Ratings Recap: HDI (Italy), Provident, Polish Re, Arab Insurance Group

December 8, 2008

Standard & Poor’s Ratings Services has placed its ‘A’ long-term counterparty credit and insurer financial strength ratings on Italy-based insurer HDI Assicurazioni SpA (HDI/Italia or HDI/I) on CreditWatch with negative implications. “The CreditWatch placement reflects our view that the company is of reduced strategic importance to the Talanx primary insurance group (TPG),” explained credit analyst Paola Del Curatolo. S&P noted that the ratings action “follows TPG’s postponement of the planned merger between HDI/I and the industrial line business from the Italian branch of the group’s core operating entity, HDI-Gerling Industrie Versicherung AG (A+/Stable/–). We viewed the planned merger, which was to be completed in 2008, as supportive of HDI/I’s importance to TPG.” S&P rates TPG’s core operating entities ‘A+’/Stable, and it is intermediately held by Talanx AG (‘A’-/Stable/–). “Our concerns about HDI/I’s strategic importance to TPG’s business model also arose because of the Italian insurer’s weakening stand-alone characteristics due to a restricted competitive position in the Italian market, lack of prospects for profitable growth, and poor operating performance,” the bulletin added. “We expect to resolve the CreditWatch status by the end of this month, after we further scrutinize the company’s stand-alone business and financial profile and prospective role within TPG. We do not expect to lower the ratings by more than four notches,” S&P concluded.

Standard & Poor’s Ratings Services has assigned its ‘BB+’ long-term counterparty credit and insurer financial strengths ratings to U.K.-based non-life insurer Provident Insurance PLC with a stable outlook. “The ratings reflect the impact of the extremely weak credit quality of Provident’s parent, GMAC LLC, offset by Provident’s good stand-alone characteristics,” noted credit analyst Nigel Bond. These include its strong operating performance, very conservative investments, and its good capitalization. “These factors are offset, however, by its unproven ability to expand its competitive position, and its very limited financial flexibility,” he added. S&P described Provident’s operating performance as “strong,” reflecting the Company’s “successful use of active cycle management that has produced nine consecutive reported years of underwriting profitability to June 30, 2007. In addition, the company’s very low risk investment portfolio has helped it to achieve 22 consecutive reported years of positive net income. The investments are very conservative. Provident invests only in short-term U.K. fixed interest deposits, and maintains the counterparty risk of its deposit-takers at a very low level. This has led to an ongoing increase in exposure to U.K. Treasury bills and a decrease in exposure to banks and building societies. While there is still a large concentration at some of these banks and building societies, the risk posed is limited due to their strong credit ratings and the short-term nature of the investments. Provident’s capitalization is good. This reflects a strong level of capital adequacy, albeit derived from a small capital base, a good track record of reserving, and a low but increasing dependence on reinsurance support. Provident was acquired by GMAC in 2007 and, under its new owner, is now seeking to enhance its competitive position through profitable growth. An important element of this is the recent win of the General Motors U.K. customer insurance program. This is a major new venture for Provident, which will likely demand significant management time and prove to be a crucial test of management’s ability to grow the business profitably and to enhance the company’s competitive position.”

Standard & Poor’s Ratings Services has commented on its CreditWatch placement of Polskie Towarzystwo Reasekuracji S.A. (Polish Re), indicating that the reinsurer’s ‘BBB-‘ long-term counterparty credit and insurer financial strength ratings remain on CreditWatch with positive implications. S&P explained: “The ratings were originally placed on CreditWatch with positive implications on Sept. 8, 2008, following Fairfax Financial Holdings Ltd.’s (BB+/Stable/–) announcement of its public offer to acquire all of the outstanding shares of Polish Re.” Credit analyst Miroslav Petkov added: “The placement reflects our expectation that, once the acquisition is complete, the ratings on Polish Re could benefit from group support under our group rating methodology.” The acquisition is subject to several regulatory approvals and it is expected to complete in the first quarter of 2009. “We placed the ratings on Polish Re on CreditWatch because, if Fairfax acquires full control of Polish Re (that is, the minority shareholders, if any, do not have blocking shares), the ratings are likely to be raised by one notch to ‘BBB’ to reflect one notch of group support,” said S&P. “If Fairfax does not acquire full control of Polish Re, the ratings are likely to be affirmed with a positive outlook,” Petkov indicated. “This would reflect the potential for credit for group support to be given should we satisfy ourselves that the remaining shareholders will not prevent Polish Re from fulfilling its expected strategic role in the group,” he added.

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb” to the Bahrain-based Arab Insurance Group (B.S.C.) (ARIG), both with stable outlooks. “The ratings reflect ARIG’s good risk-adjusted capitalization and very good business profile,” said Best. “An offsetting factor is the company’s marginal operating performance.” Best added that it “believes that during 2007 and 2008, ARIG improved the level of diversification within its business. Through the integration of Scottish Re Limited’s (now Pacific Life Re Limited) Middle East life portfolio, ARIG increased the proportion of life business within its portfolio from a very low level to over 20 percent. During the same period, ARIG also developed its non-life portfolio, increasing premium income by approximately one quarter, while at the same time reducing its exposure to poorly performing lines of business. During 2008, ARIG further developed its offices in Singapore and Labuan into positions where they are able take advantage of alternative, expanding insurance markets.” Best also said that in its opinion, “ARIG maintained a good level of risk-adjusted capitalization throughout this period of growth, which remains supportive of the company’s medium-term business plans.”

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