Ratings Recap II: Chaucer, MSIG, Congregational, Top Layer, Asia Capital

January 30, 2009

Standard & Poor’s Ratings Services has issued a bulletin indicating that “its ‘3’ Lloyd’s Syndicate Assessment (LSA) on Chaucer – Syndicate 1084 is not affected by the announcement by Chaucer Holdings PLC (Chaucer Holdings; not rated) on January 28 of the incremental losses, capital raising, and the consideration of an unsolicited indicative merger proposal from Novae Group PLC (Novae; not rated).” S&P also noted that “Chaucer Holdings is the dominant provider of capacity to the syndicate, and that it plans to raise an additional £75 million ($108 million), which has been underwritten. The funds will “be used to finance solvency deficits at its managed syndicates (£35 million [$50.45 million]), an increase in its sterling-denominated capital requirements arising from the movement of the British pound sterling against the U.S. dollar in recent months (£29 million [$41.8 million]), and expected business growth (£10 million [$14.4 million]),” said S&P. “The solvency deficits are significantly influenced by incremental investment and underwriting losses at Chaucer Holdings’ managed syndicates arising from exposure to Bernard Madoff ($17.7 million) and the reassessment of losses related to Hurricane Ike ($10 million),” S&P explained. “With the additional capital, Chaucer’s good competitive position will continue to improve as this will enable Chaucer Holdings to increase the underwriting capacity of the syndicate by £100 million [144 million] to £545 million [$785 million] for 2009. In the absence of new capital, the syndicate’s competitive position would have been adversely affected since it would have needed to reduce the syndicate’s underwriting capacity to approximately £400 million [$576.4 million].” S&P also indicated that if the Novae merger proposal “be pursued as an alternative,” S&P would “review the syndicate’s assessment again as and when the details of the proposal, if any, are finalized.”

Standard & Poor’s Ratings Services has revised the outlook on the insurer financial strength rating and long-term counterparty credit rating on MSIG Insurance (Hong Kong) Ltd., MSIG Insurance (Singapore) Pte. Ltd. and MSIG Mingtai Insurance Co. Ltd. to negative from stable. The outlook changes follow S&P’s similar outlook revision of the three insurers parent, Mitsui Sumitomo Insurance Co. Ltd. (MSI). S&P also affirmed the ‘AA-‘ ratings on the three entities mentioned above. “The recent outlook revisions of the wider MSI group followed the official announcement on Jan. 23, 2009, by the three Japanese insurance groups (Aioi Insurance Co. Ltd., Mitsui Sumitomo Insurance group, and Nissay Dowa General Insurance Co. Ltd.) that they have entered negotiations to merge under a holding company,” S&P explained. “The merger, which is slated for April 2010, would create one of the largest insurance groups in Japan, with strong ties to the Toyota Motor, Nippon Life Insurance, and Mitsui and Sumitomo corporate groups, and one whose business profile would benefit from a stronger market position and diversification. The financial profile of the merged group, however, may be somewhat weaker than the financial profile of the MSI group.”

Standard & Poor’s Ratings Services has affirmed its ‘BB+’ counterparty credit and insurer financial strength ratings on Congregational & General Insurance PLC. S&P has also removed the ratings from CreditWatch with negative implications, where they had been placed on July 30, 2008. The outlook is stable. “The original CreditWatch placement reflected our uncertainty regarding the implementation of the company’s stated strategy at that time,” S&P explained. “This concern has been alleviated, however, since Congregational & General has successfully secured a co-insurance agreement with Hiscox Underwriting Ltd. on behalf of Hiscox Insurance Co. Ltd. (A/Stable/–). In addition, Congregational & General has considerably reduced management’s high risk tolerance by selling its whole equity portfolio in December 2008.” S&P added that the “co-insurance agreement reduces pressure on Congregational & General’s reduced shareholder funds and may bring an additional dimension to the company’s profile going forward by generating other income streams. Equity exit significantly reduced the volatility in solvency.” Credit analyst Tatiana Grineva added: “The ratings on Congregational & General are constrained by its marginal, although improving, operating performance and marginal competitive position. The ratings remain underpinned by its robust competitive position within its core, but very small, niche commercial property market and prospectively good capitalization.” S&P said the “stable outlook reflects our expectation that Congregational & General will be able to maintain underwriting profitability over the next two to three years in order to rebuild its capitalization and financial flexibility to its historic levels.” “We also expect the company to maintain its recently reduced–after the sale of its equity portfolio–financial risk tolerance,” Grineva stated.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit rating (ICR) of “aa-” of Bermuda-based Top Layer Reinsurance Ltd. with stable outlooks. “The ratings reflect the substantial amount of support Top Layer receives from its co-owners, State Farm Mutual Automobile Insurance Company (currently with an FSR of ‘A++’ [Superior] and an ICR of “aa+”) and Renaissance Reinsurance Ltd. (RenRe) (currently with an FSR of ‘A+’ [Superior] and an ICR of “aa-“),” Best explained. “Since Top Layer’s inception in 1999, the company has generated outstanding operating results, which are due to the property catastrophe underwriting expertise of RenRe, combined with the lack of catastrophes significant enough to impact the programs written in Top Layer’s core markets. Top Layer’s business scope is limited to the assumption of high excess layers of non-U.S. property catastrophe risks underwritten on a global basis. The company has been loss-free since inception.” Best added that on a “stand-alone basis, Top Layer is only modestly capitalized relative to the high excess layers of property catastrophe risks it assumes. However, through the various contractual obligations of State Farm and RenRe, Top Layer receives substantial capital support and reinsurance protections from State Farm and, to a much lesser degree, RenRe. Top Layer is structured so that its maximum full limit net loss during any calendar year is capped at $100 million. The occurrence of losses will trigger capital calls for State Farm and RenRe to replenish Top Layer’s capital. Moreover, State Farm provides Top Layer with $3.9 billion excess of $100 million stop-loss reinsurance protection. This coverage is significantly larger than the aggregate exposures Top Layer undertakes in each of the geographic zones, which it assumes risks.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating (ICR) of “a-” of Singapore’s Asia Capital Reinsurance Group Pte. Ltd. (ACR). The outlook for both ratings is stable. Best said the “ratings reflect ACR’s strong capitalization, well balanced portfolio with diversified geographic risk and strong risk management capabilities. The ratings also recognize its successful implementation of the infrastructure, branding and distribution channel in the first two years of operation since 2007.” Best also noted that the Company continues to maintain a strong capital level to meet Best’s “stricter risk-based capital requirements for newly formed reinsurance companies. In general, the company has adhered to its initial five-year business plan, with some adjustments to reflect a higher premium volume coming from two newly established associated companies at the holding company: ACR ReTakaful MEA B.S.C. (c) and ACR ReTakaful SEA Berhad.” Best said that in its view, “ACR’s capitalization level has a buffer to absorb the additional risk from the higher premium exposure.” The rating agency added that ACR has demonstrated that it “has successfully established various systems for risk management regarding pricing, exposure accumulations and capital allocation. In addition, the company consistently reviewed the pricing adequacy for its products and the overall trend in the market.” best said it “believes ACR could explore more business opportunities by providing additional services through translating its expertise in risk management to its clients.”

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