S&P Says Rating Actions on AIG Have No Effect on Transatlantic

March 4, 2009

Standard & Poor’s Ratings Services has said that its rating actions on American International Group Inc. and its insurance subsidiaries “have no effect on the ratings on Transatlantic Holdings Inc. (TRH – ‘BBB+’/Stable/–) or any of TRH’s operating subsidiaries.” These include Putnam Reinsurance Co., Transatlantic Reinsurance Co., and Trans Re Zurich; all are rated ‘A+’ with a stable outlook.

S&P was referring to its recently announced rating actions on AIG, following its $61.7 billion fourth quarter loss and the subsequent increase in financial support from the U.S. Treasury (See related article).

The rating agency pointed out that “historically, we have assessed TRH and its operating subsidiaries on a stand-alone basis, meaning the ratings have not incorporated any support related to AIG’s majority ownership.” (Ed. Note: AIG has a 59.3 percent stake in Transatlantic, but AIG has also been effectively nationalized. It is now 80 percent owned by the U.S. government, which in turn now has a controlling stake in Transatlantic).

“Transatlantic reported reasonable earnings during 2008 given the large catastrophes experienced during the third quarter, with net income of $102 million, a combined ratio of 99 percent, and a return on revenue (ROR) of 10 percent,” S&P said. “The company’s estimated pretax net costs from the catastrophes totaled $170 million for the year, largely resulting from losses related to Hurricane Ike. Relative to peers’, Transatlantic’s catastrophe losses were on the lower end.”

In addition Transatlantic’s rating outlook is stable. “We expect Transatlantic’s competitive position to remain strong as the company maintains its global diversification and its excellent reputation with brokers and clients,” S&P continued. “Premium volume likely will decline slightly in 2009, as we expect a continued reduction in foreign exchange rates and a possible reduction in business assumed from AIG affiliates.

“Assuming a normal catastrophe season in 2009, we would expect TRH to return to a combined ratio of 93 percent-95 percent and an ROR of 13 percent-15 percent.

“Capital adequacy likely will remain strong in 2009, reflecting our expectation for continued strong earnings supporting the capital base. We expect financial leverage to remain at 18 percent-20 percent and interest coverage to be at least 10x. Although future net reserve additions likely will decline as releases from more recent years emerge, we still have concerns about possible continued reserve strengthening for accident years prior to 2002. We do not expect a material amount of overall reserve strengthening.

“If the company produces operating returns in line with expectations (i.e., combined ratios of 93 percent-95 percent and RORs of 15 percent or better), continues to use and enhance its economic capital modeling capabilities for strategic planning and decision making, and demonstrates an ability to preserve its strong competitive position in the market, we could revise the outlook to positive in the next 18-24 months.

“Negative pressure on the ratings could result if we see a significant departure of staff or clients in the next 12-18 months. We will continue to monitor the proceedings with AIG’s ownership stake, and we will review the ratings as necessary when the situation becomes more definitive.”

Source: Standard & Poor’s – www.standardandpoors.com

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