The Best Re Saga and The Reinsureds’ Nightmares | The Winding Up, Sue and Counter-sue

Best Re (Labuan)…. What in it for the Malaysian reinsurance markets?

The enforcement of a judgement having been earlier obtained in the South Korean courts into Malaysian jurisdiction, the winding up order, the 23rd October 2013 granting of a stay of execution on the pretext some money was deposited into the courts as well as on the argument that Best Re had earlier on filed a suit against Hanwha Insurance in South Korean court back in February 2013 are all very interesting event, causing some ripples in the market especially among those carrying out reinsurance tasks.

There were much speculation and industry buzz over the last one week or so – much of this was in respect of outstanding claims and the potential exposures on the run-offs with Best Re. Some said the winding up was necessary as the parent company refused to pay Hanwha’s claims of which they viewed as very questionable. Just before this (High Court of Sabah & Sarawak in Labuan) winding order on the 11th October, Best Re had in fact settled off quite an amount of claims and other payment requisitions that ran into a couple of millions; at least those payments were made to the Malaysian markets. In short, Best Re has prioritised settlement to the Malaysian market since it was this very market that brought them to a prominent position in this part of the region.

It was refreshing to hear Best Re having resolved their application for a stay of execution of the winding up order. Surprising the winding up order was in respect of a sum of USD 6.5 million approximately, which I am not sure what was this sum all about. Nevertheless, the stay of execution granted by the Court of Appeal in Kuala Lumpur was not accorded with any timeframe; perhaps this may be issued together with the written judgement later on. If this stay is tied to the lawsuit that Best Re has had filed against Hanwha in Pusan, South Korea then it should be fresh air for both Best Re and its cedants, whether Malaysian or those over in other parts of South East Asia.

The Lawsuit Against Hanwha

[Not sure if the following pointers are hearsay…. You decide….]

After losing an earlier appeal in South Korea filed by Hanwha last year, Best Re has filed a countersuit arguing along the following main points:

(a) Hanwha has not shown that there are valid reinsurance contracts. Best Re has only provided reinsurance quotations to Hanwha, therefore there were never any reinsurance contracts in the absence of any signing subsequent to the quotations having released,

(b) Best Re felt, even if there existed some reinsurance contracts, such may had been done without disclosing vital underwriting information and contracting on bad faith on the part of Hanwha,

(c) Even if Hanwha managed to convince the courts that there were indeed contracts by following up actions or default on the part of Best Re, those contracts should be deemed as void as Hanwha failed to provide documentary proof of claims and supporting information in regard to the primary contracts with their policyholders including SK Telecom. From this perspective there were no proper reinsurance claims filed but Hanwha proceeded to ignore those documentary request and merely providing a bordereaux requesting for payment, and

(d) Hanwha had constructively submitted the payment of premium and claims payment requests resulting in Best Re personnel unknowingly accepted the premium payment and at the same time making the claim payment to Hanwha.

This lawsuit will probably takes some 12 months to 24 months for a decision. I am not sure how the above pointers will change the understanding of the judges since those facts may had already been tendered in the earlier case where Hanwha filed the legal suit, which resulted in a Court of Appeal decision in favour of Hanwha. So the millions dollar question; will this lawsuit materialise….

Read our disclaimer before proceeding….

The write-up should not be construed as giving opinions, assessment of risks or advice of any kind but more for reading pleasure where readers should then decide if those information provided are true or hearsay. The content of this write-up is made available without warranty of any kind and without any other assurance whatsoever as to its completeness or accuracy. The writer or blog-owner does not accept any liability to any recipient or third party as a result of any reliance placed by such party on this write-up. Any decision to rely on the contents of this is entirely the responsibility of the recipient. The recipient acknowledges that this write-up does not replace the need for the recipient to undertake its own assessment or seek independent and/or specialist risk assessment and/or other relevant advice The contents of this report are based on publically available information, opinions and/or third party sources in respect of which our blogsite has no control and such information has not been verified by the blog-owner or blogger. The recipient acknowledges that the facts of the case may change over time, which thus differ from actual incidences, events or losses.

