The ratings of Polish Re reflect 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. The rating affirmations also consider Polish Re's volatile risk-adjusted capitalisation, track record of weak, albeit improving, underwriting performance and uncertain business profile.
In addition to the explicit parental guarantee, Fairfax continues to provide technical and capital support as well as other forms of assistance to Polish Re, which includes reinsurance protection and investment management services. In January 2015, Polish Re participated in Fairfax's acquisition of the branch operations of QBE Insurance Group Limited (QBE) in the Czech Republic, Hungary and Slovakia. As part of the transaction, the existing liabilities and associated assets in the amount of PLN 149 million (EUR 35 million) were ceded to Polish Re via a loss portfolio transfer. Additionally, Polish Re will provide a 100% quota share protection for new business underwritten by the QBE branches. This quota share will remain until Fairfax establishes a new direct insurance entity to underwrite risks in the region, which is expected to be completed by the fourth quarter of 2015.
Business derived from the acquired operations amounted to approximately EUR 36 million of gross written premium (GWP) in 2014. As a result of this transaction, Polish Re's risk-adjusted capitalisation is expected to be temporarily weakened in 2015, owing to the higher capital requirements to support the rise in reserve and premium risk exposure. However, capital buffers should be replenished in the following year, due the cancellation of the quota share arrangement in the last quarter of 2015.
In 2014, Polish Re produced its first underwriting profit since 2009, reporting a technical result of PLN 3.0 million (2013: technical loss of PLN 33 million), driven primarily by its withdrawal from the motor third party liability segment (previously representing approximately 50% of GWP). Although A.M. Best expects lower claims activity arising from the company's reinsurance portfolio, technical results are likely to be affected by expense pressures due to the loss of substantial premium volumes.
Polish Re faces material challenges in improving its competitive position in the near term owing to its limited profile in the highly competitive international reinsurance markets. As a result, growth is likely to be constrained by the company's ability to expand its portfolio profitably. Read the full story