Ratings: Everest Re (Ireland), Bosna Re, Peace Hills, Farmers (NZ), Swiss Re (debt), Optimum

June 18, 2009

Standard & Poor’s Ratings Services has assigned its ‘A+’ counterparty credit and financial strength ratings to Everest Reinsurance Co. (Ireland) Ltd. S&P also said the outlook on Everest Re Ireland is stable. S&P noted that Everest Re Ireland is a newly formed subsidiary of unrated Everest Risk Holdings (Ireland) Ltd., of which the ultimate parent is Bermuda-based Everest Re Group Ltd.” (rated – BBB+/Stable/). “The ratings on Everest Re Ireland are based on explicit support in the form of an unconditional and irrevocable guarantee provided by Everest Reinsurance (Bermuda) Ltd. (A+/Stable/). In addition, the guarantor intends to maintain Everest Re Ireland’s surplus at a level at least equal to €150 million [$210 million] at the end of each fiscal quarter. Everest Re Ireland was initially capitalized at €200 million [$279.6 million] with the objective of writing reinsurance in Ireland and throughout the EU to complement the group’s existing worldwide operations. In its early years, the company is expected to assume the majority of its premiums through a 50 percent quota share agreement with Everest Re Bermuda’s U.K. branch. This business is well-established, as Everest has had a presence in continental Europe and the U.K. since 1976 and has a profitable five-year (2004-2008) average combined ratio of 84.2 percent. In addition to the internal quota share agreement, Everest Re Ireland plans to source non-marine treaty reinsurance from the London market and continental Europe, especially targeting medium to large transactions. The company will leverage existing relationships that the group has developed with brokers and customers, as well as with the group’s U.K. and Belgium offices to source third-party business as opportunities arise.” S&P also noted that the “ratings on the group are based on its strong competitive position with a global market reach, very strong risk-adjusted capital adequacy despite catastrophe and investment losses, and strong financial flexibility with strong leverage measures. Partially offsetting these strengths are the group’s inability to exploit its competitive position to generate stronger underwriting results over multi-year periods, unfavorable reserve developments affecting earnings, and potential volatility created by low reinsurance use. In addition, the implementation of a robust enterprise risk management program, although it remains adequate, has been slower than expected. Credit analyst Taoufik Gharib added that the ratings and stable outlook on Everest Re Ireland “parallel those on Everest Re Bermuda because of the existing strong explicit support in the form of a guaranty. Therefore, if we change the ratings or outlook on Everest Re Bermuda, we would similarly revise those on Everest Re Ireland. However, if the explicit support ceases to exist, which we think is unlikely, we would lower the ratings on Everest Re Ireland accordingly.”

A.M. Best Co. has affirmed the financial strength rating of ‘B+’ and the issuer credit rating of “bbb-” to Bosna Reosiguranje d.d. Sarajevo (Bosna Re), both with stable outlooks. Best said the “ratings of Bosna Re reflect its strong risk-adjusted capitalisation, stabilising underwriting performance and dominant domestic business position.” Best also indicated that it “believes that Bosna Re’s risk-adjusted capitalisation is strong and is supportive of the company’s business growth in the next few years. Bosna Re’s capital level is well protected by a comprehensive retrocession programme, which is placed with companies with secure ratings. Bosna Re’s underwriting performance became more stable in 2008 and showed positive results, with a moderate combined ratio of 92.6 percent and a loss ratio of 59.8 percent (61.1 percent in 2007).” Best also sees “less volatility in underwriting performance” in the future. However, the rating agency warned that the “newly implemented reserving system is yet to be tested fully. Adoption of International Financial Reporting Standards also has been completed,” which Best said it “views as a positive step towards consistency in presentation of the results.”

