Ratings Recap: New Castle Re, Generali (Hungary), Allianz Risk Transfer

February 4, 2009

A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-‘ (Excellent) and the issuer credit rating (ICR) to “bbb” from “a-” of Bermuda-based New Castle Reinsurance Company Ltd. Best also downgraded the ICR to “bb-” from “bbb-“of New Castle Reinsurance Holdings Ltd. (Bermuda). All of the ratings have been removed from under review with negative implications and assigned a negative outlook. Concurrently, Best withdrew the ratings at the company’s request and assigned an NR-4 to the FSR and an “nr” to the ICRs. “These rating actions reflect management’s decision to withdraw from A.M. Best’s interactive rating process,” said the bulletin. “The rating actions reflect New Castle Re’s revised business profile as a run-off entity and its supportive level of risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR),” Best explained. “On December 16, 2008, New Castle Re announced a renewal rights transaction with a third party whereby the third party acquired the right to renew virtually all of New Castle Re’s policies at January 1, 2009. Additionally, New Castle Re’s infrastructure including almost all of its employees and its systems were transferred to the third party. On January 16, 2009, New Castle Re formally announced it was in run-off effective immediately, ceasing to write any new and renewal business.” Best added that, “although the company has indicated its intention to provide for an orderly run off of all existing policyholder obligations, the negative outlook reflects the continued concerns with the status of their primary investors, Citadel Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC (together known as the Funds) and the potential for dividends to be paid out inconsistently with management’s current run-off plan that assumes New Castle Re retains the remaining risk for the full term of the underlying contracts, which may be impacted by these rating actions.”

Standard & Poor’s Ratings Services has assigned its ‘BBB’ long-term counterparty credit and insurer financial strength ratings to Hungary’s Generali Providencia Biztosito Zrt (Generali Providencia) with a negative outlook. “The ratings are significantly influenced by those on the Republic of Hungary (BBB/Negative/A-3) because Generali Providencia’s investment portfolio is largely correlated to Hungarian sovereign risk,” explained credit analyst Johannes Bender. “Further rating factors are the company’s strong competitive position and operating performance. In addition, we consider the company strategically important to its ultimate parent Assicurazioni Generali SpA (Generali; AA/Negative/–).” S&P noted that “Generali Providencia’s investment portfolio is largely correlated to bonds issued by the Hungarian government. This links the credit quality of the company’s investment portfolio to the credit quality of Hungary, which significantly influences our view of investment and liquidity risks and the overall rating. Our recent downgrade of Hungary reflects the adverse impact that the deteriorating global economic environment is having on the Hungarian economy.”

Standard & Poor’s Ratings Services has revised its outlook on Swiss-based Allianz Risk Transfer AG (ART) and related subsidiaries to negative from stable. S&P also affirmed the ‘AA/A-1+’ long- and short-term counterparty credit ratings and the ‘AA’ insurer financial strength ratings. “The ratings continue to be equalized with those on ART’s ultimate parent, Allianz SE (AZSE; AA/Stable/A-1+), owing to the strong explicit group support the company receives,” explained credit analyst Ralf Bender. “The outlook revision, however, reflects our expectation that this support will diminish, owing to the anticipated termination–by year-end 2010–of sizable blocks of core traditional intragroup business that ART underwrites. Our view of ART’s stand-alone credit profile is unchanged.” S&P added that it considers “ART strategically important, but not core, to AZSE. According to our criteria, this would usually result in the ratings on ART being capped at one notch below those on the group’s core operations. However, the strength of the additional explicit support from AZSE, primarily in respect of ART’s traditional insurance and reinsurance business, has until now enabled the ratings to be equalized with those on the parent. This explicit support comprises a rolling stop-loss contract with AZSE and a cap provided by Allianz Global Corporate & Specialty AG (AGCS; AA/Stable/–) on a quota-share contract, which limit ART’s downside risk on the bulk of its traditional business. In addition, a net-worth maintenance agreement underlines AZSE’s commitment to ART’s nontraditional business, although it does not completely satisfy our criteria for such support agreements. Consequently, we expect the eventual cessation of ART’s traditional business to result in a one-notch differential between the ratings on ART and those on its parent. ART’s stand-alone creditworthiness continues to be underpinned by the company’s effective management, strong operating performance, and very strong capitalization. These factors are partly offset by the potential for business volatility to arise as a result of ART’s innovative business approach and opportunistic strategy. Earnings could also become more volatile because of the continued dislocation within global capital markets.”

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