Ratings Recap: Munich Re, Partner Re, IPC Re [S&P, Best], Vienna, Emirates

Standard & Poor’s Ratings Services has said that its “ratings and outlook on Germany-based global reinsurer Munich Reinsurance Co. (AA-/Stable/–) and core related entities (collectively Munich Re) are unaffected by Munich Re’s withdrawal of its 2010 earnings target” [See IJ web site – https://www.insurancejournal.com/news/international/2009/03/03/98321.htm]. S&P noted the drop in net income and the withdrawal of the €18.00 ($22.70) earnings per share guidance for 2010. However, in the rating agency’s opinion, “Munich Re’s results have proven relatively resilient, given the extremely turbulent financial markets. In particular, the ratings remain underpinned by what we consider to be very strong capitalization, which we believe will continue to substantially exceed our requirements for an ‘AA’ rating, and its very strong competitive position, particularly in reinsurance business. The challenge Munich Re faces in effectively exploiting its primary life insurance business model remains, in our view, an offsetting factor.”

Standard & Poor’s Ratings Services commented today on PartnerRe Ltd.’s (A/Stable/–) recent announcement of a cash tender offer on its 6.44 percent fixed-to-floating-rate capital-efficient notes (CENts), which it issued through PartnerRe Finance II Inc., a wholly owned subsidiary, in 2006. According to the terms of the tender offer, which expires on March 10, 2009, unless extended or terminated earlier, PartnerRe Finance II Inc. will pay holders $500 per $1,000 principal amount of CENts validly tendered and not validly withdrawn pursuant to the tender offer. S&P said the cash tender offer has no impact on its ratings on PartnerRe Ltd. or its operating subsidiaries. As a result of the offer, S&P said it “expects a minor reduction in the group’s financial leverage. PartnerRe has significant cash resources to pay for the tender offer without any major impact on its liquidity, with the group holding cash and cash equivalents of $838 million at year-end 2008. Cash flows from operations were also strong at $1.2 billion for full-year 2008. PartnerRe’s fourth-quarter and full-year 2008 earnings were within our expectations. The group reported a full-year nonl-ife combined ratio of 94.1 percent, a moderate increase from 80.4 percent in 2007 but good considering significantly higher catastrophe losses in 2008, including $305 million in pretax losses from Hurricane Ike. PartnerRe’s 2008 net income dropped significantly to $47 million compared with $718 million in 2007. However, this was expected and reflected higher catastrophe losses and significant realized and unrealized investment losses of $454 million (after taxes) the group incurred in 2008 related to the significant capital-market volatility.”

Standard & Poor’s Ratings Services has affirmed its ‘BBB’ counterparty credit rating on IPC Holdings Ltd. and its ‘A-‘ financial strength ratings on the company’s core operating subsidiaries, IPCRe Ltd. and IPCRe Europe Ltd. (collectively referred to as IPC). S&P also said that the outlook on all of these companies remains stable. The affirmation follows today’s announcement that the company intends to merge with Max Capital Group Ltd. The companies expect that the stock-for-stock merger will close in the third quarter of 2009. “Although there is some minor overlap within the two companies in terms of employee roles, property catastrophe exposures, and investments, the post-merger combined company will largely be the addition of two relatively intact stand-alone entities,” said S&P. “The companies chose to merge not to cut expenses but rather to create a larger, well-capitalized company with a diversified (mainly through IPC’s international presence and Max’s diversified lines) book of business and reduce earnings and capital volatility. In our opinion, IPC’s highly volatile earnings, large appetite for catastrophe-related risk, and constrained strategic flexibility owing to its concentrated business profile limited its creditworthiness. The negative factors affecting the rating on Max were its limited scale and market presence, largely a Bermuda-based distribution channel with Fortune 1,000 account concentrations, and high hedge fund exposure that previously constituted 20 percent of the investment portfolio.” S&P also indicated that it “believes that the merger of IPC and Max will address many of these negative factors, and as such, the new combined entity will create a stronger combined re/insurance group.” Credit analyst Taoufik Gharib added: “The stable outlook reflects our view that the merger will establish a consolidated entity that has significant scale relative to peers and can maintain excess capital, increase global client access, reduce hedge fund exposure, and decrease earnings/capital volatility.” In addition S&P characterized the merger of the two companies as immediately establishing “an entity that is in a favorable position vis-à-vis some of its peers. The key factor of the merger is the minimal overlap of the two companies. Hence, this is truly an addition of two complementary companies. IPC’s 32 employees and Max’s 336 employees present minimal overlap, with the exception of IPC’s underwriters. The retention of these underwriters is vital to the long-term success of the merger because this market presence incrementally adds to Max’s existing platforms.”

