AM Best Affirms Credit Ratings of Mongolian National Reinsurance JSC

AM Best has affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” (Fair) of Mongolian National Reinsurance JSC (Mongolian Re) (Mongolia). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect Mongolian Re’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).

The assessment of Mongolian Re’s balance sheet strength at the very strong level is supported by its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR) at the strongest level. During the five-year period from 2018 to 2023, the company maintained a steadily growing adjusted capital and surplus with a compound annual growth rate (CAGR) of 3.4%. Nevertheless, Mongolian Re released a majority of its index-based livestock insurance (IBLI) reserves to finance significant claims arising from a natural catastrophic event during the winter of 2023-2024. AM Best expects the company will replenish its reserves to appropriate levels in a timely manner to support potential future IBLI claims. Other supporting factors include appropriate retrocession coverage for its catastrophe-prone lines with a sound credit quality reinsurance panel and a prudent investment strategy with its invested assets predominantly deposit in domestic systematically important banks. Notwithstanding, partially offsetting factors include its limited capital size and the inherent high investment risk in Mongolia’s domestic financial and exchange markets as compared to those of developed markets.

Mongolian Re’s operating performance is assessed as adequate. The company reported a robust CAGR of 30.9% in gross written premium (GWP) from 2018 to 2023, and delivered an average return-on-equity (ROE) of 6.2% over the same five-year period. This was mainly attributed to its robust and stable investment income from time deposits with its five-year average net investment yield at 11.0%. Conversely, Mongolian Re’s underwriting performance has been unfavourable, this is attributed to its volatile loss ratio from catastrophe losses and high management expense ratio due to its limited portfolio size. The company projects that it will gradually manage down the management expense ratio by expanding its premium scale and improving its operating efficiency over the short to intermediate term. The IBLI losses in 2024, will negatively impact the company’s bottom line; nonetheless, it is expected that Mongolian Re’s will recover from this loss with its robust investment income.

AM Best views the company’s business profile as limited, when compared to international non-life reinsurance peers. Mongolian Re is a wholly owned company of the Ministry of Finance of Mongolia (MoF), which was incorporated in 2014. With over 10% of Mongolia’s gross domestic product generated from an agriculture sector that is dominate by livestock per World Bank statistics, Mongolian Re plays a vital role in the domestic insurance market by acting as the sole operator of the IBLI pool, which supports social stability by providing nationwide insurance coverage to livestock, as well as safeguarding herder households’ welfare. The company further broadened its business scope in 2018, by including additional reinsurance lines of business such as property, motor, aviation, liability and personal accident. Its 2023, GWP was MNT 6.6 billion (USD 2.5 million). Mongolian Re has maintained a leading market position in the livestock and motor reinsurance segments. Other offsetting factors in the company’s business profile assessment include its concentration in its domestic market, as well as in products with high natural catastrophe risks.

The company’s ERM is assessed as appropriate. Mongolian Re has a defined risk appetite statement and periodically monitors key risk indicators to govern its key risks. The company performs catastrophe modelling on livestock mortality and submits its risk and solvency reports to the local insurance regulator, the Financial Regulatory Commission, on a regular basis. Its solvency ratio maintains a healthy buffer over the regulatory minimum level.

Negative rating actions could occur if Mongolian Re’s risk-adjusted capitalisation is significantly eroded by factors such as escalating underwriting or investment risk, excessive dividends, or sustained operating losses and is no longer supportive of the current assessment of balance sheet strength. Negative rating actions could also occur if the company fails to execute appropriate ERM control, for example, experiencing unexpected changes in business and investment strategies subject to undue influence from its shareholders, which leads to a materially negative impact to its credit fundamentals.

Albeit unlikely in the intermediate term, positive rating actions could occur if Mongolian Re demonstrates consistent improvement in its underwriting performance and sustains a decrease in its expense ratio, while maintaining robust high investment returns.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

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