Ratings Roundup: Lemma, Russian Re, Ghana Re, International Energy

A.M. Best Europe – Rating Services Limited has placed under review with negative implications the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Ukraine’s Lemma Insurance Company. Best explained that the rating action “reflects the fact that Lemma has been unable to provide consolidated financials on an IFRS basis for the year 2009.” As a result, Best said it has “been unable to verify Lemma’s financial performance and the impact of the liquidation of its former banking subsidiary, Zemelniy Bank, on Lemma’s capitalization.” The under review status will be resolved once the information has been provided and Best has completed its analysis or by the end of April 2010, whichever occurs sooner.

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Russian Reinsurance Company JSC, both with stable outlooks. The ratings reflect the company’s “improved operating performance and excellent risk-adjusted capitalization, which is partially offset by its relatively small size in a competitive market environment,” Best explained. “Russian Re’s gross written premiums (GWP) have grown throughout 2010 and are expected to reach RUB 490-510 million [$15.92 million to $16.57 million] by year end. This is relatively small by international standards, and the company will continue to face significant challenges in growing its domestic market presence as a result of competition from both local and international reinsurers. Management’s current strategy is to expand outside of Russia and the Commonwealth of Independent States, with the Middle East and North African markets being the key drivers for growth, although this could prove demanding due to the already established positions of regional reinsurers.” Best also noted that Russian Re’s “pre-tax profits in 2009 rose significantly on the previous year to RUB 56 million [$1.82 million] as a result of improving loss experience and the release of redundant reserves.” Best said it believes that Russian Re’s pre-tax profits are “likely to remain relatively stable over the next couple of years, albeit at slightly lower than 2009 levels, given the absence of new reserve releases. Investment yield is likely to remain a robust 4 percent, which is particularly impressive given the company’s conservative investment portfolio. Best also believes that Russian Re’s risk-adjusted capitalization has “improved from its already strong level in 2009 as result of a highly profitable year and the full retention of earnings. The impact of planned premium growth will cause a slight deterioration in capitalization, but it will remain strong and supportive of the current ratings. Based on the company’s own projections, it should have sufficient capital to meet new Russian regulatory requirements, which will be adopted in 2011. Financial flexibility is very good for a company of Russian Re’s size, helped by its no dividend policy in the medium term, given the significant participation of international professional insurers in the company’s shareholding and the lack of financial leverage.”

A.M. Best Europe – Rating Services Limited has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of ‘B’ (Fair) and issuer credit rating (ICR) of “bb+” Ghana Reinsurance Company Limited. Best said the ratings reflect the company’s “strong risk-adjusted capitalization, with Ghana Re continuing to transfer profit to capital over successive years. In 2008, there was a transfer of GHC 12 million [$8.2 million], followed by a further transfer of GHC 8 million [$5.47 million] in 2009. In 2008, the compulsory cession enjoyed by Ghana Re, which obliged insurers to cede 20 percent of their business written to the reinsurer, was removed. For Ghana Re in 2009 and the year to date, the effects of this legislative change begin to materialize. To maintain premium volumes, the company has replaced existing arrangements with quota share contracts that pay very high commissions. Despite this, premiums written have fallen in real terms and are likely to fall further.” Best also expressed concerns that “Ghana Re holds a large asset, relative to the size of the balance sheet and premium income, for premium debtors. New regulations from the Ghanaian insurance regulator stating that premiums older than a year must be written off is likely to put pressure on the company’s technical profitability. It is still uncertain whether the removal of the compulsory cession may help to improve technical profitability.” Best added that it “understands from Ghana Re that a significant proportion of the premium arrears are in respect of the insurers who were forced to cede business to the company. There are material pressures on the rating, but to the extent that the company can improve its business profile, there may be scope for a smaller, more profitable organization to emerge.”

A.M. Best Europe – Rating Services Limited has downgraded the issuer credit rating to “b” from “b+” and affirmed the financial strength rating of ‘C++” (Marginal) of Nigeria’s International Energy Insurance plc (IEI), and has kept the ratings under review with negative implications. Best said the “downgrade reflects weak internal controls and risk management. The under review status reflects uncertainties over the future divestment from subsidiary companies. Offsetting this is a fair level of risk-adjusted capitalization.” Best also noted that in 2009 IEI “suffered a consolidated loss after tax of NGN 3.9 billion ($25.4 million). The loss was driven by a weak underwriting performance (after taking into consideration management expenses), losses within non-insurance subsidiaries and other non-technical expenses.” In addition Best said it “considers that IEI’s level of risk management is poor. Although meeting regulatory requirements, the company does not employ any formalized modeling tools and reserves are not actuarially assessed. Furthermore, the company now has only a limited level of control over subsidiary companies that contributed significant losses in 2009.” Best explained that the under review status reflects its “concerns and uncertainty over the future divestment from subsidiary companies. Although the operations of certain subsidiaries have been unbundled from that of the insurance company and future divestment is likely, subsidiaries had negative net worth as at December 2009.” Best said it would “monitor the situation over the coming months and revisit the rating no later than the end of March 2011. It also cited, as a mitigating circumstance, “a fair level of risk -adjusted capitalization. Although the sale of certain subsidiaries that are in a net liabilities position might have a positive impact on risk-adjusted capitalization, A.M. Best considers that the final outcome is far from clear.”