S&P Reports Top Layer Reinsurance Ltd. ‘AA’ Ratings Affirmed; Outlook Stable

March 17, 2004

Standard & Poor’s has affirmed its ‘AA’ counterparty and financial strength ratings on Top Layer Reinsurance Ltd. The outlook is stable.

Top Layer Re is a 50%/50% joint venture between State Farm Mutual Automobile Insurance Co. (AA/Stable/–) and Renaissance Reinsurance Ltd. (AA-/Stable/–). Top Layer Re was formed under the laws of Bermuda in January 1999 to provide worldwide, high-layer, non-U.S. property catastrophe reinsurance, which includes Caribbean earthquakes but excludes Caribbean windstorms. The company does not cover terrorism risk, and all contracts are written on an excess-of-loss basis with defined exposure limits.

The ratings on Top Layer Re are based largely on State Farm’s very strong capital base because of the $3.9 billion retrocessional stop-loss agreement State Farm has provided to Top Layer Re. Other rating factors are Top Layer Re’s strong and explicit support from both parents, experienced management team with disciplined property catastrophe modeling expertise, strong alignment of interest among the shareholders, and extremely strong operating performance because of loss-free underwriting results. Partially offsetting these positive factors is Top Layer Re’s exposure to foreign exchange volatility risk, though structural protections are in place.


Top Layer Re should continue to generate strong operating performance in loss-free years, with a low combined ratio and a healthy ROR. Because of the high-layer profile of its property catastrophe business, the company’s results are more likely to be affected by high-severity events (industry-driven loss) than by the occurrence of several smaller events.

Major rating factors

— Strong and explicit support. Under the current structure, Top Layer Re retains and is liable for the first $100 million of losses that occur during each contract year. In addition, the company has a stop-loss contract with State Farm that covers aggregate losses in excess of $100 million in each calendar year, up to a limit of $3.9 billion ($2.9 billion for first events and $1.0 billion for reinstatements and second events). A clause in this agreement provides Top Layer Re’s policyholders a cut-through to State Farm if Top Layer Re becomes insolvent.

— Very strong capital base. Top Layer Re has a very strong capital base with $4 billion in claims-paying ability, which includes a minimum of $27.5 million of hard capital; $75 million of irrevocable, collateralized letters of credit; and a $3.9 billion stop-loss policy from State Farm that covers in-force policies to their expiration. In addition, State Farm’s continued very strong capital base is reassuring to Top Layer Re’s clients.

— Seasoned management team with proven property catastrophe modeling expertise. Top Layer Re benefits from RenRe’s disciplined property catastrophe underwriting expertise: RenRe underwrites all policies on behalf of Top Layer Re. As part of this process, these policies are analyzed through RenRe’s proprietary model for underwriting risk selection and ongoing management of the book of business.

— Alignment of interest. The joint venture is beneficial to both shareholders. State Farm diversifies its risk exposure with noncorrelated profitable business, and RenRe expands its property catastrophe franchise and leverages its market position and underwriting expertise to generate incremental income.

— Extremely strong operating performance. Top Layer Re wrote $217.8 million in premiums in the past five years (1999-2003) and has been loss-free since its inception, mostly because of its strategy of focusing on underwriting the high layers of property catastrophe reinsurance. As a result, in the past five years, the company has had an extremely strong ROR and a low combined ratio.

— Intertwined ratings. The ratings on Top Layer Re largely parallel the ratings on State Farm because of the capital support Top Layer Re receives through State Farm’s $3.9 billion stop loss-agreement. Therefore, if the ratings on State Farm are revised, the ratings on Top Layer Re would be similarly revised.

— Exposure to foreign-exchange volatility risk. Because a significant majority of Top Layer Re’s business is denominated in foreign currencies, the company is exposed to unfavorable exchange rate fluctuations. Therefore, State Farm and RenRe amended the terms of the stop-loss contract to allow Top Layer Re to continue to provide stable, long-term capacity to its clients and to provide a mechanism to mitigate some of its foreign currency risk if the U.S. dollar weakens during any contract year.

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