Ratings Recap: RVI, DuraRock

April 2, 2009

Standard & Poor’s Ratings has lowered its counterparty credit and financial strength ratings on Bermuda-based R.V.I. Guaranty Co. Ltd. and its U.S.-based subsidiaries–R.V.I. America Insurance Co. and R.V.I. National Insurance Co.–to ‘BBB’ from ‘A-‘. S&P has also removed the ratings on all of these companies (collectively referred to as RVI) from CreditWatch, where they were placed on Aug. 12, 2008, with negative implications.
The outlook on RVI is negative. “The downgrade is based on our opinion that the weak macroeconomic environment has hurt the value of RVI’s franchise,” explained credit analyst Taoufik Gharib. S&P said the “rapidly deteriorating economic conditions, rising gas prices in the second quarter and third quarter of 2008 (which have since declined), low new vehicle sales, a decline in used car prices at auction as reflected in third-party index values, and the higher unemployment rate were the main drivers of the adverse loss development in RVI’s passenger vehicle residual value portfolio in 2008. As a result, RVI settled all present and future value asset risk coverage with its top three clients in the fourth quarter of 2008. However, the loss exposure and potential development on RVI’s existing passenger vehicle book of business could be higher, accentuated by a deepening recessionary trend, and not commensurate with the former rating.”

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Barbados-based DuraRock Reinsurance, Ltd., and has assigned a stable outlook to both ratings. “These rating actions reflect DuraRock’s maintenance of adequate risk-adjusted capitalization as a result of $16 million in capital contributions from its ultimate owner, comprised of cash and other assets,” Best explained. “The ratings also reflect the company’s profitable operating earnings, adequate liquidity, business expertise within the transportation market and the company’s ability to maintain ultimate underwriting control on nearly all of its business.” However Best indicated that “DuraRock’s limited scope of operations and its above average investment leverage, primarily driven by a single large equity investment in P.A.M. Transportation Services, Inc., should be considered as partially offsetting factors.”This concentration risk exposes the company’s capital position to fluctuations in the stock price of PAM, as evidenced by significant unrealized capital losses in 2008 and 2009,” Best explained. Nonetheless, Best added that it “believes risk-adjusted capitalization is adequate to absorb additional negative impacts from the PAM investment over the near term.”

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