S&P to Review ‘Hybrid Equity’ Covenants of Top Bermuda Insurers

June 8, 2007

Standard & Poor’s Ratings Services announced that it is “undertaking a review of the preference stock and other hybrid equity issues of the following seven insurers and reinsurers: ACE Ltd. (A-/Stable/A-2), Arch Capital Group Ltd. (BBB+/Stable/–), Aspen Insurance Holdings Ltd. (BBB+/Stable/–), AXIS Capital Holdings Ltd. (BBB+/Positive/–), Endurance Specialty Holdings Ltd. (BBB+/Stable/–), PartnerRe Ltd. (AA-/Negative/–), and RenaissanceRe Holdings Ltd. (A-/Stable/–).”

S&P said it needs to review the terms and conditions of the hybrid instruments in order to evaluate “the potential impact of credit facility financial covenants contained in separate funding agreements entered into by each of the eight stated issuers.”

The main concern is that the “financial covenants could pose a greater risk of forced deferral of hybrid dividend payments than previously assumed,” explained S&P credit analyst Jacob Schlanger. He stressed that, “this review is focused only on financial covenants that may affect these specific issues and is not reflective of any change in the financial condition of these insurers, the ratings on each of these issuers, as well as the ratings on all other issues of these companies, are unaffected.”

S&P left the door open for the companies involved to “elect to modify their loan covenants to preserve the credit quality of these issues, and thus eliminate the problem.” If a company doesn’t do so, S&P said it would then undertake “a case-by-case analysis”

Depending on what that analysis shows, S&P would then decide whether the “covenants might force an issuer to defer on dividend or interest payments relating to any rated preference or other hybrid issue, and that this forced deferral would likely occur in advance of a decision by the issuer to optionally defer.” In that case S&P warned that the ratings on such instruments might be lowered “by at least one notch, or possibly more if the likelihood of forced deferral due to covenants is considered less than remote.”

If, however, S&P determines that the “covenants relating to any given issuer are extremely remote or would only force deferral when the issuer is already likely to be deferring on a discretionary basis, then it is probable that the hybrid ratings relating to those issuers will be affirmed.”

The rating agency confirmed that it is conducting the review “with the full assistance of the issuers,” and will hopefully complete its analysis by mid June. However S&P added that this “may include placing some, or all, of the affected issues on CreditWatch with negative implications in advance of any rating action.”

S&P added that it is “currently surveying all sectors to determine if there are other cases where the potential impact of financial covenants on hybrid capital issue payment risk needs to be reassessed.” It will also “take into consideration the ability or otherwise of any affected issuer to replace or satisfactorily modify any problematic covenant language with less restrictive terms.”

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