Ratings Roundup: Arch Capital, American Safety, Parkton Re

Standard & Poor’s Ratings Services has revised its outlook on Bermuda-based insurance and reinsurance holding company Arch Capital Group Ltd.(ACGL) and its operating subsidiaries to positive from stable. S&P also affirmed our ‘BBB+’ counterparty credit and senior debt ratings on ACGL and its ‘A’ counterparty credit and financial strength ratings on ACGL’s operating subsidiaries (collectively referred to as Arch). Credit analyst Laline Carvalho explained that the “positive outlook reflects Arch’s consistent track record in reporting strong and better-than-peer-average operating results as well as its success in building a large and well-diversified franchise by product, client, and distribution source since its relaunch in 2001.” We also view the group’s management and corporate strategy as a strength to the rating, with the senior management team continuing to lead the organization with a consistent strategy based on strong underwriting discipline, active cycle management, and strong enterprise risk management (ERM). The ratings are also supported by the group’s very strong capital adequacy and moderate financial leverage. “Potential pricing and reserving risk related to the group’s significant proportion of casualty writings, given continued competitive pricing in this segment and the potential negative impact of global macroeconomic conditions on long-tail lines of business” were cited as offsetting factors. S&P also said that it believes “new risks stemming from Arch’s somewhat changing business mix as part of its cycle-management strategy could also carry additional pricing and reserving risk. In conclusion S&P noted that “Arch has performed well on absolute and relative bases since 2001. During the past five years (2004-2008), the group reported an average combined ratio of 91 percent, a return on revenue (ROR) of 17 percent, and a return on equity (ROE) of 16 percent. During this period, Arch was also one of the companies posting the least volatile operating results among its peer group, contributing to high-quality risk-adjusted earnings. Arch’s operating performance remained strong during the first quarter of 2009, with the group reporting a combined ratio of 87 percent and an ROR of 23 percent. Standard & Poor’s views Arch’s earnings strength as one of the key factors supporting the positive outlook.”

A.M. Best Co. has commented that the financial strength ratings (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Bermuda-based American Safety Insurance Group (ASI) and its members “are unchanged following ASI’s announcement of the acquisition of VICTORE INSURANCE COMPANY (VIC), an admitted insurance company based in Oklahoma City providing customized bonding solutions for the surety bond industry. A.M. Best will revisit the rating upon renewal later in the year.”

Standard & Poor’s Ratings Services has assigned its ‘B+’ rating to the Series 2009-1 notes to be issued by Parkton Reinsurance Ltd., an exempted Cayman Islands company licensed as a Class B insurer in the Cayman Islands. S&P noted that a “cedent to Parkton Re will be Swiss Reinsurance America Corp. (SWRA; A+/Stable/–). SWRA, which we consider a core member of the group, is a wholly owned subsidiary of Swiss Reinsurance Co., the group’s main U.S. property/casualty operating company. SWRA will be responsible for the premium payments due under the retrocession agreement in place between it and Parkton Re. Covered losses will not be directly linked to SWRA’s exposure in the covered area, North Carolina. Rather, they will be based on the paid losses of the North Carolina Joint Underwriting Association (NCJUA) and the North Carolina Insurance Underwriting Association (NCIUA), collectively the NC JUA/IUA.” S&P added that when rating natural peril catastrophe bonds linked to hurricanes, it “will look to the sensitivity analysis, that is, the warm sea surface temperature conditioned catalogue, which incorporates the impact of elevated sea surface temperatures on hurricane activity and looks at the last 15 years to generate the stochastic hurricane event set. The probability of attachment incorporating the effect of warm seas surface temperatures for the notes is 2.24 percent. The Series 2009-1 notes will cover [16.67] percent of losses between the attachment level of $2.55 billion and the exhaustion level of $3.30 billion.”