Ratings Recap: SecuriCan, Pioneer, Sovereign, Meritz, Island Capital

A.M. Best Co. has assigned a financial strength rating (FSR) of ‘B+’ (Good) and issuer credit rating (ICR) of “bbb-” to Winnipeg, Manitoba-based SecuriCan General Insurance Company, both with stable outlooks. Best said the ratings “are reflective of its good risk-adjusted capitalization, improved operating performance and solid market presence as one of the leading pet insurers in Canada. The company’s improved underwriting results coupled with consistent net investment income have resulted in pre-tax operating gains in each of the last three years. This favorable trend also has continued through the first three quarters of 2009. Although SecuriCan is a specialty writer and a market leader of pet insurance in Canada, as a monoline writer this poses some inherent risk of concentration.” As offsetting factors, Best cited SecuriCan’s “elevated underwriting leverage and common stock leverage. Premium growth has significantly outpaced equity over the latest five-year period. Furthermore, common stock leverage, as a percentage of equity, was elevated, which resulted in unrealized capital losses, straining overall profitability in year-end 2008. However, going forward, the company plans to implement a more conservative investment philosophy of fixed income securities.” Best added that although SecuriCan’s unique market segment of pet insurance is experiencing an increase in competition, it “believes the company is generally well positioned and resolute in its underwriting guidelines to maintain positive operating results.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of’ B’ (Fair) and issuer credit rating (ICR) of “bb” of New Zealand’s Pioneer Insurance Company Limited, both with stable outlooks. At the same time Best withdrew the ratings at the company’s request and assigned an NR-4 to the FSR and an “nr” to the ICR. “The ratings reflect Pioneer’s weak operating performance resulting from poor past underwriting standards and costs associated with the re-organization of the company,” best explained. “Offsetting these rating factors are improvements in Pioneer’s management and internal control, rationalized book of business and moderate risk-adjusted capitalization.”

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and the issuer credit rating of “aa-” of New Zealand insurer Sovereign Assurance Company Limited, both with stable outlooks. The ratings reflect Sovereign’s “stable risk-adjusted capitalization, consistent improvement in its operating performance and corresponding surplus accumulation,” said Best. “The ratings also acknowledge Sovereign’s leading market position in the New Zealand life industry and its well established distribution network. Despite the volatile investment environment, Sovereign’s risk-adjusted capitalization improved in fiscal year 2009. Prudent asset and liability management, conservative investment approach of the shareholder’s fund and consistent underwriting profitability supported the gradual accumulation of capital and surplus. As at June 30, 2009, the shareholder’s fund grew to NZD 582 million [US $408 million], up from NZD 498 million [US $349 million] in fiscal year 2008.” In addition Best noted that “Sovereign’s operating earnings steadily improved over the past five years as solid investment earnings from fixed interest instruments, favorable insurance margin and experience profits supported the steady increase in pre-tax income. Net profit after tax increased 8.9 percent in fiscal year 2009 to NZD 110 million [US $77 million], compared to NZD 101 million [US $70.8 million] in fiscal year 2008. Sovereign’s experience profits continued to exceed planned profits in fiscal year 2009 and continued to reflect its favorable underwriting profitability. Consistency in the company’s underwriting margin was predominantly supported by strong persistency in its core group of risk products, favorable claims experience and its focus on operating efficiency.” Best cited the “intense market competition, lowered investment yield from falling interest rates and the potential adverse response from market participants due to taxation reform,” as offsetting factors. The rating agency also pointed out that in fiscal year 2009, “Sovereign’s new business market share slightly declined to 30.9 percent, compared to its new business market share of 34.4 percent in fiscal 2008, due predominantly to intense competition in the life market. Nonetheless, Sovereign continued to lead the market in both new business generation and its book of in-force premium over the past five years. Given the intense competition in the New Zealand life market and a lowered investment yield in fixed interest investments, A.M. Best expects Sovereign’s operating margin will be somewhat affected over the near term.”

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of South Korea’s Meritz Fire & Marine Insurance Co., Ltd. Best said the rating actions reflect Meritz’s “soundness in its operating performance of its motor and long-term business and a recovery of capitalization. Meritz’s long-term business has largely contributed to its operating profits over the years, although the financial crisis had a negative impact on its investment performance in fiscal year 2008. The long-term business generated around KRW 95 billion [$80 million] of operating profits in fiscal year 2008. In addition, over the past five years, Meritz has shown a stable improvement of the combined ratio of its motor business.” Best noted that in fiscal year 2008, Meritz’s capitalization deteriorated due to significant losses from its refund guarantee business and an increase in valuation losses on securities affected by the financial crisis. Meritz’s purchase of treasury stocks, about KRW 60 billion [$50.68 million], also had a negative effect on capitalization. As a result, as at September 2008, the local solvency ratio dropped to 166 percent. However, Meritz has recovered its capitalization to around KRW 191 billion [$161.35 million] of revaluation gains on real estate assets, as well as a stable accumulation of net profits for 2009. As at November 2009, Meritz’s local solvency margin ratio stood at 230 percent. In addition, Meritz wrote off some risk assets, such as foreign denominated bonds, which will reduce risk and volatility going forward.” Best added that the “revised outlook reflects Meritz’s initiatives in response to the losses from its refund guarantee business and the strengthening of its risk management. Meritz accumulated around KRW 182 billion [$153.75 million] of outstanding reserves to its refund guarantee business. In addition, Meritz is cautiously monitoring its remaining exposures and tightened its underwriting guidelines for its commercial business to avoid any similar cases like the refund guarantee business in future. Partially offsetting the positive rating factors are the widening duration gap between assets and liabilities in Meritz’s long-term portfolio and its expected higher premium growth. As Meritz plans to grow rapidly in the coming years, any further volatility in capitalization could put pressure on its ratings.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based Island Capital Ltd. and Island Capital (Europe) Ltd. ,which is based in the UK. The outlook for both ratings is stable. Best then withdrew the ratings and assigned a category NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR. “The ratings reflect both companies’ sufficient risk-adjusted capitalization, proven performance through market cycles and an orderly transfer of both companies’ underwriting and risk management teams and business platforms to QBE Insurance Corporation (headquartered in New York, NY) during fourth quarter 2008,” Best explained. “Since then both companies have been placed in runoff and are not expected to write any new business. The ratings recognize Island Capital’s conservative approach to investment management and its strong risk management practices. Partially offsetting these positive factors are the potential exposure to significant net losses due to major company specific and global economic events, including such downturns as experienced in 2002-2001 and 2008-2009.”