LONDON--(BUSINESS WIRE)--A.M. Best has revised the outlook to stable from positive and affirmed the financial strength rating of B+ (Good) and the issuer credit rating of “bbb-” of Unity Reinsurance Company, Ltd. (Unity Re) (Russia).
The revision of the outlook to stable reflects it diminished, albeit supportive, risk-adjusted capitalisation, weakened technical performance and increased investment risk exposure due to the reduced credit quality of its fixed-income portfolio. Partly offsetting these factors is Unity Re’s solid market profile in the Russian reinsurance sector.
Unity Re’s risk-adjusted capitalisation deteriorated in 2013, due to a rise in capital requirements to support its underwriting exposure. The company’s net written premium (NWP) grew by 69% to RUB 1.6 billion (approximately USD 44.6 million), mainly due to income sourced from the commercial property and construction portfolio acquired through a quota share arrangement with its sister company, RESO-Garantia, a leading insurer in Russia. This account represented 57% of NWP in 2013. At the same time, reserves were negatively affected by Unity Re’s exposure to the high incidence of large losses in the year and the materially weaker than expected performance of the acquired business. Although the intra-group quota share agreement was not renewed for 2014, the subsequent strengthening of risk-adjusted capitalisation is expected to be constrained by the company’s high dividend payout ratio.
Unity Re’s investment risk increased in 2013, with 77% of fixed-income assets held in non-investment grade securities, compared with 58% in the previous year. Despite the resulting pressures on the company’s capital adequacy, as measured by A.M. Best, Unity Re’s risk-adjusted capitalisation is expected to remain supportive of its current ratings.
Unity Re’s combined ratio rose to 96.6% in 2013 (2012: 87.7%), primarily driven by the high claims activity of the domestic market. Going forward, underwriting results are likely to be affected by soft pricing conditions and lower demand arising from the weakened macroeconomic environment.
Unity Re maintains a good business profile in Russia and the Commonwealth of Independent States, writing mainly short-tailed risks. Although some growth is expected from international markets, the company’s expansion strategy remains focused within its domestic and neighbouring markets.
Positive rating actions are unlikely in the near term. Negative rating actions could occur if there is further weakening of Unity Re’s operating results or a decline in the company's risk-adjusted capitalisation to a level outside of A.M. Best expectations. Additionally, deterioration in Unity Re’s rating fundamentals due to the weakened macroeconomic conditions of Russia could negatively affect its ratings.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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