Ratings Recap: Endurance, CRC Re

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Endurance Specialty Insurance Ltd. and its affiliates. Best also affirmed the ICR of “bbb” and the debt ratings of Endurance Specialty Holdings, Ltd. All of the companies are domiciled in Bermuda. In addition Best affirmed the indicative ratings of “bb+” of Endurance Holdings Capital Trust I & II. The outlook for all ratings is stable. “These ratings reflect Endurance’s solid level of risk-adjusted capitalization, favorable historical operating performance and evolving business profile,” said Best. “Additionally, the ratings reflect the underwriting and risk management controls in place, which has been enhanced in recent years, enabling the company to better analyze correlation risk on all submissions, accumulate zonal aggregations and determine each submission’s effect on capital usage and operating returns. Partially offsetting these strengths are the competitive conditions in the primary insurance markets and the challenges in the investment markets.” Best also explained that the stable outlook reflects its “expectation that operating performance should benefit from hardening reinsurance pricing and comparatively less volatile investment returns due to Endurance’s conservative investment posture. Despite a very challenging underwriting environment during 2008, due in part to large losses from hurricane activity in the Atlantic, Endurance reported a combined ratio of 93.5 percent for the year. Net losses of approximately $145 million from hurricanes Ike and Gustav were well within the company’s risk tolerance and were a marked improvement from the outsized losses reported from the 2005 hurricane season. This is due to several initiatives implemented following the 2005 hurricane season including the elimination of business due to excessive correlations, exiting marine and energy lines, reducing risk tolerances for wind and earthquake and making improvements to underwriting systems and controls. Overall performance in 2008 also was negatively impacted by the turmoil in financial markets, with Endurance reporting a total return on the investment portfolio of negative 3.4 percent. Overall, book value per share declined 5.7 percent for the year. While these metrics declined significantly from previous years, they are in line with the company’s peer group. Although Endurance’s performance has fluctuated over the most recent five-year period, return metrics over the period remain supportive of the current rating levels.”

A.M. Best Co. has affirmed the financial strength of ‘A’ (Excellent) and issuer credit rating of “a” of CRC (Bermuda) Reinsurance Limited, a direct wholly owned subsidiary of Canada’s Fairfax Financial Holdings Limited. The outlook for both ratings is stable. “The ratings and outlook reflect CRC’s adequate capitalization, favorable long-term operating and underwriting performance and the implicit and explicit support provided by Fairfax,” Best explained. “The majority of premiums written by CRC is ceded from the subsidiaries of Northbridge Financial Corporation (Northbridge) (Canada), which is currently wholly owned by Fairfax, subsequent to its tender offer in first quarter 2009 for all of the remaining shares of Northbridge, which Fairfax did not currently own. Partially offsetting these positive rating factors is the significant underwriting loss posted by CRC in 2008, the increased risk the company has taken on through its new 40 percent quota share with Advent Syndicate 780 and CRC’s limited source of business, which is concentrated with Northbridge. CRC also is exposed to the ongoing competitive pricing environment as well as weather-related losses. Despite these attenuating factors, on balance, A.M. Best views the outlook as stable. Best also noted that “CRC’s underwriting performance deteriorated in 2008 as soft market conditions and difficult weather conditions in Canada negatively affected results, which have historically been positive. Subpar underwriting results in 2008, however, were offset by significant realized gains mainly from the company’s equity hedges more than offsetting the declines in its equity position. CRC’s loss reserve development has been variable over the years but has cumulatively proven to be redundant. The investment portfolio has remained conservative with the majority of assets invested in Canadian government bonds and cash and marketable securities. Through year-end 2008, CRC maintained a conservative risk profile. However, beginning in 2009 CRC entered into a 40 percent quota share reinsurance contract with Advent Syndicate 780 and its affiliate, Advent Capital (Holdings) Plc (United Kingdom), which is a majority owned Fairfax affiliate. The assumed retrocessions consist of worldwide property and catastrophe business, which introduces a heightened element of risk and could result in greater variability of earnings. Fairfax has provided CRC a $15 million guarantee to support its balance sheet. This explicit support was a factor in the affirmation of CRC’s ratings, and A.M. Best believes that CRC’s capital level will remain supportive of its ratings.”