A.M. Best Co., however, has taken a slightly more negative view of the MAX/IPC merger. Best said it has placed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of IPCRe Limited (Bermuda) and IPCRe Europe Limited (Dublin, Ireland), reinsurance subsidiaries of Bermuda-based IPC Holdings Ltd., under review with negative implications. Best has also placed the ICR of “bbb” and the indicative ratings for securities available under shelf registration of “bb+” on preferred stock, “bbb” on senior unsecured debt and “bbb-” on subordinated debt of IPCRe under review with negative implications. However the ratings of Max’s lead operating company, Max Bermuda Ltd. its operating subsidiaries and all debt ratings of Max are unchanged by the transaction. Best said the “under review status of IPCRe reflects the fact that IPCRe and Max combined would be largely influenced by Max from a multitude of perspectives, including premium volume, liabilities, operating platforms and information technology systems. IPCRe’s property catastrophe business would make up a moderate amount of the newly combined diversified specialty (re)insurance company, but its property business would be a sizeable piece of the property reinsurance segment. In the intermediate term, property catastrophe exposures of the combined company would have to be aggregated and analyzed for correlations. In addition, part of management’s time and effort would need to be spent on integrating office space, information technology systems and corporate cultures. The immediate advantages to the combined organization would be size and scale coupled with a strong risk-adjusted capital base. There are additional benefits to both organizations individually, which makes this a sensible transaction; however, unlocking the value and driving the sustainable edge will only be realized over the longer term.”

Standard & Poor’s Ratings Services has revised its outlook on Austria’s Wiener Staedtische Versicherung AG Vienna Insurance Group (VIG) to stable from positive. S&P also affirmed the ‘A+’ counterparty credit and insurer financial strength ratings. “The outlook revision reflects our view that the current volatility in financial markets and deteriorating economic environment will likely result in lower growth and earnings prospects than previously expected,” explained credit analyst Ralf Bender. “We have affirmed the ratings because we are of the opinion that the group’s growth track record will remain intact, albeit subdued, owing to increasing insurance demand in Central and Eastern Europe (CEE), the group’s sound underwriting, conservative investment strategy, and very strong competitive position and capitalization that represents a sizable buffer to further market fluctuations.” S&P said it believes that the “worsening economic and financial market climate is likely to somewhat hamper VIG’s previously anticipated strong premiums and earnings growth prospects in the short to medium term, owing to increased investment performance volatility, declining new life business in Austria, and lower growth rates in CEE. The group’s premiums rose by 16 percent to €8.3 billion [$10.46 billion] on an unconsolidated basis in 2008, demonstrating its very strong competitive position. This was mainly thanks to the continuation of very strong CEE growth, but was somewhat dampened by a drop in Austrian single-premium life business. Despite the currently moderate macroeconomic outlook for CEE, we expect premium income in the region to increase by about 5 percent-10 percent per year, fueling the group’s overall business expansion. Strong non-life underwriting results, reflected in a net combined ratio of about 96 percent, stable life risk and expense results, and a sustainable running investment yield should, in our view, represent a resilient block of operating earnings. We consider VIG’s capitalization to be very strong. We anticipate that capital adequacy will exceed our requirements for an ‘AA’ rating, despite adverse capital market conditions. The outlook is stable because we believe that VIG’s management will continue to successfully develop its CEE businesses, despite a weakened macroeconomic outlook.”

Standard & Poor’s Ratings Services said it has “revised its outlook on Abu Dhabi-based Emirates Insurance Co. (PSC) (EIC) to negative from stable in response to the heavy decline in the company’s capital adequacy at Dec. 31, 2008, and the heightened volatility in the value of its investment portfolio, which may have a further negative impact on its capital adequacy. At the same time, the ‘BBB+’ long-term counterparty credit and insurer financial strength ratings were affirmed.” S&P explained: On Feb. 23, 2009, EIC announced a 42.6 percent fall in its shareholder funds as at Dec. 31, 2008, compared with Dec. 31, 2007. This material movement reflects a reduction of 87 percent in investment revaluation reserves to United Arab Emirates dirham (AED) 92.9 million [$25.3 million] at the end of 2008, from AED714.5 million [$194.4 million] at the end of 2007.” However, S&P added that despite “this material weakening of capital adequacy,” it “continues to assess EIC’s capitalization as in line with the rating. The ratings on EIC reflect its strong technical earnings. In 2008, excluding asset value movements, EIC again showed a strong underwriting performance, with a net combined ratio of 78 percent compared with 64 percent in 2007. This deterioration reflects a decline in commission receipts following lower reinsurance utilization. Also, the strength of liquidity has been maintained. Bank deposits and cash at December 2008 represent 99 percent of total net technical reserves, and if tradable investments (mostly equities) are included, technical reserve liquidity remains strong.” Credit analyst Kevin Willis explained that the “outlook revision reflects our opinion that the ratings will be lowered if capital adequacy continues to decline materially in the currently volatile investment market. The outlook could revert to stable if EIC can show that its capital adequacy has been restored to a rating strength.” In addition S&P said “positive rating action may be taken if the investment portfolio is actively de-risked, capitalization sustained at a strong level, and earnings maintain their strength.”