A.M. Best Co. has downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and issuer credit rating to “bb” from “bbb-” of Peace Hills General Insurance Company of Alberta, Canada, and has assigned a negative outlook to both ratings. Best said the rating actions “reflect the further decline in Peace Hills’ risk-adjusted capitalization due primarily to investment and underwriting losses. Capitalization was adversely impacted by an additional 10.7 percent loss of shareholders’ equity, further elevating the company’s above average underwriting leverage ratio. Balance sheet strength was weakened by declining asset values from the downturn in the investment markets and from an increase in the frequency and severity of property losses from fire.” Best explained that the outlook on the ratings is negative “due to Peace Hills’ minimal capitalization relative to the ratings and several significant challenges to rebuilding capital. These include the uncertainty concerning the final status of the minor injury cap in the Alberta auto market and rate adequacy in that market; declining earnings; soft commercial lines pricing; strong competitive pricing pressure; and the potential for unanticipated loss due to an increasing trend of more frequent and severe weather events across Canada. Partially offsetting these negative ratings factors are the actions of Peace Hills’ experienced management team to reduce investment leverage and earnings volatility, increase premium rates across all major lines of business and slow growth.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Farmers’ Mutual Group (FMG) of New Zealand and FMG Insurance Limited (FMGIL), both with positive outlooks. Best said the “ratings of FMG and FMGIL reflect the consolidated entity’s (Group) adequate capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). The ratings also consider the stable growth and good business retention of the Group.” In addition best noted that the “Group’s risk-adjusted capitalization, calculated on a consolidated basis, remained strong in the fiscal year ending March 2009, although it deteriorated slightly due to losses from catastrophe events that impacted most New Zealand insurers. The Group recorded a loss of NZD 5.8 million [US$3.727 million] during the year and introduced premium rate hikes that are expected to partially mitigate the recent poor underwriting experience. Best also indicated that the “Group’s historical ties with regional New Zealand contributed to good persistency in its underwriting portfolio and resulted in it retaining a relatively stable share of its chosen market. The Group’s gross premiums written increased by 9.7 percent in fiscal year 2009. These positive factors are partially offset by the Group’s exposure to weather-related catastrophes, volatile operating performance and high expense ratio. Similar to other general insurers in New Zealand, the Group is exposed to catastrophic perils. In the past three years, the Group has experienced underwriting losses partially as a result of weather-related events.”

A.M. Best Co. has assigned debt ratings of “a+” to the CHF 700 million ($644 million) 4.25 percent senior unsecured fixed rate bonds, due 2013 issued by Swiss Reinsurance Company Limited. Best has also assigned debt ratings of “a+” to the CHF 300 million ($276 million) 2.75 percent senior unsecured fixed rate bonds, due 2010 issued by Swiss Re Treasury (US) Corporation and guaranteed by Swiss Re. The outlook for both ratings is stable. Best explained that the “notes were issued under Swiss Re’s European Medium-Term Note Program (EMTN). The proceeds will be utilized for general corporate purposes, including the refinancing of maturing debt.”

A.M. Best Co. has upgraded the financial strength rating to ‘B+’ (Good) from ‘B’ (Fair) and issuer credit ratings to “bbb-” from “bb+” of Optimum Insurance Company Inc., its wholly owned subsidiary, Optimum Farm Insurance Inc. (both of Montreal, Canada) and Optimum West Insurance Company of Vancouver. Together the members are known as Optimum General Insurance Group (Canada). The outlook for all ratings is stable. “These rating actions reflect the group’s improved capitalization, consistent operating results and favorable reserve development on both an accident and calendar year basis,” said Best. “The improved results are derived by the group’s consistent net investment income and favorable underwriting income. As a result, additions to surplus have been reported for five consecutive years. The group has benefited from management’s implementation of corrective actions to improve performance, tighten underwriting guidelines and improved rate adequacy.” However, Best indicated that “competitive pricing pressure particularly in commercial lines, rate adequacy within the market and the group’s inherent exposure to frequent and severe weather related events” should be considered as offsetting factors. Optimum Insurance Company Inc writes commercial and personal lines insurance business mainly in Ontario and Quebec, while Optimum Farm Insurance Inc writes similar lines exclusively in Quebec. Optimum West Insurance Company provides residential and automobile insurance to individuals and property/liability insurance to commercial clients in British Columbia, Alberta and the Yukon Territory.”

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