Ratings Roundup: Syndicate 0780, Munich Re Italy, NIPPONKOA, Exchange, Aerial Re, Colonial, Bay Haven

Standard & Poor’s Ratings Services has revised its outlook on the Lloyd’s Syndicate Assessment (LSA) on Advent Underwriting – Syndicate 0780 to stable from positive. S&P also affirmed the assessment of ‘2’ (high dependency). “The outlook revision reflects the recent announcement of material deterioration in estimated losses arising from Hurricane Ike, which will in turn lead to a loss on both an underwriting and net income level for the full year 2008,” explained credit analyst Eoin Naughton. S&P noted that “during January 2009, the syndicate reported that claims relating to Hurricane Ike had increased to £42 million from an initial estimate of £15 million. The size of the increase in loss estimates raises concerns that the reduction in risk retained by the syndicate since the large losses experienced in 2005, upon which positive movement in the assessment is dependent, is yet to have a beneficial impact on the reduction in volatility of earnings. In addition, the size of the loss with respect to the syndicate’s risk tolerance and modeled losses and the failure of the reinsurance program to mitigate the loss to a greater extent raises concerns regarding the syndicate’s catastrophe risk exposure management. Naughton added: “We expect that the syndicate will maintain strong capitalization and an adequate competitive position, but with below-average operating performance.” In addition S&P said the “outlook would be revised to negative if the syndicate continues to suffer outsized losses relative to peers, or if the losses on the 2008 hurricanes were to continue to deteriorate to such an extent that this causes a material deterioration in capital adequacy. Positive movement in the assessment is not anticipated in the near term.”

Standard & Poor’s Ratings Services has affirmed its ‘AA-‘ counterparty credit and insurer financial strength ratings on Italy-based reinsurer Muenchener Rueck Italia SpA (Munich Re Italy), a core operating subsidiary of German global reinsurer Munich Reinsurance Co. (Munich Re; AA-/Stable/–). The ratings were subsequently withdrawn at the company’s request. S&P said the “withdrawal follows the completion of the merger of Munich Re Italy with its parent, Munich Re. This move is in line with Munich Re’s strategic goal of enhancing capital efficiency. The ratings on Munich Re reflect the group’s very strong competitive position, very strong capitalization, very strong financial flexibility, and strong enterprise risk management.” A.M. Best Co., which had rated the financial strength of the subsidiary as ‘A+’ (Superior) and issuer credit rating of “aa-“, has also withdrawn its ratings for the same reason. In addition Best noted: “The group is aiming for a lean but sufficient capitalization of its operational units and a very strong capital position for the parent. As a result of this merger, Munich Re believes that fungibility and efficiency of the group’s deployment of capital will increase.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Hong Kong-based NIPPONKOA Insurance Company (Asia) Limited with stable outlooks. “The ratings reflect NIPPONKOA Asia’s favorable operating performance, strong risk-adjusted capitalization and sound liquidity.” Best also said it “acknowledges the company’s profile as a subsidiary of NIPPONKOA Insurance Co., Ltd. (NIPPONKOA Insurance), having parental support through its distribution network and long-term business relationships with its Japanese client base in the East Asia regions.” In addition Best said: “NIPPONKOA Asia has a strong risk-adjusted capitalization supported by consistent profitability and conservative underwriting leverage. The company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is likely to remain solid, as a result of a high level of earnings retention and its projected premium growth over the next two years.”

A.M. Best Co. has downgraded the financial strength rating to ‘B’ (Fair) from ‘B++’ (Good) and the issuer credit rating to “bb” from “bbb+” of UK-based The Exchange Insurance Company Limited, and has kept the ratings under review; however Best said it has revised the implications of the review to developing from negative. “The ratings of Exchange have been downgraded following the failure to complete the sale of a 50 percent stake in the company to an external investor,” Best explained. “The revised ratings reflect weakening in Exchange’s risk-adjusted capitalization due to the recent decline in the UK property market. This has led to increased claims volume from the exchange bonds issued by the company, delays in receiving recoveries from property purchasers who do not complete transactions and higher than expected write-offs of these recoveries. Exchange has entered into negotiations with other external investors to raise capital, and the ratings remain under review pending resolution of these discussions. If the company succeeds in raising additional capital, an upgrade is possible. However, should the current negotiations fail, a further downgrade is likely.” Best expects to complete its review of the rating by the end of February.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based Ariel Reinsurance Company Ltd. (Ariel Re) (Bermuda) and Valiant Insurance Company of Delaware. At the same time Best affirmed the “bbb-” ICR of Ariel Holdings, Ltd. and assigned a financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” to Valiant Specialty Insurance Company. The outlook on all the ratings is stable. Best said: “The ratings affirmation reflects Ariel’s supportive level of risk-adjusted capitalization, acceptable operating performance since inception and continued development of the group’s operating platforms and business profile. Risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) declined during 2008 compared to the prior period, predominantly as a result of increased loss reserves and a modest decline in reported shareholders’ equity; however, BCAR continues to be supportive
of the current rating levels. Overall performance fell short of expectations during 2008 driven by investment write-downs and catastrophe losses. Furthermore, actual premium volume was lower than anticipated resulting in a higher expense ratio as compared to its peers. However, overall performance remained in line with its peer group since inception. The outlook reflects the favorable rate environment expected in Ariel’s primary line of business, property cat reinsurance, which is partially offset by the recent softening in the casualty lines of business and the potential for continued volatility of investment returns.”

A.M. Best Co. has assigned issuer credit ratings (ICR) of “a-” and affirmed the financial strength ratings (FSR) of ‘A-‘ (Excellent) of the Bermuda-based Colonial Group International Ltd. and its life/health and P/C operating subsidiaries. The outlook assigned to all of the ratings is stable. Best noted that the “Colonial Group is a wholly owned intermediate holding company of Edmund Gibbons Limited, an ultimate parent company based in Bermuda. The affirmation of the ratings of Colonial Group reflect the group’s
consistently increasing total consolidated equity position, good risk-adjusted capitalization and its diversified business profile with the focus on life/health and property/casualty markets in Bermuda, the Bahamas, Cayman Islands and Caribbean. Within the P/C lines of business, Colonial Group’s three operating subsidiaries have generally demonstrated good underwriting results, improved operating performance trends and continuing parental support. Furthermore, the group benefits from its reinsurance leverage to manage its P/C risks while growing direct premium revenues in its core markets.” However, best noted that “partially offsetting these strengths are Colonial Group’s significant concentration risk in the volatile life/health lines of business in several geographic regions, vulnerability to frequency and severity of catastrophic events from the property/casualty risks within the market it serves, challenges of improving its unit-linked business and its fluctuating investment performance embedded within its operating subsidiaries.”

Standard & Poor’s Ratings Services has raised its subordinated debt rating on Bay Haven Ltd.’s $66.75 million Class B notes to ‘A’ from ‘BBB+’. “The Class B notes risk a loss of principal upon the occurrence of a fourth triggered risk event during the three-year tenor of the transaction,” explained credit analyst Gary Martucci. Two years and two months have passed since the initial issuance. “In this time, no triggered risk events have occurred, so the annual probability of attachment on the Class B notes has decreased to a level commensurate with an ‘A’ rating,” Martucci added. This new attachment probability was then mapped to the default matrix used for rating natural peril catastrophe bonds. S&P said it is taking “no rating action on the Class A notes, irrespective of the new probability of attachment, which is less than 1 basis point. The notes are currently rated ‘AA’, which is the highest rating we assign to a natural peril catastrophe bond.”