Ratings Recap: AIA/AIAB, SOVAG, Coface, PhilNaRe, Generali Rueck

March 2, 2010

Standard & Poor’s Ratings Services has placed its ‘A+’ counterparty credit and financial strength ratings on American International Assurance Co. Ltd. (AIA) and American International Assurance Co. (Bermuda) Ltd. (AIAB) on CreditWatch with developing implications. The ratings on American International Group Inc. (AIG) and its core insurance subsidiaries are unaffected.. The CreditWatch placement reflects the announcement by Prudential PLC (Prudential; A+/Watch Neg/A-1) that it has reached an agreement with AIG to acquire an AIG subsidiary, AIA Group Ltd. (AIA Group; not rated). In return, AIG will receive approximately US$35.5 billion through a combination of equity, debt, hybrids, and a share stake in Prudential. “We consider AIA and AIAB core subsidiaries to the AIA Group,” S&P said. Credit analyst Eunice Tan explained: “We believe uncertainties exist regarding the integration of AIA’s and AIAB’s operations into Prudential’s existing Asian operations, and this could have negative credit rating implications for Prudential. However, we also believe that the ratings on AIA and AIAB could benefit from Prudential’s stronger credit profile and financial flexibility, as well as the combined operations’ significant distribution and expense synergy in Asia. These factors are in addition to AIA and AIAB’s already strong stand-alone credit profile.” S&P also indicated that it expects the ratings on AIA and AIAB to “be similar to those on Prudential PLC’s core operating companies, reflecting its likely significant contribution to the U.K.-based insurance group’s overall earnings.” S&P also said that upon completion of the transaction, it expects “the ‘A-‘ rating on AIG, which comprises a stand-alone rating of ‘BB-‘ and a six-notch uplift for government support, would remain unaffected. We believe the acquisition is a positive step given the likelihood, upon final execution of the transaction, that the proceeds will reduce outstanding indebtedness to the Federal Reserve Bank of New York and the U.S. However, ongoing uncertainty remains related to the operational risk associated with disposing of the remaining noncore assets and the continued unwinding of AIG Financial Products Corp., as well as the subsequent reduction in the outstanding loans owed to the Federal Reserve Bank of New York and the U.S. We plan to resolve the CreditWatch developing on AIA and AIAB upon the completion of Prudential’s acquisition of AIA Group, which is subject to both regulatory and shareholders’ approval. We expect the companies to complete the transaction in the third quarter of 2010. We will update our rating analysis on AIA and AIAB after we complete our review of Prudential. Based on this, we could either raise or lower our ratings on AIA and AIAB by one notch.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb” of SCHWARZMEER UND OSTSEE Versicherungs-Aktiengesellschaft SOVAG (SOVAG), which is based in Germany. The affirmation removes the under review status of the ratings applied in October 2009 following the acquisition of a majority shareholding in SOVAG by Volga Resources SICAV-SIF S.A., a Luxembourg- based investment fund. The outlook for both ratings is stable. Best said it “believes Volga Resources will contribute to the development of SOVAG’s business profile and capitalization. In particular, SOVAG’s business profile may benefit from Volga Resources’ business relationships in the Russian oil and gas industry through its investments in the sector. SOVAG’s risk-adjusted capitalization is expected to remain excellent, underpinned by increasing equalization reserves and retained earnings.
Volga Resources is unlikely to demand significant dividends in the near future. In addition best noted that “SOVAG’s existing German-based business written for Russian immigrants is likely to remain profitable in 2010. However, supported by Volga Resources, SOVAG is likely to increase its underwriting of Russian-based property business, which leads to somewhat higher uncertainty as to future performance. SOVAG’s earnings (after tax and allocation to equalization
reserves) are likely to increase in 2009, from €0.93 million [$1.26 million] in 2008, mainly as a consequence of a recovery in investment income. SOVAG’s business profile remains good as a specialist insurer of risks relating to Russia and the Confederation of Independent States (CIS), and as a strong competitor in the niche market providing insurance cover for Russian immigrants in Germany. In 2009, however, gross premiums written are likely to decrease from €90.2 million [$122.32 million] in 2008 due to strong competition in motor lines in Germany and as a result of SOVAG’s continued restructuring of some of its personal lines business.”

