Ratings Recap: Avalon Re, Misr, Central Re

June 11, 2010

Standard & Poor’s Ratings Services has revised its subordinated debt rating on Avalon Re Ltd.’s Class C notes to ‘D’ from ‘CC’. S&P explained that “paid losses related to Hurricane Katrina and the explosion at the Buncefield oil depot totaled $297 million, and loss reserves from the July 2007 steam pipe explosion in New York City total $17.1 million. Pursuant to the reinsurance agreement, Avalon Re covers 90 percent of these losses in excess of a $300 million attachment point, and the Class C note holders will cover losses in excess of that amount. On the maturity date, which is today, the original principal balance of the Class C notes, which is $135 million, will be reduced by the covered loss amount of $12.69 million.” S&P then stated that “this constitutes a default” under its criteria, as there “will be no future principal payments from Avalon Re Ltd. to the Class C note holders.”

A.M. Best Co. has placed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb+” of Egypt’s Misr Insurance Company under review with negative implications. Best explained that the rating actions follow Misr’s announcement “to restructure the group companies operating under Insurance Holding Company (IHC) to comply with regulatory requirements of Egyptian insurance law, which obliges companies to separate life and non life portfolios from 1 July 2010.” Best added that the “restructuring of business entails the transfer of non-life business from National Insurance Company of Egypt (NICE) into Misr, and conversely, life business from Misr into NICE. This is expected to create specialized life and non-life insurance companies under IHC. NICE is expected to be rebranded as Misr Life Insurance Company from 1 July 2010.” Best said that in its view, “Misr’s capital position, which decreased during 2009, may be further pressurized following the restructuring.” In addition best will need some time to “assess the impact of Misr’s capital strategy, in particular the reallocation of capital, assets and liabilities, in addition to any planned capital increases. Furthermore, Misr’s underwriting performance is expected to remain under strain given the poor performance of motor third party liability business, in addition to the transfer of profitable life business to NICE. The under review status is expected to be resolved as soon as sufficient details regarding the restructuring has been assessed and potential implications on Misr have been clarified.”

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from A- (Excellent) and the issuer credit rating (ICR) to “a” from “a-” of Taiwan’s Central Reinsurance Corporation, both with stable outlooks. The rating actions reflect Central Re’s “rapid restoration of its capital level, continuous improvement in risk management and stable operating performance,” said Best. The ratings also factor the “company’s ability to execute its overseas expansion plan and the improvement in the underwriting results of its overseas portfolio. Central Re’s adjusted capital and surplus (including equalization reserve) increased by 28.9 percent to TWD 14 billion (USD 438 million) in 2009. Surplus growth due to strong operating earnings has enabled the company to quickly rebuild its capital level after the capital reduced by 7.4 percent during the financial turmoil in 2008.” According to Best the company’s current risk-adjusted capitalization, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), is “excellent and adequate to support its forecasted premium growth in the next three years. Central Re has directed more resources on developing its enterprise risk model (ERM) program in recent years. The board of directors and senior management are highly involved in the ERM program. Each member of senior management is assigned as a “risk owner” to a particular risk and is responsible to manage that risk” best said it “believes that Central Re’s overall risk and catastrophe exposures are well managed through its companywide ERM framework. Central Re has maintained profitable and stable underwriting results, with its combined ratio falling within the 88 percent-96 percent level in the past five years. Given that Taiwan is a catastrophe-prone country, Central Re’s stable and consistent underwriting performance has demonstrated its prudent underwriting controls and risk management practices. Offsetting factors are the keen competition in both the domestic and overseas reinsurance market in which Central Re operates.”

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