A.M. Best Co. has placed the financial strength rating (FSR) of “A” (Excellent) and issuer credit rating (ICR) of “a” of the Bermuda-based Catlin Insurance Company Limited (CICL) under review with negative implications. In addition Best placed the ICR of “bbb” of Catlin Group Limited (Catlin), also based in Bermuda, and the FSR of “A” (Excellent) and ICR of “a” of the U.K.-based Catlin Insurance Company (UK) Ltd. under review with negative implications.
However, Best noted that its Syndicate Rating of “A” (Excellent) and ICR of “a” of Catlin’s Lloyd’s Syndicate 2003 “are at the same level as Lloyd’s of London and, accordingly, are unaffected by this rating action.”
Best said it had put the ratings under review due to “concerns relating to the level of Catlin’s consolidated catastrophe exposure and the likely future impact of major events on risk-adjusted capitalization.” The rating agency’s decision was apparently triggered by Catlin’s announcement that CICL has entered into a catastrophe swap agreement that would provide it with coverage of up to $200.25 million in the event of a series of severe natural catastrophes (See IJ Website Oct. 2). Best said that as “part of the financial strength rating evaluation process,” it intends to assess the benefit, if any, to CICL of its proposed catastrophe swap agreement.
Best’s actions appear to be in sharp contrast to Standard & Poor’s, who has assigned its “AA” senior secured debt rating to the Class A Notes and a “BBB-” senior secured debt rating to the Class B notes. At present S&P hasn’t signaled any intention to review those ratings.
The Catlin Group responded immediately to Best’s decision. Catlin said it “believes that such concerns are unwarranted.” The bulletin also noted that “during the past year, Catlin has strengthened its financial security and made the Group more resilient in the event of a major catastrophe. The Group has reduced by one-third its exposure to natural catastrophe risk compared with a year earlier. Catlin has also further diversified its already balanced underwriting portfolio to increase the amount of non-catastrophe related risk it writes. It has increased the Group’s capital by approximately US$65 million through a placement of new common shares. Catlin’s strong first half 2006 underwriting performance produced net income of US$147.3 million and a combined ratio of 84.7 percent.”
Stephen Catlin, chief executive of Catlin Group Limited, further commented: “We are puzzled by A.M. Best’s decision to place the ratings of Catlin Group companies under review, especially in the light of our performance and achievements during 2006. Catlin is widely regarded as having a conservative underwriting philosophy and strong focus on all aspects of risk management. We will concentrate our efforts to engage in constructive communication with A.M. Best to alleviate any concerns Best may have regarding Catlin’s catastrophe exposures.”
London’s financial community appears equally confused by Best’s actions as Catlin is.” Jon Firkins of UBS wrote in a newsletter: “We are baffled by both the timing and the content of AM Best’s statement. Why AM Best would choose now to place the rating under review is unclear. Catlin has cut its catastrophe exposure by one third and its catastrophe swap adds another layer of protection to the overall book.”
Gerald Farr at Seymour Pierce was even more succinct. His analysis leads off with a headline calling the action “shurely shome mishtake?”
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