A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-" of Polskie Towarzystwo Reaskuracji S.A. (Polish Re) (Poland). The outlook for both ratings is stable. The rating affirmations reflect Polish Re's strong risk-adjusted capitalisation combined with the explicit support provided by its ultimate parent, Fairfax Financial Holdings Limited (Fairfax), in the form of a legal binding guarantee with an indefinite term. Offsetting rating factors is the uncertainty associated with Polish Re's ability to sustain a positive operating performance going forward following its historic volatility in underwriting and investment income and its business profile, which continues to be exposed to a small number of cedants. Following the capital injection by Fairfax in 2009, Polish Re's risk-adjusted capitalisation continues to be supported by a high capital base, albeit slightly offset by significant premium growth of 26% in 2011. In addition to the explicit parental guarantee, Fairfax continues to offer support and expertise with regards to underwriting and asset management. Hamblin Watsa, Fairfax's investment counsel, is responsible for Polish Re's investment management. Prospectively, stand-alone risk-adjusted capitalisation is expected to rely on improved profitability, profit retention and moderate growth. Polish Re's operating performance has been subject to considerable volatility for several years, partly underpinned by weak underwriting performance. In particular, 2011's combined ratio of 110.2% (2010: 104.6%) was affected by further loss exposure to the 2010 and 2011 weather-related events, reserve strengthening of the motor account and material losses from the crop portfolio. Polish Re commenced underwriting crop business in 2011. A.M. Best understands that Polish Re has taken steps to mitigate any further deterioration in underwriting performance; however, the impact of these actions has yet to materialise. Exceptional one-off drivers, largely due to the restructuring of Polish Re's investment portfolio to less volatile asset classes following its acquisition by Fairfax, have also contributed to volatility in overall earnings. In 2011, Polish Re's sale of its associate, Polskie Towarzystwo Ubezpieczen S.A. (PTU), contributed PLN 26.7 million to pre-tax profits of PLN 20.2 million. Although earnings derived from investments are expected to stabilise, contribution to overall company results is expected to be at a lower level than in the past. Polish Re remains exposed to a high concentration risk, despite the fact that the top 10 cedants' premium shares decreased from 73% to 63% between 2008 and 2011. Despite the sale of PTU, Polish Re's business relationships have been maintained and stand at approximately 30% of its total business for 2011. Positive rating actions are unlikely in the medium term. Negative rating actions are likely if there is a reduction in the level of support from Polish Re's parent, Fairfax. Risk-adjusted capitalisation falling below a level considered supportive of the company's current rating level would also put negative pressure on 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. Key criteria utilised include: “Risk Management and the Rating Process for Insurance Companies"; “Understanding BCAR for Property/Casualty Insurers"; “Natural Catastrophe Stress Test Methodology"; “Rating Members of Insurance Groups"; and “Evaluating Country Risk". Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure. A.M. Best Europe – Rating Services Limited is a subsidiary of A.M. Best Company. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.
