Europe Ratings Recap: Montpelier Syndicate 5151, Alliance Int’l., Tryggingamidstödin

June 30, 2008

Standard & Poor’s Ratings Services has assigned its interactive Lloyd’s Syndicate Assessment (LSA) of ‘3-‘ (average dependency) to U.K.-based Montpelier Syndicate 5151 with a stable outlook. S&P said the “assessment is based on the syndicate’s strategic importance to Montpelier Reinsurance Ltd. (Montpelier Re or the group, rated A-/Stable/–) and on the track record of the management team, which has significant experience in the Lloyd’s market. The assessment is constrained by the undeveloped competitive position within the Lloyd’s market, and the softening rate environment in its key lines. We expect that the syndicate will successfully implement its business plan, and will generate a steady flow of sustainable, profitable business.” Credit analyst Eoin Naughton added: “In light of the prevailing market conditions, the syndicate is likely to write below 2008 capacity, but we expect that it will retain existing business and will source a good level of new business, in particular through the U.S. coverholder.” S&P indicated that expects the Syndicated to “perform broadly in line with the market average, after adjusting for the effect on expenses of the syndicate’s start-up nature, and assuming no significant natural catastrophe losses.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B++’ (Good) and the issuer credit rating (ICR) of “bbb+” of Cyprus-based Alliance International Reinsurance Public Company Limited, and has revised the outlook for the FSR to stable from positive, and the outlook for the ICR to negative from positive. “The rating action reflects the company’s weak current and projected financial performance driven by low underwriting profits and reserve strengthening,” Best explained. In 2007, Alliance Re increased its gross premiums written (GPW) by 17 percent to €39.65 million ($54.7 million). This was the combined effect of strong premium growth of approximately 25 percent in constant exchange rates and the depreciation of the value of U.S. dollar against the Euro.” Best added that it “believes that in 2008 the company is likely to report a decrease of GPW, despite its continuing expansion in the Middle East and North Africa region as its business continues to be adversely affected by the U.S. dollar exchange rate movements. Alliance Re reported an underwriting loss of €4.4 million ($6.4 million) in 2007, and it is likely to record a loss on its technical account in 2008 as well due to the continued reserve strengthening and the impact that a new whole account quota share will have in its first year of implementation.” As a result Best expects the Company to A.M. Best believes that the company is likely to “report marginal underwriting profit during the following two years, as the full benefits of the alternative income streams and respective whole account quota share commissions materialize. Alliance Re’s combined ratio is expected to improve over the next three years as a result of a lower expense ratio but is likely to remain relatively high at approximately 98 percent.” Best, however added that “Alliance Re has good risk management, and its capitalization is likely to remain strong over the next two years.” It has also “enhanced its risk management tools by utilizing an in-house capital model with capital allocated based on current and forecasted business activity.” In addition Best said the “acquisition of almost 30 percent of Alliance Re’s shares by the Bermudan reinsurer Flagstone Re is likely to enhance the company’s financial flexibility.”

Standard & Poor’s Ratings Services has lowered to ‘BBB-‘ from ‘BBB’ its long-term counterparty credit and insurer financial strength ratings on Iceland-based insurer Tryggingamidstödin hf. (TM) and its subsidiary, Norway-based non-life insurer NEMI Forsikring ASA. S&P also removed the ratings from CreditWatch, where they were placed with negative implications on June 6, 2008. The outlook on both entities is stable. “The rating actions reflect our concerns over the levels of debt leverage in the unrated parent company, Iceland-based investment holding company FL Group,” explained credit analyst Peter McClean. “These concerns relate particularly to the potential threat to the capitalization of TM and NEMI derived from the uncertainty regarding FL’s ability to service its debt obligations. In our view, this diminishes TM’s and NEMI’s financial flexibility.” S&P said that following discussions with FL Group’s management, it “has received further clarification regarding FL’s intentions toward its investment in TM and NEMI, and regarding FL’s ability to draw upon the capital resources of those entities.” McClean added: “As a result of these discussions, we have concluded that there is sufficient potential threat to capitalization to justify a downgrade. However, we also believe that there are regulatory, governance, and other mechanisms in place that will limit the extent to which FL is able to access TM’s capital, and that consequently the downgrade should be limited to one notch. Standard & Poor’s view of the stand-alone credit quality of both TM and NEMI remains unchanged.” S&P said it “expects that capitalization will be maintained at a level that supports the ratings on both TM and NEMI to offset our continuing concerns regarding FL Group’s debt leverage. In this respect, we will continue to monitor the parent’s actions to reduce leverage, as well as its dividend flows from TM and NEMI. An upgrade is regarded as unlikely in the medium term, based on information currently available. Conversely, any significant unexpected deterioration in the TM group’s capitalization may lead to a downgrade.”

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