Lemma sister company rating downgraded

Lemma Insurance Company’s issuer credit rating has been downgraded to ‘BB’ from ‘BB+’ by AM Best Europe Ratings Services over reputational risk concerns about its sister company Lemma Europe Insurance Company which went bust last month.

But the Ukrainian sister company of troubled Gibraltar insurer Lemma Europe had its financial strength rating affirmed at B (fair).

The outlook for both ratings has been revised to negative from stable.

Lemma Europe went into liquidation last month and froze claims payments after sister company Joint Stock Insurance Company Lemma, one of the Ukraine’s largest non-life insurers, failed to make payments under a reinsurance agreement.

The rating actions reflects Best’s concerns following the announcement of Lemma Europe’s liquidation.

Best said: “Liquidation and legal proceedings are ongoing, but Lemma may potentially face a claim of approximately €10m (£8m) for claims underwritten by Lemma Europe in 2009/2010 and reinsured by Lemma.

“The issues surrounding the dispute have highlighted problems with Lemma’s corporate governance and controls as well as the complexity and transparency of the ownership structure.

“AM Best believes that Lemma’s risk-adjusted capitalisation remains in line with its ratings and is sufficient to absorb the cost of any contingent liability arising from the dispute with Lemma Europe. But the reputational risk of Lemma Europe’s liquidation is likely to negatively impact the business profile of Lemma.”

Best said that Lemma’s ratings may be upgraded as a result of the simplification of Lemma’s group structure and an improvement in its enterprise risk management.

But it warned that it could also be downgraded as a result of further control failings, and a deterioration in the company’s underwriting performance and risk-adjusted capitalisation.