Ratings Roundup: Allianz, Stellar, W.R. Berkley (Europe), Kiln

June 19, 2008

Standard & Poor’s Ratings Services has affirmed its ‘A+’ junior subordinated long-term debt rating on the $2.0 billion undated, subordinated, fixed-rate callable bonds issued by Germany’s Allianz SE (rated ‘AA’-/Stable/A-1+). “We have characterized the bonds as having intermediate equity content,” said S&P. Credit analyst Karin Clemens explained: “The two-notch differential between the counterparty credit rating on Allianz SE and the rating assigned to the bonds reflects the bonds’ subordinated nature and optional interest deferability.” S&P also noted that “there is no additional notching for the mandatory deferral clauses because the risk of events that trigger mandatory deferral is relatively remote and the issue has an alternative payment mechanism (APM). This decision was also influenced by Allianz SE’s intention to use its best endeavors to issue or sell its shares or other securities to raise sufficient cash to enable it to make interest payments no later than 30 days after they fall due.” Clemens added: “We therefore consider the likelihood of Allianz SE deferring payment on the bonds to be no greater than that of it deferring on existing hybrids, which don’t have a mandatory deferral clause.”

Standard & Poor’s Ratings Services has assigned its ‘AA-‘ counterparty credit and insurer financial strength ratings to the captive insurance company, Stellar Insurance, Ltd., of Hamilton, Bermuda with a stable outlook. S&P noted that Stellar was formed in December 2001, as a “wholly-owned, special purpose captive insurance vehicle of the large oil and gas company, the Saudi Arabian Oil Company (Saudi Aramco), which is in turn owned by the Kingdom of Saudi Arabia (rated ‘AA-‘ /Stable/A-1+). Credit analyst David Anthony explained: “Exclusively writing parent group and parent-related business, essentially marine, aviation, and energy risks, Stellar qualifies as an eligible ‘captive insurer’ under Standard & Poor’s rating criteria and is rated at a level commensurate with that of the Kingdom of Saudi Arabia, the ultimate shareholder of Saudi Aramco.” S&P added that “in addition to the very strong, albeit implicit, support of its immediate corporate and ultimate sovereign shareholders, Stellar’s financial strength is also supported by very strong liquidity and capitalization, the latter reaching $428 million as of end 2007. The captive also benefits from being a core element in the corporate parent’s own sophisticated enterprise risk management processes.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a” of the UK-based W.R. Berkley Insurance (Europe), Limited (WRB Europe) with stable outlooks. Best sad it “expects WRB Europe to maintain excellent risk-adjusted capitalization, despite the payment of a dividend of £7.2 million ($14.3 million) in February 2008. The rating also factors support from WRB Europe’s ultimate parent, W.R. Berkley Corporation.” Best also indicated that it believes that WRB Europe continues to be important to its parent company as a route to international diversification outside its core U.S. market.” In Best’s opinion, WRB Europe’s operating performance is “likely to be good in 2008, despite further rate deterioration in its main UK
professional indemnity and construction and engineering lines of business. Results are expected to be supported by a continuation of the company’s record of cutting back on lines of business where profitability targets cannot be maintained.”

A.M. Best Co. has affirmed its Syndicate Rating of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a+” of Lloyd’s Syndicate 510, which is managed by R.J. Kiln & Co Ltd., and has revised the outlook on the rating from positive to stable, in line with the outlook on the ratings on Lloyd’s. Best also affirmed the ICR of “bbb+” of Kiln (UK) Holdings Limited (Kiln UK), which, Best explained, “is currently a non-operating holding company in the United Kingdom, and affirmed the debt rating of “bbb” on the $30 million and $35 million floating rate subordinated bonds issued by Kiln UK.” In addition Best affirmed the ICR of “bbb+” of Kiln Ltd. (Bermuda), the ultimate holding company of the Kiln group of companies, and subsequently has withdrawn the rating following the June 2008 announcement by Millea Holdings Inc that it will wind up Kiln Ltd. and transfer its business operation to Kiln UK (See IJ web site – https://www.insurancejournal.com/news/international/2008/06/02/90508.htm). Millea is the ultimate holding company of Kiln Ltd. and Tokio Marine & Nichido Fire Insurance Co., Ltd. Best also noted that it has removed the ratings of Kiln UK and Kiln Ltd. from under review, which was applied when the takeover offer of Kiln by Tokio Marine was announced in December 2007. The outlook for the Kiln ratings is also stable. Best stated: “In addition to the financial strength of the Lloyd’s market, syndicate 510’s ratings reflect financial flexibility provided by Kiln Ltd. and its ultimate parent, Millea Holdings Inc. The syndicate also continues to benefit from a comprehensive reinsurance program based on two long-standing pro rata treaties.” On an annually accounted basis, Best anticipates some deterioration in the syndicate’s combined ratio from the strong level achieved in 2007 of 91 percent, reflecting softening market conditions and certain large individual risk losses experienced in 2008 to date.

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