Ratings Recap: AXIS, Groupama (notes), Newport Bonding

Standard & Poor’s Ratings Services announced that “there’s no impact on the ratings on Bermuda-based insurance and reinsurance holding company AXIS Capital Holdings Ltd. (A-/Stable/—) and related operating subsidiaries (collectively referred to as AXIS) following a recent announcement from AXIS.” The company said it expects its third quarter operating results to suffer as result of an increase of approximately $136 million in the fair value liability of an indemnity derivative contract that is exposed to longevity risk. AXIS also expects to incur about $260 million in other than temporary impairment losses (OTTI) in its fixed maturity investment portfolio related to certain medium-term note investments. S&P said it considers “AXIS’ losses in the indemnity derivative contract modest relative to the group’s capital base.” S&P also noted that it continues to expect “AXIS’ underwriting performance for the second half of 2009 to remain strong and within our expectations.” In S&P’s opinion the derivative contract losses are “a one-time event in that it is not representative of the group’s core property/casualty lines of business. AXIS did not write any other derivative contracts with longevity exposure, with other derivative products written by the group consisting of foreign-exchange related hedging instruments. Thus, we do not expect a similar loss in subsequent quarters.” S&P said it also views “AXIS’ OTTI losses on its medium-term notes to be modest relative to the group’s capital base. In addition, we continue to view capital adequacy as very strong and improving through the third quarter of 2009. AXIS’ expectation that its total capitalization will increase to approximately $5.9 billion at Sept. 30, 2009, compared to $5.4 billion at June 30, 2009, further supports our assessment.” Overall the rating agency expects AXIS’ “underwriting results for full-year 2009 to remain strong, with the full-year combined ratio in the 85 percent-90 percent range and return on revenue upwards of 18 percent.” S&P also expects that AXIS’ “capital adequacy to remain very strong over the next two years. Financial leverage, as measured by total debt plus preferred stock to total capital, likely will remain conservative and supportive of the ratings at less than 25 percent over the medium term (debt plus preferreds stood at 19 percent of total capital at June 30, 2009).”

Standard & Poor’s Ratings Services has assigned its ‘BBB+’ issue rating to French insurer Groupama S.A.’s proposed unsecured subordinated callable notes due in 2039 (the instrument). The ratings are subject to confirmation following receipt of final terms and conditions. S&P said it “expects to classify the notes as ‘intermediate equity content’ under its hybrid capital criteria, subject to confirmation following receipt of final terms. We include securities classified as intermediate equity content up to a maximum of 25 percent in calculating total adjusted capital (TAC), the basis of our consolidated risk-based capital analysis of insurance companies. We have analyzed and rated the proposed debt issue on the understanding that, when issued, the notes will be subordinated to senior creditors and deferrable. We also understand that interest deferral can occur at the option of the issuer. Nevertheless, we believe that certain aspects of the compulsory interest payment provisions weaken the equity-like features of the instrument. In particular, the look-back provisions relating to payments on pari passu and junior securities could delay the issuer’s flexibility to defer payments on the instrument. We understand that the instrument will be callable on the tenth anniversary of issuance and any interest payment date thereafter. The coupon will remain fixed until the tenth anniversary. After that, the securities will carry a variable rate based on euro interbank offered rate (EURIBOR) plus a margin. The margin will contain a step-up of 100 basis points over the credit spread on issue. We also understand that the instrument will be used to replace the €750 million [$1.122 billion] notes issued in 1999 and callable in January 2010.

A.M. Best Co. has downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and issuer credit ratings to “bb” from “bbb-” of Puerto Rico-based Newport Bonding and Surety Company, and has also assigned a negative outlook for all of the ratings. “The rating actions reflect Newport’s weakened overall capitalization, which is reflective of poor operating performance and continued stockholder dividends that were paid over the past five years,” Best explained. “The company has reported increased underwriting losses in recent years due to higher claim frequency associated with earlier accident years, elevated commission expenses and reduced premium volume.” However Best also noted that “corrective actions implemented by management including the non-renewal of unprofitable business, as well as utilizing Newport’s subrogation rights to recover losses stemming from prior year policies,” partially offset the negative factors. “Nevertheless, the outlook reflects the significant reduction in overall capitalization and expectations for continued weak operating performance over the near term,” Best concluded.