Ratings: Hannover Re, Scottish Re, NTI, Korean Re, Southern Rock, Ecclesiastical/Ansvar

January 26, 2009

A.M. Best Co. has commented that the financial strength rating of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a+” of German reinsurer Hannover Rueckversicherung AG (Hannover Re) remain unchanged following the company’s announcement of an agreement to acquire ING U.S.’ individual life reinsurance business in the U.S. from Scottish Re Group Limited. The outlook for both ratings remains positive. Best noted that the “acquisition will be in the form of block assumption transaction (BAT), whereby Hannover Re will replace Scottish Re as a reinsurer to the ING entities, Security Life of Denver Insurance Company and Security Life of Denver International Limited.” Best added that it “views this transaction positively as it would create a visible market position in the U.S. mortality market for Hannover Re and would provide further diversification of Hannover Re’s life and non-life portfolio. Furthermore, Hannover Re will benefit from the infrastructure as well as from the know-how transferred in scope of the transaction. In addition, this portfolio transaction has only a limited impact on Hannover Re’s consolidated risk-adjusted capitalization.” Best also indicated that Hannover Re is expected to generate additional gross premiums written of between €800-$850 million ($1.05 billion to $1.116 billion) “and an additional non-recurring significant positive net income after taxes effective in 2009, flattening out in subsequent years.”

Standard & Poor’s Ratings Services today said that its ratings on Scottish Re Group Ltd. (CC/Negative/–) and related entities are not affected by the company’s Jan. 23, 2009, announced agreement to sell part of its administrative platform and nearly all of its individual life reinsurance business that was originally acquired from ING at the end of 2004. S&P said: “On Jan. 9, 2009, we lowered our counterparty credit rating on Scottish Re Group Ltd. to ‘CC’ from ‘CCC-‘. We also lowered our counterparty credit and financial strength ratings on Scottish Annuity & Life Insurance Co. (Cayman) Ltd. (SALIC) to ‘CC’ from ‘CCC+’, and we lowered our ratings on Scottish Re (U.S.) Inc. and Scottish Re Life Corp. to ‘CCC’ from ‘CCC+’. The outlook on all of the companies is negative. We stated that we will lower the ratings if the company is unable to make timely payment of its mandatory obligations.”

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Ireland’s New Technology Insurance (NTI) – originally a subsidiary of the UK-based Carphone Warehouse Group (CPW). Best explained that the U.S. corporation, Best Buy, Inc. (BBY) had acquired a 50 percent stake in CPW’s European and U.S. retail interests in 2008 for a cash consideration of £1.1 billion [$2.1 billion at the time; around $1.53 billion today]. Following this transaction, NTI is now jointly owned by the two companies via the Best Buy Europe Distributions Limited holding company. Best explained that the “ratings reflect NTI’s improving prospective business profile in addition to very good anticipated overall earnings and robust risk-adjusted capitalization.” The improved outlook is largely a result of what Best said it “believes is a significantly improved net business profile, with the likely retention of all European business and the acceptance of reinsurance of UK business, which is currently insured elsewhere.” Best also “anticipates that the combination of these factors is likely to increase gross premium income from £124 million ($172.7 million) for the fiscal year ending in 2008 to around £180 million ($251 million) for the fiscal year ending in 2010. Over the same period, net retained premium income is likely to increase from £19 million ($23.5 million) to around £180 million ($251 million). Overall profits have been driven by a consistently low loss ratio of around 23 percent,” which Best said it “believes will be maintained in 2009 and 2010.” Best also indicated that it “considers that NTI’s very good current level of risk-adjusted capitalization is likely to remain at a robust level in 2009 and 2010, given the significant increases in retained premium income.”

A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Korean Reinsurance Company (Korean Re). Best explained: “The ratings reflect Korean Re’s sound asset portfolio, dominant market position in the Korean reinsurance industry and strengthening underwriting guidelines for its overseas business. The revised outlook reflects the deterioration of risk-based capitalization in fiscal year 2007 and the first half of fiscal year 2008. Korean Re maintains a conservative investment strategy, and most of its invested assets are concentrated in fixed income securities with high credit quality.” Best also noted that the Company is South Korea’s sole domestic reinsurer, and maintains a “dominant presence in the Korean reinsurance market.” However, Best indicated that the “decline in risk-adjusted capitalization and the slowdown in the Korean economy” should be taken into account as offsetting factors. In addition Best noted that “due to higher than expected losses stemming from its overseas business as well as the softening reinsurance market, Korean Re was unable to grow its capital in line with its business growth in fiscal year 2007 and the first half of fiscal year 2008. This resulted in a decline in risk-adjusted capitalization as well as the local solvency ratio, which stood at 162 percent as of September 2008 compared to 197 percent in fiscal year 2006 (March 2007).” Best, did indicate, however that it “recognizes Korean Re’s decision to improve its overseas portfolio, which will result in gradual improvement of its capitalization.”

Standard & Poor’s Ratings Services has revised its outlook on Gibraltar-based motor insurer Southern Rock Insurance Co. Ltd. to stable from positive. S&P also affirmed the ‘BB’ insurer financial strength and counterparty credit ratings, and then withdrew the ratings at the company’s request. As a result of the rating withdrawal, Southern Rock is no longer subject to S&P’s ongoing surveillance. S&P explained that it had changed its outlook to reflect a “lower-than-expected capital adequacy. This reflects losses on the company’s investment portfolio, especially relating to equity investments in financial institutions and sufficient additional capital required for the company’s premium growth not being offset by additional capital received during the year.” S&P also indicated that it “no longer expects that the company’s marginal capital adequacy would be supportive of a higher rating level over the rating horizon. In addition, losses on investments raise concerns regarding the company’s risk appetite with regard to their investment portfolio.”

Standard & Poor’s Ratings Services has revised its outlook on U.K.-based non-life insurer Ecclesiastical Insurance Office PLC and its subsidiary Ansvar Insurance Ltd. to stable from positive. S&P also affirmed the ‘A-‘ insurer financial strength and counterparty credit ratings on Ecclesiastical and the ‘BBB+’ insurer financial strength and counterparty credit ratings on Ansvar. “The outlook revision is driven by recent volatility in underwriting and investment performance combined with increasingly challenging economic conditions,” explained credit analyst Tatiana Grineva. Generally, S&P said its ratings on Ecclesiastical “reflect the company’s strong capitalization, strong operating performance, and strong competitive position. These positive factors are partially offset by the company’s investment strategy, which exposes it to relatively high investment leverage and increases its solvency volatility.” Grineva added the stable outlook reflects S&P’s expectation that “Ecclesiastical’s senior management team will continue to build a track record of prudent growth and development of core U.K. specialist property lines, while displaying strategic clarity of purpose in their other activities.” Overall, S&P said it expects ” to see fundamentally strong and stable earnings throughout the business cycle, with results that tend to be above average for their sectors and which, in the absence of exceptional events, will display consistently profitable underwriting results on its core business.”

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