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Bahrain reinsurer says funds on the way after accounts reveal $92M capital hole

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Bahrain reinsurer says funds on the way after accounts reveal $92M capital hole

Bahrain-based reinsurer Trust International Insurance Co. BSC has said replacement funds are on the way from its parent after its delayed 2017 financial statements revealed a $92.5 million hole in its solvency capital.

The 2017 finances, published in April 2019, show that the company had a negative solvency capital position of $38.6 million at the end of 2017, putting it $92.5 million below the $53.9 million solvency margin that the Central Bank of Bahrain requires it to hold. Auditor PwC said in the financial statements that the 2017 shortfall, among other items, resulted in a "material uncertainty" that "may cast significant doubt" on Trust Re's ability to continue as a going concern.

'Erroneously calculated'

The accounts also reveal that, following a restatement, the company had a similar-sized solvency capital shortfall of $91.5 million in 2016, with negative solvency capital of $40.6 million against a requirement of $50.8 million. Trust Re previously reported a positive capital position for 2016 of $343.8 million, giving it a $293 million surplus over its required solvency position. But it admitted in the 2017 accounts that it had "erroneously calculated" the figure, overstating it by $384.4 million.

The company also said it had not made it clear in its 2016 accounts that $357.5 million of its bank balances were restricted cash, as they were pledged against a loan granted to its parent company, Nest Investments (Holdings) Ltd., which is based on Jersey in the Channel Islands.

The equivalent figure in 2017 was $355 million. Trust Re said that after the end of 2017, the pledged deposits were liquidated to pay off the loan. Trust Re said in the accounts that the company is "assessing the legality" of the pledging process followed by the bank, and is "considering the engagement of a legal firm in Qatar to investigate the matter further."

Elsewhere in the accounts, Trust Re said $351 million of bank deposits pledged against a loan benefiting its parent had been liquidated after the end of 2017, which PwC said indicated "the continued solvency issue."

Money en route

However, Trust Re said in the accounts that Nest Investments plans to replace the liquidated deposits with a $353 million capital transfer. It said $130 million will be injected "latest by June 2019" and the remaining $223 million "in three years starting 2020." It added that its parent has "confirmed its intention to provide continuous financial support to the group and the company" to meet their obligations for at least 12 months from the date of the accounts.

Trust Re said in an emailed statement to S&P Global Market Intelligence that the company has positive shareholders' equity of $452.3 million and that its liquidity position is "very strong." It also said renewals for the 2019 financial year "have been well above budget."

It said its parent "has confirmed its commitment to inject the replacement funds in due time," which it said would "further strengthen the company's outlook." The company added that it "continues to be committed to its clients" and paid gross claims of $378 million in 2018, compared with $237 million in 2017.

Trust Re, through its subsidiary Trust Underwriting Ltd., provides capacity to Lloyd's of London syndicates. Trust Underwriting provided just over £27 million of capacity for the 2018 underwriting year up from £25.1 million in 2017, according to a Companies House filing. Trust Underwriting provided capacity to some of the biggest Lloyd's syndicates in 2018, including £2.74 million to Hiscox Ltd.'s Syndicate 33 and £3.48 million to Beazley PLC's Syndicate 623, the filing shows.

Trust Re itself says on its website that it has up to US$390 million of facultative underwriting capacity for marine project cargo risk; US$110 million of capacity for each of energy offshore, energy onshore and engineering; and US$95 million for each of property and alternative energy. It also has smaller levels of capacity for about two dozen other lines of business.

The company also has branch offices in Cyprus and Malaysia, and according to its 2017 annual report owns just under half of Oman Re, over which it exercises control through majority representation on the board of directors. It spent over $20 million in 2016 on acquiring shares in Oman Re.

Ratings impact

News of the capital hole closely follows the loss of Trust Re's financial strength ratings because of the delayed 2017 accounts. S&P Global Ratings suspended its A- financial strength rating for Trust Re on Aug. 10, 2018, and withdrew the rating entirely Nov. 12. A.M. Best downgraded Trust Re's financial strength rating to B++ from A- and suspended the ratings Oct. 15, and withdrew its ratings on the reinsurer Dec. 5.

Financial strength ratings are typically required to transact reinsurance business, and buyers generally require a financial strength rating of at least A-, particularly for longer-tail business such as casualty. Some reinsurance contracts contain downgrade clauses that annul the policy and call for a return of unearned premium if the reinsurer is downgraded below the required point. The Lloyd's Market Association, a trade body representing Lloyd's underwriters, publishes model downgrade clauses for members' use, for example.

In the directors' report accompanying the 2017 financial statements, Trust Re Chairman Kamel Abunahl noted that because of the loss of the ratings "we anticipate a drop in our premium in 2019." But he added: "With the determination of the team, we are confident that the lost business will be regained."

Alongside the delayed 2017 results, Trust Re also named a new CEO on April 17, appointing Talal Al Zain to the post. He is a former CEO of PineBridge Investments Middle East and also of Bahrain's sovereign wealth fund.