A.M. Best has placed the financial strength rating of A- (Excellent) of Gulf Reinsurance Limited (Gulf Re) (United Arab Emirates) under review with negative implications.

The under review with negative implications status reflects the weak technical performance of Gulf Re, according to the rating announcement from A.M. Best Europe – Rating Services Limited, which also cited the possibility of that the company will be able to finalize stronger alignment with its joint shareholder, Arch Capital Group Ltd (ACGL).

According to Arch Capital’s website, Gulf Reinsurance Ltd. (Gulf Re) was formed in 2008 as a 50/50 joint venture between Arch and Gulf Investment Corporation (GIC), established as a Gulf Cooperation Council (GCC) home-based reinsurer.

In the rating announcement, Best said that Gulf Re’s underwriting performance was marked by technical losses in four out of five full years of operation. The weak performance reflects high expense costs associated with the startup operation, combined with a higher than expected frequency of large losses in recent years, including two large claims in 2014. The claims in 2014 will mean a loss ratio above 100 for the year, and a drop in capital and surplus below the $200 million with which the company was founded.

In response to weakening technical performance, efforts are being made to produce a technical profit in 2015 and reduce underwriting volatility within Gulf Re’s profile, Best said, adding that further measures enhancing ACGL’s support to Gulf Re are being finalized.

These actions include: regulatory approval of board control, an updated stop-loss agreement attaching at a 65 loss ratio, effective from January 2015, Gulf Re’s participation in ACGL business through quota-share treaties and a capital injection to return shareholders’ equity above $200 million.

Best said that while positive rating actions are currently unlikely, negative rating pressure could result if A.M. Best’s view of the level of support provided by ACGL to Gulf Re changes or if Gulf Re is unable to demonstrate reduced earnings volatility within the technical account.

The action follows an accepted appeal by Gulf Re where new information was provided outlining enhanced strategic initiatives that are expected to be implemented by the company. The ratings will be reviewed again by the end of November 2014.

Source: A.M. Best