The AM Best insurance rating company has affirmed the B++ financial strength rating of BEST Reinsurance, Tunisia. A negative outlook has been applied. The rating is based upon BEST Re's very good capitalization and excellent but prospectively deteriorating operating performance and good spread of business.
Offsetting these positive factors is the limited market profile, poor financial flexibility and potential default on reinsurance protection. Very good capitalization--on a risk-adjusted basis, the company's capital position is supportive of the current rating.
During 2002, paid up capital increased by 40 percent to $42 million through a $3.6 million capital injection by two existing shareholders, a $4.3 million reinvestment of dividends and a $4.1 million incorporation of reserves. AM Best believes that further capital is required to support prospective premium growth in 2003.
The suspension of the initial public offering (IPO) in 2001 highlighted the difficulties in raising sufficient capital to improve financial flexibility. BEST Re's management is actively seeking additional private investors and, until this is achieved, financial flexibility will remain restricted.
Prospective deterioration in operating performance is likely to be carried through to 2002 as the company benefits from improved underlying rates on its proportional reinsurance underwriting. The company has recorded a five-year average return on equity earnings of 10.6 percent.
However, AM Best believes that continued improvements in underlying rates will be offset in 2003 by the projected increase in retrocession costs, leading to flat earnings. Combined with a higher level of capital and surplus in 2003, this will drive the deterioration in prospective return on equity to between 5 - 7.5 percent.
Premium income is well spread, both geographically and by class. The company has main branch offices in Tunis, Beirut and Kuala Lumpur through which it accesses the major markets of the Maghreb region, Middle East and Asia. Through actively developing joint ventures with other reinsurers and financial services companies, the company is also expanding its product range.
Despite this, Best Re's market profile in each of its chosen markets remains limited by its relatively small size. By concentrating on specialist classes such as takaful insurance, market profile should be strengthened.
However, BEST Re will remain small relative to its competitors, restricting access to higher quality business. A significant proportion of participants on BEST Re's retrocession program are either not rated or are rated very good and lower. This is particularly the case on lower layers of the catastrophe reinsurance program. Although there are no significant outstanding recoveries or litigation with reinsurers, the potential for bad debt places strong negative pressure upon the rating. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
