Ratings: Imagine, New Castle Re, E+S Re, Ship Owners, Labuan Re, Dongbu, Lemma, Scandinavian

December 18, 2008

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B+’ (Good) from ‘A-‘ (Excellent) and issuer credit rating (ICR) to “bbb-” from “a-” for the Barbados-based Imagine Insurance Company Limited, both with stable outlooks. Best then withdrew the ratings at the company’s request and assigned a category NR-4 to the FSR and an “nr” to the ICR. “The downgrading and withdrawal of the ratings follow the recent and unexpected decision by the board of directors of Imagine Group Holdings Limited (Barbados) to place Imagine into run-off in order to free up capital,” Best explained. “Imagine’s run off is expected to be orderly with capital levels anticipated to be adequate to pay future claims. However, given the board of directors’ desire to free up capital for all shareholders and the long-term nature of Imagine’s loss portfolio, the downgrade also anticipates that risk-based capital levels will remain supportive but not necessarily at current levels.”

A.M. Best Co. has placed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based New Castle Reinsurance Company Ltd. under review with negative implications. Best also placed the ICR of “bbb-” of New Castle Reinsurance Holdings Ltd. under review with negative implications. Best said the “under review status reflects the potential change in the business profile and the continued deterioration faced by their primary investors, Citadel Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC (together known as the Funds). Citadel Limited partnership is the manager of the Funds. Best also noted that the under review status reflects its concerns about the “long-term operating strategies of New Castle Re and its impact on the company’s business profile, a significant factor in the rating process. As a result of the start-up nature of New Castle Re, any material deviation from the initial business plan could result in A.M. Best revising its ratings and/or outlook.”

A.M. Best has withdrawn the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a+” of E+S Reinsurance (Ireland) and Hannover Reinsurance (Dublin), following the transfer of all assets and liabilities to Hannover Reinsurance (Ireland) Limited. Best the assigned a category NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR. The FSR of A (Excellent) and ICR of “a+” of Hannover Reinsurance (Ireland) Limited remain unchanged.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and the issuer credit rating (ICR) of “a-” of the Luxembourg-based West of England Ship Owners Mutual Insurance Association (WOE or the ‘Club’). Best noted that the action “removes the under review status applied to WOE in November 2008, following weakening of the Club’s risk-adjusted capitalization as a result of substantial investment losses and poor underwriting performance. The outlook for the ratings is stable.” Best said it “believes the Club’s risk-adjusted capitalization at year-end 20th February 2009 will be excellent as a result of additional calls that are likely to raise approximately $140 million net of expenses. The Club is to make three additional calls of 20 percent, 35 percent and 45 percent of the advance calls on each of the 2006, 2007 and 2008 policy years respectively. The additional calls are binding upon WOE’s members and will benefit performance and capitalization at year-end February 2009.” In addition Best said “previously anticipated underwriting losses for the year ending 2009 are likely to be reversed by the additional calls, resulting in a technical profit more than sufficient to offset investment losses for the year.” However, Best also noted that the “Club is heavily exposed to losses from its equity portfolio resulting from the slowing global economy, and it is expected to report a loss on investments of approximately 10 percent at year-end February 2009 (including dividend and interest income).”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Malaysia’s Labuan Reinsurance (L) Ltd. with stable outlooks. “The ratings reflect Labuan Re’s stable underwriting performance, conservative investment portfolio and well balanced portfolio with diversified geographic risk,” Best explained. “Labuan Re has maintained a stable loss ratio in the range of 61.0 percent-65.1 percent over the past five years through 2007. The stable loss ratio shows the company’s ability to generate profitable underwriting business as well as highlights the underwriting techniques that it has learned from prior losses. Labuan Re has a low exposure to equity markets. The company aimed to have a maximum 15 percent of its invested assets in equities. As at 31 December 2007, 46 percent of Labuan Re’s invested assets were held in cash, 29 percent in fixed income securities and 13 percent in equities. As of fiscal year-end 2007, the company’s business spread comprised 24 percent in Malaysia, 43 percent in Lloyd’s and 32 percent in other overseas markets in the Middle East and Asia. The participation in Lloyd’s increased international diversification of the company’s underwriting portfolio. The exposure to Europe and North America in the Lloyd’s portfolio offers instant diversification to Labuan Re’s primarily Asian risk exposure.”

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating (ICR) to “a” from “a-” of South Korea’s Dongbu Insurance Company, Ltd., and has revised its outlook on the ratings to stable from positive. Best said: “The ratings reflect Dongbu’s superior underwriting performance, stable market profile, sound investment performance and adequate capitalization level. Dongbu has been strengthening its capital level over the last five years driven by the strong performance. Although risk-adjusted capitalization is expected to weaken slightly in fiscal year 2008 due to unrealized capital losses stemming from the volatile investment market, the current risk-based capitalization level is viewed adequate to support the ratings.” Best added that it expects “Dongbu will continue to maintain profitability with its low expense structure and profit-oriented strategy strongly committed by top management. Thus, the capitalization level will further strengthen over the mid to long term.”

A.M. Best Co. has affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” of Ukrainian insurer Lemma Insurance Company with stable outlooks. “The ratings reflect Lemma’s good operating performance, reduction of financial risk insurance volume in the portfolio and strong risk-adjusted capitalization, which, however, is offset by increased financial leverage,” Best noted. “Other offsetting rating factors are expected fluctuations in underwriting performance mainly due to substantial growth in the international business where the company does not have a track record and limited financial flexibility.” Best added that it “believes Lemma’s level of risk-adjusted capitalization is expected to remain strong in the next few years, as a result of full earning retention and no-dividend policy. In A.M. Best’s opinion capital is also protected from catastrophe losses as Lemma’s risk exposures are spread across different regions, with an adequate reinsurance program for international risks. However, there is limited financial flexibility as prospective capital is dependent on retained earnings and the main shareholder ability to raise capital if required. In addition, Lemma’s leverage level has gone up significantly mainly due to liability increase related to Zemelniy bank (subsidiary of Lemma).” However, Best also said it “is of the opinion that the current high leverage level also has a negative impact on the quality of the capital base and, going forward, needs to be controlled.”

A.M. Best Co. has affirmed the financial strength rating of ‘B’ (Fair) and the issuer credit rating of “bb+” of Russia’s Scandinavia Insurance Company Limited Liability Company (SIC) with stable outlooks. “The ratings of SIC reflect its supportive level of risk-adjusted
capitalization and moderate operating performance,” said Best. “Offsetting factors are SIC’s volatile underwriting performance and declining business profile.” Best added that in its opinion, “SIC’s risk-adjusted capitalization is supportive of the current rating, with its capital position benefiting from a reduction in premium and reserve risk, following a continued decline in gross premiums written from RUB 487 million in 2005 ($17 million) to RUB 185 million ($8 million) expected in 2008. The deterioration in SIC’s profile is the result of the company restructuring its portfolio, eliminating unprofitable business and thereby concentrating on its key marine business, where it has its main expertise. A.M. Best expects SIC to grow up to 20 percent in each of the next two years from a low premium base, developing and servicing its clients in the local St. Petersburg market. The company’s operating performance has been moderate with pre tax profits of RUB 58 million ($2 million) expected in 2008, mainly arising from investment income. Underwriting performance has been volatile, largely arising from fluctuations in the company’s reserves following its changing profile and expense allocation within group companies. Best anticipates the combined ratio to remain below 95 percent over the next two years, with its loss ratio expected to improve to 64 percent in 2008.”

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