Ratings Recap: Munich Re, Island Capital, Orkney Re, SCR, AEGIS

May 7, 2009

Standard & Poor’s Ratings Services has said that its ratings and outlook on German global reinsurer Munich Reinsurance Co. (‘AA-‘/Stable/–) and core related entities) are unaffected by the Group’s first-quarter 2009 earnings announcement. “Munich Re’s net income for the first quarter of 2009 reportedly dropped to €0.4 billion from €0.8 billion [to $536 million from $1.072 billion] for the same period in 2008, mainly reflecting continued write-downs on investments and goodwill. Nevertheless, in our opinion, Munich Re’s overall results continue to prove relatively resilient. For the full-year 2009, we expect Munich Re to remain focused on capital preservation and underwriting discipline, which should allow the group to achieve its combined ratio targets of 97 percent for the reinsurance and 95 percent for the non-life primary insurance segments, assuming no exceptional natural catastrophe experience. We would consider repeating the €0.4 billion quarterly net income on average in each of the following quarters in 2009 as a sound performance in a challenging business environment.”

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of Bermuda-based Island Capital Ltd. (formerly known as Exporters Insurance Company, Ltd.) and the UK-based Island Capital (Europe) Limited (formerly known as Exporters Insurance Company [Europe], Ltd); both with stable outlooks. Best explained: “These rating actions follow the recent acquisition by QBE Holdings, Inc. (QBE) of the Company’s core underwriting and risk management group. QBE has agreed to provide administration services in connection with the run-off of the Company and Island Capital Europe’s existing portfolios. The Company’s management has indicated that it will remain in run off for the foreseeable future but will continue to be fully supported, both financially and administratively.” Best added that the “Company’s ratings recognize its excellent capitalization, the stable run-off of its remaining liabilities and its ultimate ownership by a group of shareholders with continued support from a strong panel of reinsurers and conservative investment management. Partially offsetting these positive rating factors is the uncertainty associated with the Company’s run-off book of business as it winds down with minimal remaining liabilities.”

Standard & Poor’s Ratings Services has lowered its senior debt rating on Orkney Re II plc’s series A-2 notes to ‘CC’ from ‘CCC-‘. “We removed this rating from CreditWatch, where it had been placed with negative implications on Jan. 31, 2008,” said the announcement. S&P has also lowered its subordinated debt rating on the series B notes to ‘C’ from ‘CC’. “The continued decline in the mark-to-market value of assets in the excess reserve account has decreased the likelihood that Orkney Re II will continue to make scheduled payments on its issuances,” explained credit analyst Gary Martucci. S&P added that the “series B notes, which are deferrable, have already missed four payments and are not expected to receive any subsequent payments. The next payment date is May 11, 2009. The class A-1 notes are rated ‘AAA’ based on a financial guaranty policy from Assured Guaranty (UK) Ltd. Pursuant to this policy, Assured will pay any shortfall in the scheduled payments on these notes.” The rating agency said it would continue to “monitor the development of the transaction and take rating actions as appropriate.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Moroccan reinsurer Société Centrale de Réassurance (SCR), both with stable outlooks. Best said the “ratings reflect SCR’s strong business position and adequate risk-adjusted capitalisation. An offsetting factor is the volatile underwriting experience on its life portfolio from reserve adjustments and dependence on a relatively high level of soft capital in the form of unrealised capital gains, which is subject to the local stock market volatility.” Best also said it “believes that SCR’s business position as Morocco’s national reinsurer remains consistent. This is despite the progressive phasing out of SCR’s compulsory cession following the signing of a free trade agreement with an impact on the gross written premiums that are likely to fall to MAD 2.4 billion ($307 million) in 2009.” Best also “believes that the continued growth in conventional business—both in the domestic and foreign markets—is likely to partially mitigate the loss of compulsory cession business prospectively,” and it expects SCR’s risk-adjusted capitalisation to remain adequate and is likely to benefit from the increase in investment in mutual funds.”

A.M. Best Co. has downgraded the financial strength ratings to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Bermuda-based Associated Electric & Gas Insurance Services Limited (AEGIS), and has removed both ratings from under review with negative implications and assigned a stable outlook. “These rating actions are due in part to the unexpected large decline in the company’s surplus as of December 31, 2008, compared to year-end December 31, 2007,” Best explained. “The ratings were placed under review with negative implications on April 3, 2009, following a significant decline in AEGIS’ total capital at year-end 2008 due to a reported net loss that included significant investment related realized losses and impairment charges, which produced a $ 323.4 million or 30 percent erosion in policyholders’ surplus in 2008. The rating downgrades are the result of AEGIS’ weakened capitalization in 2008 and a deteriorating trend in its operating performance.” Best added that in determining the company’s overall risk-adjusted capitalization it had “considered a significant level of capital relief derived from the loss reserve adverse development contract (ADC) provided by National Indemnity Company (Omaha, NE) covering workers’ compensation, excess casualty, pollution and directors & officers portfolios in force at December 31, 2008. The ADC contract resulted in improvement in its risk-adjusted capitalization—as measured by Best’s Capital Adequacy Ratio—and contributed to the assignment of a stable outlook.” However, the rating agency said it is “concerned that the continuing turmoil in the financial markets could further erode AEGIS’ capital position and negatively impact its earnings in 2009. However, through March 31, 2009, the company’s overall investment portfolio has not recognized investment losses despite its 7 percent equity investment allocation in fund of funds hedge funds. AEGIS’ overall equity allocation is down from an equity allocation of 22.3 percent a year earlier.” In addition best noted that the rating actions are partially resulting from AEGIS’ “continued erratic operating performance, as it has registered a combined ratio in excess of 100 percent for more than five years in a row, with a five-year combined ratio of more than 110 percent thru December 31, 2008. AEGIS has established a number of forward looking initiatives that it expects will mitigate recent operating results. Management also has implemented a more robust and enhanced risk management process.”

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