Ratings Roundup: NAGICO, Sun Hung Kai Properties

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit ratings of “bbb” of National General Insurance Corporation (NAGICO) N.V., based in St. Maarten, and Nagico Insurance Company Limited (NICL),which is based in Anguilla. The outlook for all of the ratings is stable. The ratings “reflect NAGICO and NICL’s common ownership, adequate consolidated risk-adjusted capitalization, overall profitability in recent years and NAGICO’s dominant market presence in its domestic market,” said Best. “NAGICO is the leading property/casualty insurer in St. Maarten with a dominant market share in the Dutch Caribbean, while NICL is one of the leading insurers in several overseas markets.” Best also noted that “on an individual and consolidated basis, the companies continue to report overall operating profits. Given their common parent company’s minimal dividend requirements, both NAGICO and NICL have been able to enhance capitalization through the retention of earnings. Consequently, both companies continue to maintain more than adequate risk-adjusted capitalization for their current business profiles. In addition, NAGICO and NICL have implemented adequate risk management policies and procedures to assess and manage risks throughout their operations.” As partial offsetting factors, Best cited the “increasingly competitive regional markets in which NAGICO and NICL operate and the somewhat limited financial flexibility of both companies as a result of their private ownership structure.” In addition Best noted that “both NAGICO and NICL, like other regional insurers, have significant exposure to catastrophic losses. Both companies manage this risk through the utilization of reinsurance to limit their catastrophe exposure to a manageable level and to protect their surplus against frequency of catastrophic events. While the ratings of NAGICO and NICL are stable, factors that could contribute to rating enhancement include sustained improvement in their underwriting performance, consistent long-term overall profitability and an upgrade in St. Maarten’s and Anguilla’s country risk tier ratings. Factors that may lead to negative rating actions include significant loss of consolidated market share, a sustained decline in underwriting profitability, significant deterioration in risk-adjusted capitalization as measured by Best’s capital model and a downgrade in St. Maarten and Anguilla’s country risk tier ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Hong Kong-based Sun Hung Kai Properties Insurance Limited (SHKPI), both with stable outlooks. Best explained that the affirmation of the ratings “reflects SHKPI’s consistent operating profit and solid risk-adjusted capitalization. The company is a wholly owned subsidiary of Sun Hung Kai Properties Limited, one of the leading property developers and conglomerates in Hong Kong. SHKPI gains operating synergies through product distribution with the parent group, enabling SHKPI to maintain a stable market presence in its key business—general liability insurance in the local industry. SHKPI’s underwriting profitability remains strong, demonstrated by its five-year average combined ratio of 53 percent during fiscal years ended June 2007-2011. SHKPI’s business model keeps the company’s acquisition costs low, easing the profit impact from the rising trend of the loss ratio and results in a favorable combined ratio.” Best also noted that the company “has a track record of a successful investment performance. The investment income raises the profit further. SHKPI’s risk-adjusted capitalization remains supportive of the assigned ratings. Net premium leverage is maintained at a conservative level (0.20 times as at June 2011). The surplus level increased with the profitable operation, although the growth remains modest because of SHKPI’s high dividend payout practice (average dividend payout ratio of 74 percent in the past five years). The asset composition remains highly liquid, with cash and cash equivalents accounting for over half of invested assets. Partially offsetting these positive rating factors is the potential volatility in future profitability due to investment activities. Capital gains from investment disposal and revaluation profits from investment properties have been the major operating profit contributor in the past three years.” However, Best also indicated that the “amount of realized capital gains is expected to decrease in coming years after a series of asset liquidations. With the potential drop in local property prices, reduced investment income could lead to a short-term fluctuation of SHKPI’s earnings.” Best added that it “does not expect positive rating actions on SHKPI over the near term. Factors that could lead to negative rating actions include notable deterioration in the company’s operating performance or risk-adjusted capitalization.”