Ratings Recap: PartnerRe, Oriental

Fitch Ratings has affirmed the ratings of PartnerRe Ltd. with a negative outlook. The affirmation follows an “updated review of PartnerRe’s financial performance, capital position, liquidity, and investment exposures,” said Fitch. The rationale for the ratings includes the company’s” strong competitive position, solid long-term operating profitability, and high-quality balance sheet.” As offsetting factors, Fitch cited PartnerRe’s “relatively higher exposure to low-frequency but high-severity events – an exposure highlighted by the first-half 2010 Chilean earthquake and European windstorm losses and material hurricane losses in 2008. PartnerRe’s ratings also reflect Fitch’s belief that the company’s risk management capabilities will enable it to maintain its strong and liquid balance sheet during periods of heightened capital market volatility, such as those experienced in 2008, when PartnerRe experienced relatively little capital deterioration despite very difficult capital market conditions and significant catastrophe-related losses. In addition Fitch noted that PartnerRe’s investment portfolio as high quality and liquid. The company’s investment portfolio and capitalization remain supportive of PartnerRe’s current ratings under stress test scenarios where Fitch assumes credit-related losses on the company’s fixed-income portfolio and asset valuation losses on the company’s very modest equity portfolio.” In explaining the negative outlook for the ratings, Fitch cited the “uncertainty over whether PartnerRe’s returns and stability of returns, over an extended period will remain commensurate with those required at the ‘AA’ rating level following the company’s late 2009 acquisition of Paris Re. Fitch revised PartnerRe’s Outlook to Negative from Stable when that acquisition was completed and believes that it is too early to assess the transaction’s ultimate impact on PartnerRe.” Fitch added that the negative outlook also “reflects ongoing and expected near-term future industry-wide pressure on premium rates that Fitch believes is currently adversely impacting PartnerRe’s (and other reinsurers’) underwriting margins. If PartnerRe demonstrates the ability to generate adequate returns over the next 12-18 months while retaining solid risk-adjusted capitalization levels, Fitch will likely revise PartnerRe’s Outlook to Stable. Otherwise, Fitch believes that the company’s ratings would likely be downgraded by one notch. Factors that Fitch would view as supportive of PartnerRe’s current ratings include the following when viewed on a run-rate or multi-year rolling average basis:
–Calendar year combined ratios in the mid 90 percent, which would be largely consistent with PartnerRe’s average result of 91 percent from 2005 through 2009;
–Operating earnings-based returns on average total capital that approximate 10 percent, which is consistent with PartnerRe’s 2005-2009 average of 10.6 percent; –Profitable underwriting results evidenced by combined ratios, excluding the impact of prior-accident-year reserve development of less than 100 percent. Fitch views this as especially important in the current low interest rate environment;
–Operating-earnings-based interest and interest and preferred dividend coverage ratios that approximate 12 times (x) and 7x, respectively versus PartnerRe’s 2005-2009 average of 16x and 9x, respectively, which was achieved when the company’s financial leverage was near historical lows.”
Fitch also noted that “PartnerRe’s operating performance during the first six months of 2010 was impacted by approximately $315 million of catastrophe losses (net of retrocession and reinstatement premiums) from the Chilean earthquake and Winter Storm Xynthia, which combined to add roughly 16 combined ratio points to PartnerRe’s first-half 2010 combined ratio of 103.8 percent that was among the highest reported by Bermuda (re)insurers during that time period. Importantly, Fitch does not expect PartnerRe’s underwriting results over this admittedly brief time period to be representative of the company’s future performance. Excluding catastrophe losses and favorable prior period development, Fitch estimates that PartnerRe’s ‘run rate’ combined ratio was roughly 99 percent for the first half of 2010, versus approximately 96 percent and 97 percent for full years 2009 and 2008, respectively. Fitch attributes this modest deterioration to the softening pricing environment rather than relaxed underwriting standards over the same time period.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B++’ (Good) and the issuer credit rating (ICR) of “bbb+” of India’s The Oriental Insurance Company Limited. The outlook for the FSR is stable, and the outlook for the ICR is negative. The ratings reflect “Oriental’s strong presence in the Indian insurance market, its strengthened underwriting processes and improved capitalization level,” said Best. It also explained that “as a public sector undertaking, Oriental has a strong presence in the Indian insurance market. Amidst strong competition, the company has generated premium growth far in excess of the market average growth. In terms of direct premiums written, Oriental has maintained its position as one of the top four general insurers, with a market share of 13.6 percent in fiscal year 2009-10.” However, Best also indicated that it “remains cautious of the sustainability and viability of the company’s rapid premium growth.” On a positive note, Best explained that “Oriental has continually taken measures to strengthen its underwriting procedures, and this process has been enhanced with changes in regulations whereby the company is able to vary deductibles and write policies with clauses in addition to the current prescribed wording.” In the future Best said that with the maturing of the competition in the market, it “anticipates that Oriental will move toward a more risk-based pricing approach. Oriental’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), strengthened in fiscal year 2009-10 primarily as a result of the company’s surging stock index.” As offsetting factors, Best cited the company’s “exposure to investment risk, poor underwriting results and intense market competition. As of fiscal year 2009-10, Oriental invested over 60 percent of its total investments (market value basis) in the Indian equity market. This high weighting in equities heavily impacts the company’s risk-based capitalization and was the reason for the steep decline of its risk-adjusted capitalization in fiscal year 2008-09.” In addition Best pointed out that Oriental’s “underwriting performance, with a combined ratio of 125.9 percent in fiscal year 2009-10, is considered high. Expenses and losses are not expected to decline drastically in the short term, and hence, the company’s overall profitability continues to be dependent on investment income. The influx of competitors since the liberalization of the Indian insurance market in 1999 has increasingly exerted pressure on the market share of public sector insurers. Premium rates in certain lines have seen corrections; however, price continues to be the determining factor in competing, as witnessed by the ever high loss ratios.”