Ratings Roundup: Max Capital, CLICO, China Re, Exchange

March 2, 2009

Standard & Poor’s Ratings Services has placed its ‘BBB-‘ counterparty credit rating on Max Capital Group Ltd. on CreditWatch with positive implications following the company’s announcement that it will merge with IPC Holdings Ltd., a leading provider of property catastrophe reinsurance. “We believe this merger of Max with IPC is positive to the rating on Max,” explained credit analyst Damien Magarelli. “The transaction is a stock-for-stock merger, with the new company becoming the combination of IPC and Max.” S&P also noted that “although some overlap exists between the two companies (i.e., employees, property catastrophe exposures, and investments), the post merger company will basically be the combination of two relatively intact stand-alone entities. The merger is not driven by expense savings, but rather by the creation of a larger and well-capitalized company, with a more diversified book of business (mainly through IPC’s international presence and Max’s diversified business lines) and reduced earnings/capital volatility.” Magarelli added: “The CreditWatch positive reflects our expectation that the merger will establish a consolidated entity that is of significant scale relative to peers, as well as maintain excess capital, increase global client access, reduce hedge fund exposure, and decrease earnings/capital volatility.”

A.M. Best Co. has downgraded the financial strength rating to ‘E’ (Under Regulatory Supervision) from ‘B’ (Fair) and the issuer credit rating to “rs” from “bb” of CLICO (Bahamas) Limited. Best also removed the ratings from under review with negative implications. CLICO Bahamas is an insurance member of CL Financial Limited (CLF), a holding company based in Trinidad and Tobago. Best said the “downgrades follow the February 25, 2009 announcement by the Office of the Registrar of Insurance Companies in the Bahamas of a winding-up order for CLICO Bahamas. The action by the regulator followed a continuing decline in the market value of CLICO Bahamas’ real estate investment in the United States as well as uncertainty regarding the financial position of its ultimate parent, CLF.” Best also explained that the “prior ratings had reflected CLICO Bahamas’ significant exposure to affiliated loans as a percentage of its assets and capital and the volatility of earnings in its international operations. The company’s loan to a real estate subsidiary represented a significant concentration risk with a high exposure to the depressed Florida real estate market.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’- (Excellent) and the issuer credit rating of “a-” of Hong Kong-based China International Reinsurance Company Limited (CIRe), both with stable outlooks. “The ratings reflect CIRe’s sound level of liquidity, track record of operating profitability and prudent reserving practice,” said Best. “The ratings also acknowledge the solid business presence in its designated markets and its initiative in solidifying its presence in mainland China.” Best also noted that “CIRe achieved strong operating profitability due predominantly to the absence of a major catastrophic loss and favorable investment return in2007. With a stable cost structure, CIRe kept its combined ratio to around 95.9 percent, although small to medium-sized claims slightly exacerbated the loss ratio from 66.2 percent in 2006 to 69.0 percent in 2007. Nonetheless, the claims from the severe storms in the southern provinces of China and the earthquake event in Sichuan, which occurred in the first half of 2008, are expected to weaken CIRe’s underwriting margin in 2008.”

A.M. Best Co. has downgraded the financial strength rating to ‘C’ (Weak) from ‘B’ (Fair) and the issuer credit rating to “ccc” from “bb” of the UK-based Exchange Insurance Company Limited. However, Best said the “ratings remain under review, but the implications of the review have been revised to negative from developing. The ratings of Exchange have been downgraded due to the continued failure to complete negotiations with external investors to raise additional capital. The downgrading of the ratings reflects the company’s capacity to pay claims in the event of run-off given the increased likelihood that it will be placed into administration.” In addition Best indicated that the Company “continues to pursue negotiations to sell the company to potential investors. The ratings remain under review pending resolution of these discussions. Should these talks conclude successfully, an upgrade is possible. However, the company will require regulatory approval for a change of controller if negotiations are concluded successfully.”

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