Ratings Recap: Everest Re (Notes), Int’l. Hannover, China Int’l., Transmonde

March 20, 2009

Standard & Poor’s Ratings Services said that its ratings on Bermuda-based Everest Re Group Ltd. and its U.S.-based intermediary holding company, Everest Reinsurance Holdings Inc. (both rated ‘BBB+’ with a stable outlook), as well as the ratings on the company’s core operating subsidiaries (all rated ‘A+’ with a stable outlook) “are not affected by today’s announcement of a cash tender offer for Everest’s 6.60 percent fixed to floating rate long-term subordinated notes scheduled to mature in 2067. The core operating subsidiaries are Everest Reinsurance (Bermuda) Ltd., Everest Reinsurance Co., and Everest National Insurance Co.” S&P explained: “These long-term subordinated notes were issued in April 2007 with $400 million in principal. Under the terms and subject to the conditions of the tender offer, Everest Reinsurance Holdings Inc. will pay holders $500 per $1,000 principal amount of the long-term subordinated debt securities. The tender offer will expire on March 26, 2009, unless extended or earlier terminated by Everest Reinsurance Holdings Inc. Everest is offering the cash tender offer to take advantage of the low market value of these securities that are trading at a significant discount ($0.37 on the dollar). At year-end 2008, the company had approximately $2.1 billion in cash, cash equivalents, and short-term investments, which could be used to fund the tender offer without any significant impact on its liquidity. Furthermore, the company had strong operating cash flows of $663 million in 2008. Following the completion of the tender offer, we expect Everest’s financial leverage and coverage metrics to improve, while its risk-adjusted capital adequacy will remain very strong and redundant at the current rating.”

A.M. Best Co. has upgraded the financial strength rating (FSR) to’ A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating (ICR) to “a+” from “a-” of the UK-based International Insurance Company of Hannover Limited, a subsidiary of Germany’s Hannover Re. The outlook for both ratings is stable. Best said the “upgrades reflect Inter Hannover’s closer integration with Hannover Re and increased reinsurance support from Hannover Re and affiliates.” Best also indicated that it “expects Inter Hannover’s stand-alone risk-adjusted capitalization to remain strong in 2009. The ratings factor Inter Hannover’s importance to Hannover Re as a source of direct business. Hannover Re has strengthened the reinsurance support it provides to Inter Hannover, and from 2009 onwards will reinsure most of Inter Hannover’s single risk and delegated authority business via quota share agreements.” In addition Best indicated that it “believes that the additional reinsurance support, which has been accompanied by increased integration between Inter Hannover and Hannover Re’s business units, marks a strengthening of the importance of the company to Hannover Re. A.M. Best anticipates that Inter Hannover will report a small overall profit in 2008, despite soft market conditions. The company’s profitability is expected to improve in 2009 and 2010, primarily reflecting increased commission income from Hannover Re on ceded business. In A.M. Best’s opinion, Inter Hannover has a good business profile, supported by Hannover Re. The company writes large commercial single risks with a focus on the London market and Scandinavian business, as well as delegated authority business, which is written primarily through European agencies and brokers and has a focus on small commercial and personal lines business.”

Standard & Poor’s Ratings Services has placed its ‘BBB-‘ long-term and ‘A-3’ short-term counterparty credit ratings on China Insurance International Holdings Co. Ltd. (CIIH) and the ‘BBB-‘ issue rating on the company’s senior unsecured debt on CreditWatch with negative implications. S&P has also placed its ‘A-‘ long-term counterparty credit and insurer financial strength ratings on China International Reinsurance Co. Ltd. (CIRe) on CreditWatch with negative implications. “The CreditWatch actions follow the group’s recent profit announcement and reflects the risks stemming from the deterioration in the group’s capitalization as a result of losses made in 2008,” explained credit analyst Paul Clarkson. “There is some uncertainty about the group’s likely earnings performance over the next two years, given the currently volatile market conditions and the rapid growth of the group’s operations in China.” S&P also noted that “CIIH’s operating performance in fiscal 2008 was weaker than expected despite its profit warning a month ago. The insurer reported a loss attributable to shareholders of Hong Kong dollar (HK$) 299.715 million [US$38.7 million]. The company’s operating performance was significantly affected by losses from its property and casualty subsidiary, fair-value unrealized investment losses throughout the group, a goodwill impairment loss, and an operating loss at its pension subsidiary. In addition, capital was diminished through unrealized losses that went straight to shareholders. As a result, CIIH’s relative capital strength weakened, which placed a continued strain on capital, given the high growth of the Chinese mainland subsidiaries. However, its reinsurance and life operations still reported a profit in 2008 and their performance was satisfactory in view of the difficult market conditions. We placed the ratings on CIRe on CreditWatch to reflect the potential rating impact on CIRe if we lower the ratings on CIIH. However, the standalone profile of CIRE remains strong and the current market turmoil has not had a material impact on the company.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based Transmonde Services Insurance Company Limited, both with stable outlooks. Best explained that Transmonde’s ratings “reflect its minimal underwriting leverage, strong level of capitalization and profitable operating results driven by excellent underwriting performance. Partially offsetting these positive rating factors are the company’s relatively high retentions and concentration in liability lines with significant loss severity potential and its limited market profile as a single parent captive.” Transmonde provides professional, general and pollution liability coverages to subsidiaries and affiliates of the SGS Group. In addition it has “maintained very conservative underwriting leverage ratios as surplus has consistently grown to support increasing business volumes,” best continued. “This surplus growth is the result of retained earnings from highly profitable operating results driven by excellent underwriting performance. The company has posted low loss and loss adjustment expense ratios, reflecting SGS Group’s effective risk management. Transmonde’s relatively high per occurrence retentions are mitigated by significant deductibles, conservative reserving practices and minimal exposure to pollution losses. SGS Group has no manufacturing or trading interests to contribute to pollution exposure. In 2004, Transmonde entered into loan facility agreements to provide substantial funds to its parent in the form of loans. Concerns regarding liquidity at Transmonde are mitigated in part by a favorable termination provision. Transmonde also benefits from the strong balance sheet and financial flexibility of SGS Group, a publicly traded Swiss company.”

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