Ratings Recap: Ageas (ex-Fortis), Island Heritage, New Century

May 19, 2010

Standard & Poor’s Ratings Services has affirmed its ‘A-‘ long-term counterparty credit and insurer financial strength ratings on AG Insurance and the operating entities of Millenniumbcp-Fortis Grupo Segurador S.G.P.S. S.A.; its ‘BBB-/A-3’ issuer credit rating on holding companies Ageas N.V. and Ageas SA/NV, and its ‘BB’ rating on Fortfinlux S.A.’s FRESH instrument and the ‘BBB’ rating on Fortis Hybrid Financing’s (FHF) issues (HYBRONE, NITSH I, and NITSH II). Concurrently, S&P removed all of the ratings from CreditWatch with negative implications, where they had been placed on April 30, 2010. The outlook on operating and holding entities, however, is negative. The ratings affirmations reflect “our view on Ageas Group’s management actions to address investment concentration risk,” S&P explained. “In addition, we believe the current market context gives AG Insurance management some latitude to execute the corrective actions it expects to undertake on its investment portfolios to reduce concentration risk, while managing the risk of material realized losses.” However S&P also pointed out that the ratings “remain supported by the group’s strong competitive position in Belgium, complemented by good positions abroad and strong operating performance, despite challenges to restore the profitability in the property/casualty book. We believe that management actions are likely to restore capitalization to a good level, but capitalization is likely to remain an offsetting factor to the other credit strengths over the rating horizon, according to our criteria.” The ratings on Millenniumbcp-Fortis Grupo Segurador (MFGS) are “supported by the company’s strong capitalization, strong competitive position, and strong operating performance,” S&P said. It explained that the negative outlook on AG Insurance “reflects the remaining uncertainties linked to the increased credit risk caused by the recent downgrades of Greece and Portugal and the challenges that Ageas’ management may face in executing its planned asset rebalancing actions to mitigate concentration risk. Adverse development within the rating horizon may put pressure on AG Insurance’s capital adequacy, earnings, and liquidity. The negative outlook on Ageas N.V. and Ageas SA/NV reflects that on AG Insurance. We may, however, change the outlook on the holding companies, independently from that on AG Insurance, if we believe the impact of its noninsurance assets and liabilities on its ratings does not justify a three-notch differential any more. The negative outlook on MFGS’ operating entities reflects that on the parent and the impact of the downgrade of the Republic of Portugal on the credit quality of MFGS’ investment portfolio.” S&P indicated that it may lower the rating on AG Insurance “if its capitalization or liquidity comes under further pressure because of a default or restructuring of the sovereign debt. We may also lower the ratings if earnings are weakened by material realized losses as a result of the planned asset sales, if we believe management actions have failed to reduce the concentration risk, or if we believe that market circumstances will prevent management from executing the rebalancing without materially impairing the company’s capital and earnings prospects.” On a more positive note S&P indicated that it could revise the outlook to stable “if we believe actions undertaken are likely to substantially reduce investment concentrations on the long term, while shifting capitalization and earnings to levels supportive of the ratings.” On the other hand the rating agency said: “We may lower the ratings on MFGS’ operating entities if Portugal is downgraded, or if the ratings on the parent are lowered. We may revise the outlook on MFGS to stable if the outlooks on both Portugal and Ageas are revised to stable.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Cayman Islands-based Island Heritage Insurance Company, Ltd. , both with stable outlooks. Island Heritage’s ratings “reflect its solid level of risk-adjusted capitalization, favorable operating results and local market expertise,” said Best. “Additionally, the ratings also reflect the benefits to Island Heritage from its majority owner, Flagstone Reinsurance Holdings Limited. Best explained that “Flagstone Holdings provides Island Heritage access to enhanced modeling capabilities and reinsurance capacity as well as increased financial flexibility as a member of a publicly traded group.” However, Island Heritage’s geographic concentration, substantial dependency on reinsurance, competitive market and local regulatory risk,” should be considered as offsetting factors, said Best. “Island Heritage focuses on the unique needs of the Caribbean property owner and designs its programs to provide the depth of cover needed,” Best continued. “As a predominantly Caribbean property insurer, Island Heritage is exposed to significant catastrophe risk; however, this is mitigated by the company’s extensive reinsurance program. The reinsurance structure protects the company’s capital from both the frequency and severity of events in an efficient and effective manner.”

Standard & Poor’s Ratings Services has affirmed its ‘A+’ insurer financial strength rating on Bermuda-based New Century Insurance Co. Ltd., and has assigned its ‘A+’ long-term counterparty credit rating to the company. The outlooks on both ratings are stable. New Century is a pure captive insurance arm of Japan-based Mitsubishi Corp. (A+/Stable/A-1),” S&P explained. Therefore under the rating agency’s captive insurer rating methodology, “it is considered as a core captive insurer to its parent, and as such, New Century is rated at the same level as Mitsubishi Corp. The assignment of the ‘A+’ long-term counterparty credit rating on New Century reflects our consistent global application of counterparty credit ratings to captive insurance companies. Meanwhile, the stable outlooks on New Century also reflect the rating outlooks on its parent. The ratings on New Century will be equalized with the ratings on the parent as long as New Century continues to qualify as a core captive insurer under Standard & Poor’s rating criteria.”

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