Ratings Recap: Fuji Fire, Munich Re (Mauritius), Ballantyne Re

February 13, 2009

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘A-‘ (Excellent) and the issuer credit rating (ICR) to “bbb+” from “a-” of The Fuji Fire & Marine Insurance Company, Limited. Best has also placed the ratings under review with negative implications. In addition Best downgraded the FSR to ‘B++’ (Good) from ‘A-‘ (Excellent) and the ICR to “bbb+” from “a-” for Fuji Fire’s subsidiary, American Fuji Fire and Marine Insurance Company of Long Grove, Ill. The outlook for both ratings has been revised to negative from stable. “These rating actions reflect Fuji Fire’s declining capital position and weakening overall earnings due to its poor investment performance,” Best explained. “The ratings also factor Fuji Fire’s well-balanced insurance portfolio and stable underwriting performance.” Best pointed out that the “continuing extreme volatility in the capital markets has negatively impacted Fuji Fire’s capitalization. The company continues to suffer losses stemming from foreign currency exposure, equity market exposure and real estate funds exposure. The company’s capital and surplus stands at JPY 80 billion [$870.8 million] as of September 2008, compared to JPY 178 billion [$1.937 billion] as of March 2007. Although a substantial cushion is added if the catastrophe reserves are considered, the risk-based capitalization decreased over the last two years, which is also evidenced in the drop in the local solvency ratio.”.

Standard & Poor’s Ratings Services has raised its counterparty credit and insurer financial strength ratings on Mauritius-based reinsurer Munich Mauritius Reinsurance Co. Ltd. (Munich Re Mauritius) to ‘A’ from ‘BBB’. The outlook is stable. S&P said the “upgrade is based on the extensive reinsurance support offered by both the ultimate parent Munich Reinsurance Co. (AA-/Stable) and immediate parent Munich Reinsurance Co. of Africa Ltd. (A/Stable). Credit analyst Matthew Day noted that “stand-alone characteristics which benefit the rating include strong operating performance and good capitalization.” However, S&P said “these positive factors are offset to a limited extent, however, by Munich Re Mauritius’ exposure to a number of potentially volatile business and political environments across the African continent.” In addition the rating agency noted that “Munich Re Mauritius benefits from a significant quota-share placed with the group, as well as an extensive stop-loss agreement placed with Munich Re Africa. The group also provides business line specific excess of loss arrangements protecting peak risks. Day indicated that the “stable outlook is based on the outlook on the immediate parent, Munich Re Africa, and the ratings on Munich Re Mauritius will move in lockstep with those on Munich Re Africa.” In the event of the removal, or significant reduction in the reinsurance protection, the rating would be revised downwards.

Standard & Poor’s Ratings Services has assigned its ‘CC’ rating to Ballantyne Re’s Class A-notes and its ‘C’ rating to the company’s Class B notes, after it revised the ratings to ‘D’ on Jan. 5, 2009. “We are assigning new ratings to the notes because today the company will pay the Class A-1 noteholders delinquent interest, including additional interest on the previously unpaid interest,” explained credit analyst Gary Martucci. “In addition, Ballantyne Re made all scheduled payments previously paid by the financial guarantors on each other series of notes.” S&P also noted: “On Feb. 9, 2009, (with an effective date of Dec. 31, 2008), Security Life of Denver Insurance Co. recaptured an additional 11.4 percent of the ceded business from Ballantyne, bringing the total amount recaptured to 62.9 percent. This decreases the amount of XXX (excess) reserves Ballantyne is required to hold and lowered the minimum balance requirement in the surplus account. (The minimum balance requirement is what triggered the nonpayment back in January.) Although we expect that Ballantyne should be able to make scheduled payments for a quarter or two, a decline in the market value of the assets or unfavorable insurance experience (such as higher-than-expected mortality resulting in greater benefit payments from Ballantyne) could result in another nonpayment. On the business that Security Life of Denver has not recaptured, the XXX reserve requirement will continue to increase, putting additional strain on Ballantyne’s ability to make scheduled interest payments over time.”

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