Ratings Recap: Everest Re, NIPPONKOA, Sompo, Evergreen Re, Endurance

March 17, 2009

Standard & Poor’s Ratings Services has lowered its counterparty credit ratings on Bermuda-based Everest Re Group Ltd. and its U.S.-based intermediary holding company, Everest Reinsurance Holdings Inc., to ‘BBB+’ from ‘A-‘. S&P also lowered its counterparty credit and financial strength ratings on three operating subsidiaries – Everest Reinsurance (Bermuda) Ltd., Everest Reinsurance Co., and Everest National Insurance Co. (collectively referred to as Everest) to ‘A+’ from ‘AA-‘. S&P has now removed all of these ratings from CreditWatch, where they were placed on Dec. 19, 2008, with negative implications, and has changed their outlooks to stable. “The downgrade stems from Everest’s inability to exploit its competitive position to generate sustainable, strong underwriting and operating results commensurate with the former rating,” explained credit analyst Taoufik Gharib. S&P also noted that the rating action was the result of the company’s “continuous adverse reserve developments, which have plagued earnings. In addition, Everest’s enterprise risk management (ERM) program is adequate, but the implementation of a more robust program has been slower than expected.” The bulletin then said the “ratings on Everest are based on its strong competitive position with a global market reach, very strong capital adequacy, and strong financial flexibility. The stable outlook reflects our view that Everest will maintain its strong competitive position with a global presence. Premiums writings will likely grow modestly in 2009, benefiting from hardening prices, mainly in property reinsurance. Its international business will likely increase as a percentage of total writings as it continues to diversify its geographic business mix. In addition S&P indicated: “Everest’s risk-adjusted capital adequacy will likely remain very strong, redundant, and supportive of the rating in 2009.”” S&P also “expects that the company will continue to strengthen its ERM construct with the implementation of its economic capital model in 2009, which eventually will provide actionable information for strategic decision-making based on risk/reward relationships. In 2009, we expect that Everest will produce a GAAP combined ratio of 93 percent-95 percent and a return on revenue of about 15 percent. Supporting these results are rate increases, mainly in the property reinsurance, and the investment income from its large invested asset base. Everest has shifted its business mix toward property and international business in the past two years, with reductions in U.S. casualty writings. We believe this strategy could make the company’s operating results more volatile, and it should require strong risk-adjusted rates of return. We expect that financial leverage, as measured by total debt plus preferreds to total capital, will remain modest and within a range acceptable for the rating (about 18 percent-20 percent), in the medium term, with fixed-charge coverage of at least 5x.” Gharib added: “Considering the recent downgrade, a revision of the outlook to positive is unlikely in the next 12-24 months. However, if the company cannot sustain strong earnings or suffers further material adverse reserve developments, we could revise the outlook to negative.”

