LONDON, 7 June 2013—A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of B+ (Good) and issuer credit rating of “bbb-” of Bosna Reosiguranje d.d. Sarajevo (Bosna Re) (Bosnia and Herzegovina [BH]). The outlook for both ratings remains stable.
The ratings reflect Bosna Re’s dominant position within its domestic market, BH, consistently positive operating results and adequate risk-adjusted capitalisation. Offsetting factors include its relatively high exposure to illiquid equity investments and high concentration risk to cedants. The ratings also consider Bosna Re’s exposure to country risk associated with its operation in BH.
Bosna Re remains the dominant reinsurer in BH, with a market share of around 85%. The company’s strong competitive position is protected by the high barriers to entry into the BH market through regulatory constraints and associated costs of operating in a small market, and its long-standing relationship with its cedants, some of which are also its shareholders. Given the size of the BH market, Bosna Re is reliant on a small number of cedants for business volume. In 2012, 55% of gross written premiums (GWP) were derived from its top three shareholders. A.M. Best understands that Bosna Re will focus on maintaining its competitive position in its domestic market in the medium term. This is in contrast to its previous strategy, which was centred on the expansion into former Yugoslavian states. Domestic business accounts for approximately 80% of GWP. A.M. Best recognises Bosna Re’s exposure to the weakened economic and political conditions in BH, but believes that the company’s dominant profile will provide a safeguard against any adverse effects on its solid rating fundamentals.
Bosna Re’s earnings profile remains stable. Operating results are supported by consistently positive technical results (since 2007), with a five-year average combined ratio of 94%, and solid investment earnings.
A.M. Best expects Bosna Re’s earnings to remain at a similar profitable level, due to stability in its business mix and the limited opportunities available to support growth in scale of its operations within its domestic market.
Bosna Re’s risk-adjusted capitalisation is marginal. A.M. Best notes that the Best’s Capital Adequacy Ratio (BCAR) analysis considers the application of higher asset risk charges to Bosna Re’s investment portfolio. These asset risk charges are higher in relation to charges applied to investment portfolios of other insurers operating in more stable markets. The company’s portfolio largely consists of investments derived from BH and is therefore subjected to the highest asset charges in the BCAR model. Additionally, Bosna Re’s risk-adjusted capital position remains constrained by its investments in associates, which represents 44% of consolidated shareholders’ funds at year-end 2012. Despite the above factors, risk-adjusted capitalisation is expected to remain supportive of Bosna Re’s rating levels, owing to the modest growth prospects in the next two to three years, given the depressed economic environment in BH.
Positive rating actions are unlikely given the current weak economic conditions in BH. Negative rating actions could occur if there is deterioration in the quality of investments or in Bosna Re’s financial profile, resulting in deterioration in risk-adjusted capitalisation.
Additionally, further deterioration in country risk factors associated with the company’s operations in BH could negatively affect Bosna Re’s 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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