Ratings Recap: Echelon, Calabash Re III

May 20, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb+” of Canada’s Echelon General Insurance Company. Best also affirmed the ICR of “bb+” of Echelon General’s publicly traded parent, EGI Financial Holdings Inc. The outlook for all ratings is stable. “The ratings for Echelon General are reflective of its strong risk-adjusted capitalization, historical profitability, improving product line and geographic diversification, experienced management team in the non-standard auto and niche product markets as well as the additional financial flexibility of EFH,” Best explained. “These rating strengths are partially offset by the company’s weakened capitalization, diminished earnings, concentration in the volatile Ontario auto market and strong competitive market pressures. Echelon General’s capitalization has been weakened by realized and unrealized investment losses, adverse development on its emergency travel health insurance and higher than expected losses on its motor cycle business.” Best also said it is “concerned about potential regulatory changes to the Ontario auto insurance product and what impact this may have on the company’s future earnings. However, the balance sheet remains strong, and Echelon General’s management team has many years of experience in the non-standard auto business. In addition Best said that the “rating for EFH is based on the overall financial strength of its operating companies and the subordination of the holding company’s creditors to the operating companies’ policyholders. In addition to Echelon General, EFH is the parent of CIM Reinsurance Company Ltd., a captive Barbados reinsurer. Furthermore, EFH has been granted preliminary regulatory approval in Florida to establish Echelon Insurance Company of America as a vehicle for growing business in the non-standard auto market in the United States.” Best will closely monitor the growth and progress of these companies and their impact on the overall financial strength of the organization.

Standard & Poor’s Ratings Services said today that it assigned its ‘BB-‘ and ‘BB+’ ratings to the Series 2009-1 Class A and B notes, respectively, to be issued by Calabash Re III Ltd. S&P said: “The Class A notes are exposed to U.S. hurricane and U.S. earthquake, and the Class B notes are exposed only to U.S. earthquake, each on a per-occurrence basis. Calabash Re III is a special-purpose Cayman Islands exempted company licensed as a Class B insurer in the Cayman Islands. All of its issued and outstanding share capital will be held in trust for charitable purposes.” The rating agency also noted that the “cedent will be Swiss Reinsurance America Corp. (SWRA; A+/Stable/–). SWRA, which we consider a core member of the group, as a wholly owned subsidiary of Swiss Reinsurance Co., the group’s main U.S. property/casualty operating company. SWRA will be responsible for the payments due under the reinsurance agreement in place between it and Calabash Re III and will be transferring a portion of its U.S. hurricane and earthquake exposure via a securitization to 144A fixed-income investors. Covered losses will be calculated on a per-occurrence basis. The exposures being ceded constitute a portion of the exposure SWRA has written with ACE American Insurance Co. (ACE). Because the reinsurance agreement is between Calabash Re III and SWRA, there is no direct credit exposure to ACE, so we did not factor ACE into the rating analysis.”

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