinkhole losses following management’s decision to run-off the Florida operations.” Best said the rating affirmations for Real Legacy reflect its “strong capitalization, profitable operating performance and benefits derived from the company’s affiliation with CSM, one of the leading multi-line providers in the Puerto Rico insurance market, which provides additional brand name recognition.” As partial offsetting factors Best cited Real Legacy’s “geographic risk concentration as a property writer in Puerto Rico and USVI, which exposes the company’s results to frequent and potentially severe weather-related events. Other offsetting factors include the impact of the competitive local marketplace in which the company operates and the elevated underwriting expense ratio reflective of Real Legacy’s heavy reliance on ceded reinsurance. While this reliance has reduced the level of net premiums with which to spread the company’s fixed costs, a change in the company’s reinsurance structure in 2011 is expected to mitigate this issue going forward. Despite these concerns, the outlook reflects Real Legacy’s strong capitalization and improved operating performance.”

A.M. Best Co. has assigned a financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” to New Zealand’s Contractors Bonding Limited (CBL), and has assigned a stable outlook to both ratings. The ratings reflect CBL’s “diverse premium source, experienced management team and relatively stable loss experience. The ratings also consider the company’s recent acquisition of an underwriting agency, European Insurance Services Limited (EISL), which gives CBL greater access to a desirable book of business. CBL is a niche credit and financial risk insurer whose business is exposed to the economic and financial situation of the jurisdictions/countries in which it operates. In operating across different geographical areas, CBL is able to diversify some of the risk associated with location specific events.” In addition Best noted that the “risk of operating without sufficient local knowledge is mitigated by working with local channel partners. The CBL management team has diverse financial experience and complementary skills and underwrites all risks from its head office in Auckland. Management is focused on profitable underwriting and its results for the five years under review reflect this philosophy. The global financial crisis has impacted the company somewhat; however, the impact has been reflected more in CBL’s written premium than its net profit. While the purchase of EISL is expected to substantially increase CBL’s business volume, the company’s building warranty business also is expected to gain from the underwriting expertise of EISL. Offsetting rating factors include the substantial non-traditional assets on the company’s balance sheet, high dependence on channel partners and the competitive nature of the business lines in which CBL operates. The substantial amount of long-term receivables, related company receivables and intangible assets created as a result of the purchase of EISL was weighted heavily in the rating decision. The business lines that CBL participates in are competitive in nature and CBL’s reliance on channel partners for business further exposes the company. However, the company’s focus on service has distinguished it from the competition and has resulted in steady growth. Further, the acquisition of EISL partially mitigates these concerns.”

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