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FOR IMMEDIATE RELEASE
LONDON - NOVEMBER 28, 2014 09:45 AM (EST)
A.M. Best has commented that the under review status with negative implications of the financial strength rating of A- (Excellent) and the issuer credit rating of "a-" of Gulf Reinsurance Limited (Gulf Re) (United Arab Emirates) has been extended pending further review of new strategic initiatives initiated by Gulf Re's co-founder Arch Capital Group Ltd (Arch). Gulf Re's ratings currently benefit from the support of Arch, which has established majority board control during the third quarter of 2014. Arch provides support to Gulf Re through risk management services, underwriting guidance and strategic reviews of its operations.
Despite Gulf Re maintaining very strong risk-adjusted capitalisation, the ratings are under negative pressure, resulting from exceptionally weak technical performance and delay in the implementation of key strategic initiatives. Arch is now considering stronger measures to reinforce its commitment to Gulf Re. The following initiatives are expected to be implemented by Arch over the short term, subject to regulatory approval: acquiring Gulf Investment Corporation's 50% shareholding to establish full control and ownership of Gulf Re's holding company (Gulf Re Holdings Limited), a 90% whole account quota share retrocession arrangement of net liabilities, effective 1 October 2014 and a loss portfolio transfer. The implementation of these initiatives may result in a positive re-assessment of Arch's support for Gulf Re.
Gulf Re's underwriting performance remains under considerable strain, with technical losses in five out of its six years of operation. The company's combined ratio increased significantly during the third quarter of 2014 and A.M Best expects full-year performance to be materially weaker than its reported 2013 combined ratio of 120%. A.M. Best expects a net loss of USD 20-30 million for full-year 2014, which would result in Gulf Re's capital and surplus falling below the USD 200 million with which it was founded.
The primary driver of the weak performance in recent years is a higher-than-expected frequency of large losses. Gulf Re has introduced greater volatility into its profile during 2014 following a change in its retention, doubling its net exposure per risk. The non-implementation of the planned stop-loss arrangement has exacerbated this effect.
Gulf Re continues to maintain a very strong risk-adjusted capital position, resulting from its low underwriting leverage and conservative investment profile.
A.M. Best will resolve the under review status once the transaction between Arch and Gulf Investment Corporation is finalised.
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.
Key insurance criteria reports utilised:
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This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best's Ratings & Criteria Center .
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