The Best Re’s Statement from afar….

Best Re said in the statement on Tuesday that it retains the support of the Labuan Financial Services Authority who have not objected to the appeal process. The parent company, Islamic Arab Insurance Company (Salama) also continues to affirm its willingness to provide capital support to meet our operational needs. Best Re (L) Limited remains committed to its clients and the reinsurance markets it operates in and we are undertaking all necessary steps to obtain a stay of the winding up order with immediate effect. The statement concluded, “….we continue to pursue our lawsuit against Hanwha in the Korean courts.”

Standard & Poor’s Comments

Meanwhile S & P had immediately commented on the development….

Malaysia-Based BEST RE Reinsurance Companies Downgraded To ‘B+’ And Placed On CreditWatch Developing

Overview

· BEST RE’s parent, Salama/Islamic Arab Insurance Co., has not provided the capital increase we expected when we assessed BEST RE’s strategic importance to its parent previously. We are therefore revising our view of BEST RE’s group status to nonstrategic and have removed all parental support from our ratings on BEST RE.

· At the same time, BEST RE has successfully appealed against a winding-up order previously issued by a Malaysia-based court. Although BEST RE can now resume normal business activity, we believe BEST RE’s competitive position has been further weakened by the uncertainties surrounding the now-lifted winding-up order.

· We have therefore lowered the ratings on BEST RE to ‘B+’ to reflect both its lower stand-alone credit profile and our view of its group status as nonstrategic.

· We have also placed the ratings on CreditWatch developing to reflect the still-uncertain consequences of the previous winding-up order and, separately, of BEST RE’s ongoing liabilities, in particular those related to a dispute with a South Korean insurance cedant, Hanwha.

Rating Action

On Oct. 22, 2013, Standard & Poor’s Ratings Services lowered to ‘B+’ from ‘BBB’ its counterparty credit and financial strength ratings on the Malaysia-based reinsurers BEST RE (L) Ltd. and BEST RE Family (L) Ltd. (collectively, BEST RE or the subgroup). The ratings have been placed on CreditWatch with developing implications. They had previously been placed on CreditWatch negative on Jan. 25, 2013.

Rationale

Our view of BEST RE’s group status has changed to nonstrategic from strategic, and consequently we no longer factor any parental support into the ratings on the subgroup. Revising our stand-alone credit profile (SACP) for BEST RE to ‘b+’ from ‘bb+’ has compounded the effect, triggering a five-notch downgrade of BEST RE. The ‘B+’ ratings on BEST RE reflect its ‘b+’ SACP and anchor; other factors, such as ERM, management, and liquidity, do not modify the outcome.

The change in BEST RE’s group status indicates that BEST RE’s parent, Salama/Islamic Arab Insurance Co. (P.S.C.) (Salama), has not yet injected new capital into BEST RE, contrary to our expectations. This suggests to us that BEST RE may be less strategically important to its parent than we had believed. Nevertheless, Salama still maintains that it may increase BEST RE’s capital in due course, and there are indications that it is indirectly supporting the subgroup, to some extent.

The downward revision of the SACP was triggered by a number of issues. Depending on their outcome, these issues could further weaken BEST RE or could, in due course, permit an improvement in its currently uncertain commercial and financial prospects.

The most immediate issue for BEST RE management until today was its appeal against a winding-up order issued against their subgroup’s principal operating company, BEST RE (L) Ltd. Now that the Labuan-based High Court of Sabah and Sarawak has accepted the appeal and the winding-up order has been lifted, the reinsurer can return to normal operations.

Hanwha General Insurance Co. (Hanwha) of South Korea petitioned for the winding-up order, claiming that BEST RE had failed to honour certain of the insurer’s claims in respect of "loss-of-handset" reinsurance cover. BEST RE disputes this liability, and has, in turn, taken out counter-proceedings against Hanwha in the South Korean courts.