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and insurer financial strength ratings on French credit insurer Coface S.A. and its core operating entities to ‘A-‘ from ‘A’. The core entities are: Germany-based Coface Kreditversicherung AG; Italy-based Coface Assicurazioni SpA; U.S.-based Coface North America Insurance Co.; Austria-based Coface Austria Kreditversicherung AG and, Germany-based Coface Finanz GmbH. S&P added that the outlook on all the ratings is negative. The ratings agency also lowered the short-term ratings on Coface Kreditversicherung AG and Coface Finanz GmbH to ‘A-2’ from ‘A-1′. “The downgrade follows the announcement of Coface’s owner, Natixis, that it is conducting a strategic review of its 100 percent stake in Coface,” explained credit analyst Marie-Aude Salinas. “We understand that Natixis might envisage an initial public offering or a sale of a minority stake in the medium term.” As a result S&P said it now views “Coface’s positioning within Natixis (A+/Stable/A-1) as nonstrategic versus strategically important. Still, we factor into the ratings one notch of support, instead of two previously, for Natixis’ commitment to financially support Coface, in accordance with our group rating methodology for nonstrategic subsidiaries. We note that Natixis is demonstrating its support through two consecutive capital injections of €50 million [$67.8 million] in July 2009 and €175 million [$237.3 million] planned in March 2010.” S&P added that in its opinion, “Coface’s stand-alone creditworthiness remains good, but has worsened over the past two years. The ratings are based on our perception of its strong competitive position in the credit insurance market, as well as its strong and prudent investment strategy. Rating constraints are the company’s capital adequacy, which we consider to be weak, and the hurdles we think the company’s management will likely face to restore Coface’s weakened earnings. The negative outlook reflects the possibility that we could lower the ratings if Coface does not restore capital adequacy to a “good” level within one year, as measured by our risk-based insurance model without our 1.25 stress weighting, either through additional risk measures, additional raising of capital, or earnings. We could also consider a downgrade if Coface’s earnings heighten pressure on capital adequacy, either because Coface’s net combined ratio was above 145 percent in 2009 or is unlikely to recover to close to 100 percent in 2010. Similarly, we could lower the ratings if Natixis shows signs of diminishing financial support toward Coface. Conversely, we could consider a positive rating action if Coface’s capital adequacy recovers more quickly than we currently anticipate and the company’s earnings exceed our current expectations.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb” of National Reinsurance Corporation of the Philippines (PhilNaRe), both with stable outlooks. The ratings reflect PhilNaRe’s “strong capitalization, conservative investment portfolio and established market presence in the Philippines,” said Best. “PhilNaRe’s risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), remained strong in 2008 and 2009. After the increase in the company’s capital base through its initial public offering in 2007, PhilNaRe plans to accept and retain more business.” Best also said it “believes that PhilNaRe’s current risk-adjusted capitalization is adequate to support its future net premium growth in the next three years. According to the company’s forecast, its retention ratio will gradually increase to over 40 percent from 27 percent in 2008. PhilNaRe invested 86 percent of its invested assets in bonds and in cash and cash equivalent. With this conservative investment portfolio, the company generated a stable investment income. PhilNaRe is the only domestic reinsurance company in the Philippines. With its long history, the company has established a good presence in the market. Moreover, PhilNaRe also benefits from compulsory cessions, which requires all insurance companies to cede at least 10 percent of their overseas outward reinsurance placements to PhilNaRe.” However, “high catastrophe exposure in the Philippines, the company’s relatively weak international market presence and high loss ratio” are to be considered as offsetting factors. Best noted that “PhilNaRe recorded a high loss ratio of 79.7 percent in 2008 and 129.1 percent for the first nine months of 2009. The high loss ratio was mainly attributed to several individual large fire losses, catastrophe-related claims of property and motor, and run-off losses from marine hull business. The company’s current risk-adjusted capitalization is strong; however, if the poor underwriting performance continues, it will create pressure on the capitalization level and stability of the ratings.”

Standard & Poor’s Ratings Services has assigned its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings to Austrian reinsurer Generali Rueckversicherung AG (Generali Rueck) with a stable outlook. “The rating action reflects our assessment that Generali Rueck is a core member of the Italy-based Generali insurance group,” indicated credit analyst Johannes Bender. “Generali Rueck is, in our view, an integral part of Generali’s group strategy, and we understand that this year it will take on the role of the group’s nucleus for employee-benefit business, which is a core group activity.” S&P also explained that in this function, Generali Rueck will “originate and manage this labor-intense business, which includes cover for death, medical, accident and disability risks. Moreover, Generali Rueck will pool and reinsure employee-benefit business ceded from Generali’s global primary insurance subsidiaries, through the Belgian branch of the parent company Assicurazioni Generali SpA (AA-/Stable/–) and Generali’s international office network. The Belgian branch will now fall under the umbrella of Generali Rueck.” The rating agency also noted that Generali maintains employee-benefit business with about 1,400 international corporate clients, and we understand from the group that it achieved a market share of about 23 percent in 2007. This business produces about €1.5 billion [$2.03 billion] in primary premiums for the Generali group and could provide Generali Rueck with about €0.8 billion [$1.08 billion] of reinsurance premiums in 2009 and €1.0 billion [$1.355 billion] by 2011. We believe the concentration of Generali’s employee-benefit business within Generali Rueck will enhance Generali’s strong competitive position in this segment and support the group’s continued growth in the medium to long term.” S&P noted that “until 2009, Generali Rueck “mainly reinsured household and fire risks via quota-share agreements with its Austria-based sister company Generali Versicherung AG (AA-/Stable/–). Generali Rueck’s capitalization is, in our view, a relative rating weakness because the company’s balance sheet is dominated by minority participations in Austrian sister companies, mainly Generali Versicherung. We deduct these participations from Generali Rueck’s total adjusted capital. However, we believe that Generali Versicherung is well capitalized and that it could draw on these sources of capital should the need arise.” S&P said the stable outlook “reflects that on Generali.” For more details see the full analysis “Generali Group,” published on Dec. 29, 2009, on RatingsDirect. Bender added that the “ratings could be lowered if we were to perceive a significant adverse change in Generali Rueck’s future role as Generali’s competence centre for employee-benefit business. However, we believe employee benefits will become a strategic long-term business for Generali Rueck. Moreover, we do not believe that Generali Rueck’s third-party reinsurance business is likely to increase in importance and don’t expect it to exceed 10 percent of its premium income.”

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