Standard & Poor’s Ratings Services has revised to positive from stable its outlook on its ‘A+’ financial strength and long-term counterparty credit ratings on NIPPONKOA Insurance Co. Ltd., as well as the outlook on its financial strength rating on NIPPONKOA Insurance Co. Ltd. (U.S. branch). S&P has also affirmed its ‘AA-‘ financial strength and long-term counterparty credit ratings on Sompo Japan Insurance Inc. and its core subsidiary, Sompo Japan Himawari Life Insurance Co. Ltd. “The outlook revision reflects our view that the ratings on NIPPONKOA are highly likely to be revised to ‘AA-‘ as a result of a merger plan with Sompo Japan, under which the companies have agreed to establish a joint holding company in April 2010 and consolidate their operations,” S&P explained. The rating agency also indicated that it “believes that, if the plan materializes, its ratings on the three insurers would be ‘AA-,’ which is the same as the current rating on the core entities of the Sompo Japan group.” S&O also affirmed its ratings on the overseas subsidiaries of the two groups. “The merger would create a non-life insurance group with an extensive and solid domestic business franchise, backed by Sompo Japan’s individual products sold via agents and NIPPONKOA’s use of distribution channels of regional banks and other financial institutions,” S&P continued. However, it expects the “new group to face difficulties enhancing its profitability, as the domestic non-life insurance business, which accounts for a large proportion of both insurers’ business, is currently under pressure. In particular, the deteriorating domestic economy and the dwindling birthrate and aging population continue to squeeze the profitability of automobile and fire insurance. A key challenge for the new group will be to enter growth areas by consolidating the logistics of the two insurers and streamlining back office functions such as systems and administration while the two insurers continue to exist separately under a holding company structure. The new group would also benefit from promptly establishing a group-wide management and risk management system, in a bid to further develop its overseas business, which has so far targeted mainly Japanese companies overseas.” S&P added that it will “monitor the progress of the merger and incorporate the results in its ratings on NIPPONKOA and Sompo Japan. In line with our rating criteria of the group methodology of financial service groups, we plan to recognize the three insurers as the core companies of the new group and equalize our ratings on the companies when the establishment of the holding company is confirmed.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Bermuda-based Evergreen Reinsurance Company, Ltd. – both with stable outlooks. “These ratings reflect Evergreen Re’s excellent capitalization, consistently strong operating performance and its unique role as the primary insurance carrier for its ultimate parent, Evergreen Group,” said Best. “These positive rating factors are derived from the company’s conservative underwriting standards, low cost operating structure and multiple product line book of business and broad geographic exposure base. Partially offsetting these positive rating factors is Evergreen Re’s exposure to earthquakes and typhoons in the Asia/Pacific region, though the risk is mitigated by policy sublimits, prudent reinsurance and the wide geographic dispersion of assets insured. Furthermore, the majority of its book of business is generated from one source – Evergreen Group. Nonetheless, the group’s business is diverse in scope, complexity and in its risk profile. In addition, management places great emphasis on risk control and carefully monitors its writings in order to avoid a concentration of risk.” Best also noted that the ratings “reflect the strong level of commitment on the part of the Evergreen Group, whose management incorporates Evergreen Re as an integral component in the overall risk management program of the group. Moreover, Evergreen Re gains from its parent’s global scope and business relationships. These commitments have been developed over the last several years and encompass risks located in a number of countries in East and Southeast Asia. Overall, Evergreen Re benefits from its parent’s strong management experience and market presence, as well as Evergreen Group’s adherence to a philosophy of providing a stable market for global insurance and reinsurance for the Evergreen Group and its operating subsidiaries.”

Fitch Ratings has affirmed the ‘A’ insurer financial strength (IFS) rating of Endurance Specialty Insurance Ltd. (Endurance Bermuda, the principal (re)insurance operating subsidiary of Endurance Specialty Holdings Limited (Endurance). Fitch has also affirmed the following ratings for Endurance: – Issuer Default Rating (IDR) ‘A-‘;–Senior unsecured notes ‘BBB+’;–Non-cumulative perpetual preferred shares ‘BBB’. Fitch’s rating outlook for all of the ratings is stable. Fitch said its “affirmation reflects its belief that Endurance’s risk management capabilities will enable the company to maintain its strong and liquid balance sheet during periods of heightened capital market volatility, such as those currently being experienced. Fitch views the company’s 13 percent reduction in reported GAAP basis common shareholders’ equity in 2008 as a comparatively modest decline given the year’s very difficult capital market conditions and significant catastrophe-related losses.” In addition Fitch said that it “views Endurance’s investment portfolio as high-quality and liquid with the entire portfolio invested in cash and fixed income securities. The company’s portfolio is dominated by agency mortgage-backed securities, government issued debt, and highly rated corporate bonds. At year-end 2008 Endurance’s fixed income portfolio had a weighted average credit rating of ‘AAA’. Endurance’s investment portfolio and capitalization remains supportive of the company’s current ratings under stress test scenarios where Fitch assumes credit related losses on the company’s fixed income portfolio and asset valuation losses on the company’s very modest preferred equity portfolio. Fitch’s ratings for Endurance continue to reflect the company’s solid profitability, earnings and cash flow benefits derived from the company’s diverse book of business and the strong support the company’s high-quality and liquid investment portfolio provides for its loss reserves. The ratings also contemplate adequate capitalization and a strong balance sheet. Additionally, the ratings consider Endurance’s exposure to large catastrophe events, as evidenced by meaningful hurricane-related losses suffered in 2005 and 2008. The ratings also incorporate Fitch’s belief that premium rates in many of the company’s core business lines continue to face cyclical pricing pressure, which could dampen underwriting results in the near term. Finally, Endurance’s ratings recognize the potential for adverse reserve development from the company’s casualty lines reserves, although Fitch believes that the company’s loss reserves are currently adequate.”

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