Ratings: Hull Club, Lloyd’s Syndicate 623/2623, Flagstone Re, First Net

September 8, 2008

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and insurer financial strength ratings on marine mutual insurer Norwegian Hull Club (NHC) to ‘A-‘ from ‘A’. The outlook is stable. S&P said the “rating action reflects the extent to which the greater-than-expected deterioration in NHC’s operating performance has, in turn, weakened its capitalization. Credit analyst Ali Karakuyu added: “NHC’s operating performance continued to deteriorate sharply during the first half of 2008 from its historically good level, despite the active steps taken during 2007 and 2008 to stem the losses in the hull and machinery segment. While this partly reflects the current unprofitable marine nature of the hull market globally and the downturn in the financial markets, the extent of the deterioration somewhat exceeds our expectations.” S&P indicated that although NHC’s current capitalization “supports the rating, the deterioration in the operating performance has led to a reduction of some $20 million in NHC’s free reserves. Capitalization could weaken further should operating performance not improve significantly during the next two years. The ratings continue to reflect NHC’s strong competitive position and strong financial flexibility.”

A.M. Best Co. has affirmed the Best’s Syndicate Ratings of ‘A’ (Excellent) and the issuer credit ratings of “a+” of Lloyd’s Syndicate 2623 and Lloyd’s Syndicate 623. Best also affirmed the ICR of “bbb+” of the UK’s Beazley Group plc, the non-operating holding company of the Beazley group of companies, and the debt ratings of “bbb” on the £150 million [$275 million] junior subordinated notes due 2026 and the $18 million junior subordinated notes due 2034 issued by Beazley. In addition, Best said it has revised the ratings to stable from positive, “bringing the outlook in line with the outlook on the ratings of Lloyd’s of London. The ratings reflect the syndicates’ excellent financial flexibility, good prospective operating performance and strong business profile in the London market.” However, Best said it considers the “uncertainty relating to the performance of new, predominately long-tail business written in the local U.S. market, the profitability of which will only be proven over an extended period of time,” as an offsetting factor. Best also said this “uncertainty has been heightened following two key changes to the senior management team, including the departure of the group’s head of specialty lines, and is reflected in the revision of the outlook to stable from positive.” Best noted: “Syndicates 2623 and 623 are managed on a combined syndicate basis by Beazley Furlonge Ltd. and underwrite business at Lloyd’s in parallel. Syndicate 2623’s capacity is provided 100 percent by Beazley, while syndicate 623 is supported by third party capital. For the 2008 underwriting year, capacity for the combined syndicates was reduced to £814 million [$1.49 billion] from £860 million ($1.58 billion) in 2007.”

Fitch Ratings has affirmed the ‘A-‘ Insurer Financial Strength (IFS) ratings and ‘BBB+’ Issuer Default Ratings (IDRs) of Flagstone Reinsurance Holdings, Ltd. (FSR) and its subsidiaries with stable outlooks. Fitch said its “rating action follows completion of its review of FSR’s restructuring plan, which the company announced on Aug. 8, 2008. Under the restructuring plan, FSR plans to merge its two wholly-owned subsidiaries; Flagstone Reinsurance Limited (Flagstone Bermuda) and Flagstone Reassurance Suisse S.A. (Flagstone Suisse) with Flagstone Suisse being the surviving entity. Flagstone Bermuda’s obligations at the time of the merger will become obligations of Flagstone Suisse. Upon implementation of the restructuring plan, which is expected to take place after FSR receives various regulatory approvals, Fitch plans to withdraw its insurer financial strength (IFS) rating on Flagstone Bermuda.” Fitch also said it “views the restructuring’s near-term financial and operational effects on the company as negligible,” as Flagstone “will retain its operational presence in the Bermuda market through a branch office and that FSR, a Bermuda-domiciled holding company, will retain operations in Bermuda. Additionally, Fitch notes that it considers both the Swiss and Bermudan regulatory environments to be ‘moderate’ environments in the context of priority of payments and cash/capital restrictions.”

A.M. Best Co. has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” of Guam-based First Net Insurance Company, both with stable outlooks. “The ratings reflect First Net’s persistent favorable operating results, adequate risk-based capitalization and solid local market knowledge,” said Best. They also “recognize the distribution, claims management and administrative support from its affiliate, Moylan’s Insurance Underwriters, Inc. The company’s overall operating results remained profitable in 2007, although its net loss ratio experienced a slight deterioration. First Net produced favorable underwriting results due to the continued initiative in strengthening its operating efficiency through a better underwriting process and information system. First Net produced a combined ratio of 81.7 percent over the past five years, which is superior to the industry average.”

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