Ratings Recap: Aviva Canada, IRB-Brasil

A.M. Best Co. has placed under review with negative implications the financial strength rating (FSR) of ‘A ‘(Excellent) and issuer credit ratings (ICR) of “a+” of Aviva Insurance Company of Canada and its affiliates, Elite Insurance Company, Pilot Insurance Company, Scottish & York Insurance Company Ltd, S&Y Insurance Company and Traders General Insurance Company (together known as Aviva Canada). Aviva plc. Aviva plc, a global diversified financial services company based in the UK, is the companies’ ultimate parent company. As with a number of other ratings announcement Best has made recently it cited the “recent review of Aviva plc, which resulted in its ratings and that of its subsidiary companies being placed under review with negative implications on December 15, 2011. Aviva Canada’s ratings are inherently tied to those of Aviva plc and reflect enhancement in consideration of Aviva’s overall credit profile. The rating actions on Aviva plc were driven by the company’s exposure to investments in several peripheral euro zone economies, Italy in particular. The rating actions on Aviva plc and other European (re)insurers reflect their exposure to the continued deterioration of the sovereign creditworthiness of several euro zone countries and the negative economic outlook for the region. “Aviva Canada’s ratings reflect its leading position in the property/casualty market, along with its continued strong operating performance,” Best continued. “The ratings for Aviva plc and therefore Aviva Canada will remain under review with negative implications,” while Best examines Aviva plc’s exposure to a prolonged adverse economic environment within the euro zone.” Best said it is particularly concerned by potential exposure to Italy and Spain’s sovereign bonds and the potential for contagion into other asset classes, particularly holdings of European bank securities. In addition, Best said it would “assess the likely impact of a prolonged financial crisis and recessionary environment on these carriers’ market position and ongoing business operations. Negative rating actions could occur if there were a worsening of risk-adjusted capitalization tied to investment losses or a deterioration of the operating environment in Aviva plc’s key territories.”

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” to IRB-Brasil Resseguros S.A. (IRB), both with stable outlooks. The ratings reflect IRB’s “strong business profile in the Brazilian reinsurance market, solid overall financial performance and strong risk-adjusted capitalization,” Best explained. The report also noted that “since the reinsurance market was opened up in Brazil, IRB predictably has experienced a decline in market share; however, it continues to have the largest market share by a wide margin. In recent years, as the Brazilian reinsurance market has transitioned to a more open market, IRB has enacted various initiatives to maintain a competitive edge. Those initiatives, among others, include installing enterprise-wide systems to help control processes and allow for increased cost efficiency, establishing a client management group to provide enhanced customer service and strengthen business relationships, and establishing a corporate risk management group to optimize capital and aid in prudent risk-taking. Overall, IRB, given its history and ownership structure, has a unique and strong position in the growing Brazilian (re)insurance market, and the company has a dedicated strategy and experienced personnel to execute its business plans.” In addition Best noted that “stabilization in premium volume or modest growth while maintaining strong risk-adjusted capital and strong operating performance” should be considered as “rating factors that could change IRB’s outlook to positive or move the ratings higher. As partial offsetting factors Best cited the “sustained and significant competitive market pressures as more reinsurance companies enter the Brazilian market each year, as well as potentially new or altered regulatory requirements, which may or may not be favorable to IRB. The aforementioned challenges and other rating factors that could lead to a downgrade or a revision of the outlook to negative include a material loss of capital whether it is driven by investment losses or underwriting losses, increased volatility with regards to operating performance relative to other market participants, or a material decline in risk-adjusted capital if, for example, premium growth is pursued in a manner that strains the company’s claims paying ability. In Latin America, Brazil is the largest (re)insurance market. Brazil has the largest population in South America and is among the 10 largest economies in the world by gross domestic product. Currently, Brazil has low insurance penetration and a favorable economic environment, which represents significant growth potential, making Brazil an attractive place for (re)insurance companies. In Brazil, reinsurance companies fall into three categories depending on a company’s participation and financial commitment: ‘local,’ ‘admitted’ and ‘occasional.’ IRB is a ‘local’ reinsurance company, which is currently 50 percent owned by the Brazilian government, and up until 2007, when the Brazilian reinsurance market was opened up to international reinsurance companies, IRB was privy to a long-standing monopoly. IRB has predominately operated as a property/casualty reinsurer with a small amount of life business.”

Topics Canada