BEST RE has not set aside any specific reserves for the disputed loss-of-handset claims being made by Hanwha. We believe that BEST RE, with some support from the resources of the consolidated Salama group, has the ability to settle potential liabilities that may result from any final court decision that confirms Hanwha’s claim. However, we do not expect the dispute to be resolved in the near term. Meanwhile, in our view, the reputational and other consequences of the Hanwha claim could be almost as damaging to BEST RE’s confidence-sensitive operations as any large financial loss that could ultimately result from Hanwha’s claim against BEST RE.

These current legal issues apart, the original issue affecting BEST RE–notably that of its outstanding claims liabilities–remains fundamental. Two sets of reinsurance liabilities are of concern: those relating to the Thai floods of 2011, and, as discussed, the potential liabilities relating to Hanwha’s loss-of-handset claims against BEST RE (L).

In respect of the Thai floods, BEST RE calculates that its "worst case" gross liability stands at about $160 million. The net amount would be substantially reduced by recoveries from retrocessionnaires. However, the exact level of such recoveries is not entirely clear. In our opinion, the consolidated reserves and resources of BEST RE and Salama are likely to prove sufficient to address most of the probable outcomes. However, as the degree of parental support is uncertain, we felt it appropriate to stress the reinsurer’s stand-alone capital position in respect of the floods in our capital modeling of BEST RE. Thus, our model assesses BEST RE’s position if it does not receive the full expected level of recoveries from retrocessionnaires, for whatever reason.

We believe that our assessment of capital adequacy at BEST RE is no longer particularly sensitive to any realistic degree of increase in the final level of BEST RE’s Thai flood liabilities. By contrast, any crystallization of the disputed liability toward Hanwha would have to be reserved by a transfer out of the reinsurer’s shareholders’ equity.

Our ‘b+’ SACP is based on our assessment of BEST RE’s vulnerable business risk profile and its weak financial risk profile. The business risk position, in turn, reflects our combined view of moderate industry and country risk and a weak overall competitive position. We assess competitive position as weak because we see BEST RE, as a reinsurer, as more sensitive to franchise-related matters than primary insurers. In our opinion, recent developments have likely harmed its ability to retain and source new profitable business.

Our view of BEST RE’s financial risk profile principally reflects our opinion that its financial flexibility is currently less than adequate, and that its risk position is very high in light of its high dependence on recoveries from retrocessionnaires, and its potentially significant liability relative to the disputed claims being made against it by Hanwha. However, capital and earnings–before any specific deduction for the disputed South Korean liabilities–is moderately strong. The subgroup has now substantially reduced the risk level of its investment strategies, and had already significantly reduced its levels of underwriting activity, relative to unadjusted shareholders’ equity of approximately $90 million at BEST RE (L) Ltd., and around $9 million at BEST RE Family (L) Ltd.

CreditWatch

The CreditWatch placement reflects our view of the various near- and medium-term uncertainties currently affecting BEST RE.

On the downside, BEST RE continues to be affected by reputational and consequent commercial difficulties relating to its exposure to and handling of Thai flood losses, and to the considerable ongoing uncertainty that surrounds the potential financial implications of the legal dispute with Hanwha. If BEST RE were to lose the appeal, we would expect BEST RE to disburse the disputed

amount to prevent a further winding-up order being enforced. Should this prove incorrect, and BEST RE was indeed wound-up, then the rating would be lowered to ‘D’.

On the upside, there are some grounds to believe that, despite recent commercial and financial difficulties, BEST RE’s competitive position may prove more resilient than expected. That said, its medium-term commercial prospects are likely to remain, at best, less than adequate, in our view. It is also possible that BEST RE’s parent, Salama, may yet carry out its previously declared intention of increasing the capital of BEST RE, in addition to providing other forms of implicit support.

If BEST RE’s commercial position stabilizes and if parental support takes a more tangible form, we believe that BEST RE’s competitive position could improve beyond our current assessment of weak. If our immediate concerns are alleviated during the CreditWatch period, we could raise the ratings on BEST RE by one or possibly two notches. However, if capital continues to decline as new liabilities are recognized and reserved, or if time-sensitive payment obligations are not met, the ratings could fall further.

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