AM Best has maintained the under review with developing implication status for the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of "bbb+" TM hf. (TM) (Iceland). Concurrently, AM Best has withdrawn these Credit Ratings (ratings) as the company has requested to no longer participate in AM Best’s interactive rating process.
The ratings reflect TM’s balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
TM’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), was assessed as strongest in 2019 and benefits from a successfully concluded share capital offering of ISK 3 billion at year-end 2019. The issued capital was used as part of the purchase price of ISK 9.6 billion for the acquisition of Lykill fjármögnun hf. (Lykill), an Icelandic lending and financing company, which was finalized in first-quarter 2020.
The company’s historical good level of earnings, as demonstrated by a five-year weighted average return on equity of 16% (2015-2019), have been supported predominantly by strong investment income. AM Best expects prospective operating performance to remain adequate, albeit subject to volatility as a result of the company’s exposure to the financial system risk of Iceland, and in the short term due to financial market volatility associated with the COVID-19 pandemic. In 2019, TM reported a weaker operating result relative to its performance record over the past five years (2015-2019). The company reported a net investment return including gains of 8.3% in 2019, compared with a five-year weighted average of 10.2%. The company also reported a weak technical result, with a combined ratio (as calculated by AM Best) of 103.4% in 2019, compared with the five-year weighted average of 102.5%; this was the result of a number of large claims in TM’s marine book reflecting large losses and reserve strengthening of past claims.
TM benefits from a good market position and expertise in the Icelandic commercial and public insurance sector. However, the company’s business profile assessment is somewhat constrained by its geographic concentration to Iceland’s relatively small insurance market.
The under review with developing implications status reflects the complex nature of TM’s recent acquisition of Lykill, with potential financial and operational benefits and disadvantages on rating fundamentals, which AM Best is not able to assess at this point.
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