S&P Affirms Tokio Millennium Re ‘AA-‘ Rating, Upgrades Outlook on Guarantee by Parent

Standard & Poor’s Ratings Services announced that it has revised its outlook on Tokio Millennium Re Ltd. (TMRe) to stable from negative, and affirmed its “AA-” financial strength rating, based on a guarantee of policyholders’ obligations from its parent company, Tokio Marine & Fire Insurance Co. Ltd., which S&P also rates as “AA-” with a stable outlook.

“The rating actions reflect the explicit support from TMRe’s parent following the issuance of a guarantee to TMRe’s policyholders’ obligations,” explained S&P credit analyst Taoufik Gharib. “The guarantee refers to all current and future reinsurance obligations of TMRe,” he added.

Gharib also noted: “This guarantee shall be terminated if TMRe receives a Standard & Poor’s financial strength rating of at least ‘AA-‘ without any support from its parent, or if an entity acquires control of TMRe and such entity is rated similar to that of the guarantor.” Control is defined as direct or indirect ownership of more than 50 percent of TMRe’s shares, which are entitled to vote.

S&P noted that under its current criteria, in the absence of an explicit support, ratings are capped on a strategically important subsidiary to at least one notch below the rating assigned to core group members. “Therefore, Tokio Marine provided a guarantee to its subsidiary, TMRe, to carry the same rating.”

Similarly the “stable outlook on TMRe reflects the stable outlook on its guarantor, Tokio Marine. The guarantee provided by Tokio Marine to TMRe signifies TMRe’s strategic importance to its parent. The company enjoys an extremely strong capital base thanks to multiple capital infusions from Tokio Marine coupled with a superior operating performance.”

“Partially offsetting these positive factors are TMRe’s narrow business focus and its short track record,” S&P continued. “TMRe should continue to deliver very strong operating results in 2004 (excluding a major catastrophe loss), with a low combined ratio and healthy ROR, because of its focused strategy on high layer property-catastrophe reinsurance. The company’s earnings are expected to fluctuate since TMRe is concentrated in the property-catastrophe line of business and would be hurt by severity (industry driven loss) rather than frequency of events.”

It also noted: “TMRe has been branching out into alternative risk transfer (ART) business to mitigate some of its concentration risk. Its ART business is expected to opportunistically grow through two to five transactions a year with a nominal overall effect on capital and earnings. Standard & Poor’s expects that TMRe’s capitalization will remain very strong in 2004. As TMRe’s risk profile grows, if necessary, Tokio Marine will contribute additional capital to keep the company’s exposure leverage within its underwriting guidelines.”