A.M. Best Europe - Rating Services Limited has downgraded the financial strength rating to B from B+ and issuer credit rating to "bb+" from "bbb-" of Lemma Insurance Company.

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

The rating actions reflect A.M. Best's concerns regarding the continuing deterioration of the Ukrainian economy as well as ongoing political uncertainty. A.M. Best also noted that Lemma's financial risk business has increased, which deepens the company's exposure to the domestic economy.

Lemma's profile and investment portfolio remain concentrated within the Ukraine, which has suffered in recent years as a result of the global financial crisis and political instability. The Company said it believes that the risks pertaining to operating within the Ukrainian market have increased and consequently could have a negative impact on the company's business profile and investments. Overall business continues to be volatile; in 2011, gross written premiums increased by 53 percent to UAH 598 million (USD 76 million) following two years of declining premiums. This increase included a 60 percent increase in financial risk business to UAH 94 million (USD 11 million), representing 7 percent of capital and surplus (2010: 5 percent). Although the performance of this business has improved since the financial crisis, it further exposes the company to the Ukrainian economy.

During 2011, Lemma's profit before tax increased to UAH 272 million (USD 33 million); the result was driven by an improved technical performance as well as an increase in the retention ratio. A.M. Best reported that it expects that the combined effect of an increase in business and a reduction in reinsurance coverage will expose Lemma to higher underwriting risk going forward.

In A.M. Best's view, Lemma's risk-adjusted capitalization is expected to slightly decline in 2012, as a result of increased net premium risk as the company expands its business. Although the impact of the loss of Zemelnyi Bank has been factored into A.M. Best's analysis, the Company noted that risk-adjusted capitalization for 2011 remains in line with Lemma's current ratings.

A.M. Best said that negative rating actions could result from a further deterioration in Ukraine's economy as well as a deterioration in underwriting performance and risk-adjusted capitalization.

Positive rating actions could result from an improvement in Lemma's country risk profile as well as an improvement in risk- adjusted capitalization.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides an explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process.

A.M. Best Europe - Rating Services Limited is a subsidiary of A.M. Best Company. A.M. Best Company is an insurance rating and information source.

More Information:

www.ambest.com

www.ambest.com/ratings/methodology.

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