Fitch affirms insurer Commercial Value

Fitch Ratings yesterday affirmed Commercial Value AAE’s (CV) Insurer Financial Strength (IFS) rating at BB- (BB minus) with Stable Outlook following the announcement on December 28, 2007 of the pending acquisition of Proton Insurance for an expected -17.8 million. CV has agreed to buy Proton Insurance from Proton Bank with the deal expected to be finalized in February. As part of the deal, CV will benefit from a 20-year bancassurance distribution deal through Proton Bank’s 24 branches. The deal will be financed through a loan provided by Proton Bank. In the absence of new shareholder capital to finance this acquisition, CV’s capital (as calculated by Fitch) will decrease as a result of this transaction. Fitch, however, believes that this deterioration of capital is offset by the positive aspects of the deal, such as the distribution arrangement and the increase in market share. In the recent past, CV had written increased volumes of general insurance business (around a 34 percent increase in gross premiums written in 2007) without an equivalent increase in the company’s capital to finance this growth. Given that the distribution deal is expected to further increase CV’s premium volumes, Fitch highlights the risk that rapid growth without capital injections will further reduce capital adequacy and could introduce negative pressures on the rating in the future. Fitch believes that such a transaction carries execution risks, though it recognizes that the bancassurance distribution deal is already in place and has a track record of several years. CV has recently acquired a license to open a branch in Cyprus. Fitch views positively CV’s expansion into the Cypriot market, but notes that there will be execution risks at least in the short term. Fitch also views positively CV’s balanced exposure to life and non-life risks, as well as the diversification value of the company’s relative strength in the marine business, as this line is relatively uncorrelated to the rest of the non-life book.

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