Ratings Recap: Hanover, Assurant, Wadena/IMT, Berkshire Hathaway, Finial

A.M. Best Co. and Standard & Poor’s Ratings Services have both reacted positively to The Hanover Insurance Group’s (THG) announcement that has reached agreement to sell its remaining run-off life insurance business. Best said it sees no change in any of its ratings and outlooks on Hanover. S&P affirmed its ‘BBB-‘ counterparty credit rating on THG and its ‘A-‘ counterparty credit and financial strength ratings on Hanover Insurance Co., Citizens Insurance Co. of America, and THG’s other rated P/C affiliates (collectively referred to as Hanover). The outlook on THG and Hanover remains stable. In addition Best has placed the financial strength rating (FSR) of ‘B+’ (Good) and issuer credit rating (ICR) of “bbb-” of First Allmerica Financial Life Insurance Company (FAFLIC) under review with positive implications. “As a result of the acquisition, Commonwealth will obtain FAFLIC’s New York license, which is expected to add flexibility in structuring Commonwealth’s future transactions,” said Best.

Standard & Poor’s Ratings Services said that its ratings on Assurant Inc. -(BBB+/Negative/A-2) and related entities are not affected by the company’s announcement that it will acquire Signal Holdings LLC for $250 million in an all-cash deal. The acquisition is subject to regulatory approval and is expected to close in the fourth quarter of 2008.

A.M. Best Co. has assigned a financial strength rating (FSR) of ‘A’ (Excellent) and an issuer credit rating (ICR) of “a” to Wadena Insurance Company, and has affirmed the FSR of ‘A ‘(Excellent) and the ICR of “a” of IMT Insurance Company (IMT), both of West Des Moines, Iowa. The outlook for all ratings is stable. “IMT’s ratings reflect its strong capitalization and favorable operating performance in recent years,” said Best. “The ratings also acknowledge the company’s long-standing local market presence and solid agency relationships. Partially offsetting these positive factors are IMT’s above average expense structure and its geographic concentration, primarily in Iowa. Wadena’s ratings are based on its affiliation with IMT, as they share common management and support functions.”

Standard & Poor’s Ratings Services has assigned its ‘AAA’ senior debt rating to Berkshire Hathaway Finance Corp.’s (BHFC) $1.0 billion senior notes, which are due on Aug. 15, 2013. “The assignment is based on the ratings on Berkshire Hathaway Inc., BHFC’s ultimate parent, reflecting Berkshire Hathaway Inc.’s extremely strong competitive position, experienced and focused management team, extremely strong insurance and reinsurance capitalization, and extremely strong financial flexibility,” explained credit analyst Damien Magarelli. However, S&P noted that “weaknesses to the rating include exposure to severe natural catastrophe losses (though these exposures are declining very rapidly), common stock concentrations, and the significant amount of long-term claims payments assumed through retroactive reinsurance covers by National Indemnity Co. (NICO), a Berkshire Hathaway Inc. (BRK; AAA/Stable/A-1+) subsidiary.” “We are concerned about whether the culture and risk profile will be maintained following a management change, though we expect no such change anytime soon,” Magarelli added.

Standard & Poor’s Ratings Services has affirmed its ‘BBB’ counterparty credit rating on Finial Holdings Inc. (Finial; formerly Converium Holdings (North America) Inc.) with a stable outlook. “The affirmation reflects National Indemnity Co.’s (NICO) 100 percent ownership in Finial and its North American operating subsidiary, Connecticut-based Finial Reinsurance,” stated credit analyst Damien Magarelli. S&P said the “rating also reflects Finial’s purchase by NICO as an opportunistic acquisition of a nonstrategic entity within NICO. Although NICO does not offer any explicit support to bondholders of Finial’s US$200 million 7.125 percent notes due October 15, 2023, the acquisition benefits Finial’s bondholders given the importance for NICO, a core subsidiary of Berkshire Hathaway Inc. (BRK), to continue servicing the assumed debt to protect BRK and NICO’s reputation with regulators. Finial’s primary operating company, Finial Re, is domiciled in Connecticut and though NICO is domiciled in Nebraska and its headquarters are located in Nebraska, the reinsurance division’s management office is located in Connecticut. Several BRK insurance subsidiaries (NICO affiliates) are domiciled in Connecticut and thus fall under the purview of that state’s insurance regulators. We expect that NICO will continue to service Finial’s $7.125 million semi-annual interest expense on the outstanding debt in the near term, as Finial’s subsidiary remains under heightened regulatory supervision and cannot yet pay dividends to service the holding company’s debt. Because of NICO’s coverage of the debt, NICO and Finial established an inter-company loan whereby F all interest payments assumed by NICO will be compensated by Finial. It remains uncertain whether Finial bondholders benefit from the financial strength of NICO over the long term without explicit support. Over time, the economic value of the deferred tax asset to NICO will decline and the rating support will decline proportionately. The stable outlook is based on our belief that NICO has an incentive to ensure an orderly run-off of Finial Re’s reserves.”