S&P, Fitch Lower RenRe’s Ratings

November 3, 2005

Once a company gets into trouble, the troubles seem to pile up. So it comes as no surprise that both Standard & Poor’s Ratings Services and Fitch Ratings announced downgrades of Bermuda’s leading property reinsurer, RenaissanceRe, following the announcement that long time head James N. Stanard was leaving the company, mainly due to an ongoing investigation by the Securities and Exchange Commission (See IJ Website Nov. 1).

S&P said it has “lowered its counterparty credit and financial strength ratings on Renaissance Reinsurance Ltd. to ‘A+’ from ‘AA-‘.” It also lowered its counterparty credit and senior debt ratings on RenaissanceRe Holdings Ltd., which is trade on the New York Stock Exchange, “to ‘A-‘ from ‘A’ and lowered its preferred stock rating to ‘BBB’ from ‘BBB+’ and removed all the ratings from CreditWatch.”

S&P also removed its ‘A’ counterparty credit and financial strength ratings on DaVinci Reinsurance Ltd. (DaVinci is about 22 percent owned by RNR) from CreditWatch and affirmed the ratings. The outlook on all these ratings is stable

Fitch was more negative. It downgraded its long-term rating on RenaissanceRe Holdings and the rating on RenRe’s senior unsecured notes to “BBB+” from “A-“; and also downgraded its rating on RenRe’s preferred stock to “BBB” from “BBB+” and its insurer financial strength (IFS) rating on RenRe’s lead operating subsidiary, Renaissance Reinsurance Ltd. (RenRe Ltd.) to “A” from “A+”. Fitch said it has removed the ratings from its credit watch, but has assigned them a negative outlook.

“These ratings actions reflect that the catastrophes in 2005 will create sizeable losses for RNR, measuring a consolidated net loss, which we expected to be between $200 million-$300 million at year-end 2005–the first net loss for the company,” explained S&P credit analyst Damien Magarelli. “Furthermore, the ratings actions reflect the view that 2005 followed 2004’s lower earnings and this has raised questions regarding the volatility inherent within property catastrophe risks and RNR’s concentrated exposures in certain zones.”

S&P also noted that RenRe “has announced the departure of the Chairman and CEO, and the ratings actions reflect the uncertainty with regards to potential changes to the company’s risk profile following this management change.”

Fitch also noted its concerns “about RenRe’s management continuity, operational focus, and market position,” as well as Stanard’s departure and the impending retirement of its COO and CFO in June 2006. “Given the comparatively small size of RenRe’s senior management and Fitch’s understanding of the active role played by Mr. Stanard, Fitch has historically viewed Mr. Stanard’s contributions as an integral part of RenRe’s success,” said the bulletin.

Fitch said its “Negative Rating Outlook reflects on-going uncertainty surrounding the ultimate resolution and potential for fines or settlement costs related to an on-going investigation being conducted by the Securities and Exchange Commission (SEC) and the SEC’s issuance of a Wells Notice to the company.”

S&P noted that its ratings on RenRe “are based on historically strong operating performance, strong financial flexibility, and a strong competitive position. Capital adequacy is strong.”

However, S&P is also concerned with the “uncertainty about the long-term performance of the specialty reinsurance and individual risk business, considerable exposure to high-frequency and high-severity events, and correlated risks between the operating company and some other holding company investments.” S&P also indicated that it “expects volatility within RNR’s property catastrophe core line of business, but volatility within other lines would be viewed with concern.”

S&P said its stable outlook “reflects that significant concerns regarding increased volatility, decreased earnings, and management changes have been captured at the new rating levels.” It warned, however, that “to the extent further management changes occur, or large settlements decrease earnings expectations in 2006, or there are additional or incremental catastrophe losses in 2005 and 2006, the outlook may be revised to negative.”

Fitch explained that its ratings on RenRe “will also reflect its evolving views on catastrophe risk and capital management and how its assessment of these factors could affect its ratings on the company going forward. Fitch views this as especially important given RenRe’s exposure to catastrophe-related losses and recent underwriting performance. The company’s year-to-date hurricane related losses are estimated at $823 million – $873 million, which equates to roughly one-third of RenRe’s beginning of the year shareholders’ equity.”

Fitch had originally placed RenRe’s ratings on credit watch /negative at the end of July 2005 after the company announced that Stanard had received a Wells Notice from the SEC. The Wells Notice recommended a civil enforcement action against him alleging violations of federal securities laws. The company also received a Wells notice in September. The investigations follow the Group’s announcement that it would restate its financial statements for the years ended December 31, 2001, 2002 and 2003 “to correct accounting errors associated with reinsurance ceded by the Company.”

S&P’s report concluded that RenRe is expected “to have a ROR above the industry average, a combined ratio of less than 95 percent in 2006, and maintain capital adequacy at 145 percent based on Standard & Poor’s model. RNR is considered a leader in risk management and is expected in most years to outperform peers, but the company may be an outlier in earnings volatility, prospectively, due to its risk profile and concentrated exposures in certain zones. Upgrades are not expected in the near-term even if earnings are above expectations because the potential increased volatility within RNR’s business profile, and recent management changes, will require a long-term track record to support revising the ratings.”

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