Ratings Roundup: Argo Re, Delvag, Guardian Life/General

June 25, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Bermuda-based Argo Re Ltd. and its subsidiaries. Best also affirmed the ICR of “bbb” and debt ratings of the parent holding company, Argo Group International Holdings, Ltd. The outlook for all ratings is stable. These ratings “consider Argo Group’s first quarter earnings announcement and take into account Argo Re’s supportive capitalization, experienced management team, product expertise in niche focus areas and the historical profitability at Argo Re’s subsidiaries,” Best noted. “The U.S. specialty operations are managed holistically with respect to capital, investment strategy and market presence. Argo Re, as the lead insurer, also assumes risk via quota share reinsurance agreements with its subsidiaries. The ratings further reflect Argo Group’s diversified insurance and reinsurance platform, which includes a book of unaffiliated, third party reinsurance business and the addition of an international specialty segment written through Lloyds in May 2008. The ratings also consider Argo Group’s first quarter 2010 conservative debt-to-capital ratio of 19.0percent and strong interest coverage.” Ass offsetting factors, Best cited “the execution risk associated with the platform expansion in recent years, and the current obstacles presented by the prevailing competitive and economic conditions.” However, Best indicated that despite these challenges, it expects that Argo Re’s “operating performance and capitalization will continue to support the ratings based upon the favorable rating factors noted above. The FSR of A (Excellent) and ICRs of “a” has been affirmed for Argo Re, Ltd. and its following subsidiaries:
• Argonaut Great Central Insurance Company
• Argonaut Insurance Company
• Argonaut Limited Risk Insurance Company
• Argonaut-Midwest Insurance Company
• Argonaut-Southwest Insurance Company
• Colony Insurance Company
• Colony National Insurance Company
• Colony Specialty Insurance Company
• Rockwood Casualty Insurance Company
• Select Markets Insurance Company
• Somerset Casualty Insurance Company

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Delvag Luftfahrtversicherungs-AG and Delvag Rueckversicherungs-AG (Delvag Rueck), both with stable outlooks. “The rating actions reflect Delvag’s “stable operating performance and strong risk-adjusted capitalization,” said Best. They also factor in Delvag’s role as the composite insurance captive of its ultimate 100 percent parent, Lufthansa German Airlines. Best said that the “ratings of Delvag Rueck benefit from a full rating enhancement from the profit and loss absorption agreement with Delvag, its immediate parent.” Best also indicated that it expects Delvag to “produce relatively stable post-tax earnings of approximately € 9-11 million [$11 to $13.6 million] in 2010, translating into an excellent return on premium of approximately 50 percent-60 percent and a return on equity in the range of 18 percent-20 percent.” Best also indicated that it believes Delvag’s earnings will “continue to be supported by a stable claims experience and low expense levels. In addition, investment income is expected to remain strong, driven to a large extent by transfers of profits from its subsidiaries, Albatros and Delvag Rueck.” In Best’s opinion, Delvag Rueck’s prospective pre-tax earnings are” likely to remain marginally positive, supported by a stable underwriting performance in both the non-life and life portfolios.” Best also said it expects the “risk-adjusted capitalization for both companies to remain strong prospectively due to limited forecasted growth and some transfers to the equalization reserves. While the profit and loss absorption agreements in place continue to limit the potential of earnings retention, they also provide significant balance sheet protection. Delvag’s dependence on reinsurance remains high.” But Best also noted that it believes that its “credit risk remains limited as the high cession rate mainly relates to the group fleet business program, which is placed with highly rated reinsurers.” Following two years of stagnating business volumes, Delvag’s gross written premiums (which consist to a large extent of group fleet business) are likely to increase by 5 percent to 10 percent to €55 million [$68 million] in 2010, mainly driven by an anticipated recovery in aviation rates. Delvag Rueck is expected to continue reinsuring business relating to Lufthansa and its employees, including life and non-life business—predominantly in private lines—while writing a small book of non-life business in the open market. A.M. Best believes that gross written premiums will remain relatively stable in the next two years.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Guardian Life of the Caribbean Limited (GLOC), as well as the FSR of ‘A’- (Excellent) and ICR of “a-” of Guardian General Insurance Limited (GGIL). The outlook, however, for all ratings is negative. Both Guardian Life and Guardian General are insurance operating subsidiaries of the publicly traded holding company, Guardian Holdings Limited (GHL), which is listed on the Trinidad and Tobago and Jamaica exchanges. All companies are domiciled in Port of Spain, Trinidad. The ratings “reflect GHL’s improved consolidated balance sheet strength, which is due to a modest decrease in total debt and lower intangibles following the write-off of goodwill related to its European property/casualty operations,” Best explained. The continuation of the negative outlook reflects “concern over the remaining level of leverage and other intangibles relative to GHL’s total equity,” Best explained. “In addition, GHL’s exposure to Jamaica through its life insurance subsidiary, although representing only 10 percent of assets, remains an ongoing concern. These issues continue to impact the ratings of GLOC and GGIL, which represent the core insurance entities within GHL, despite their consistent profitability and contribution to GHL.” Additionally, GHL’s P/C business, which operates in several Caribbean territories, has been “impacted by soft pricing, creating a challenge for its top line growth. Further impacting GHL’s balance sheet is the negative impact of currency risk as evidenced by the steep depreciation of the U.K. pound sterling and Jamaican dollar.” Best said the ratings of GLOC continue to acknowledge its “strategic position within the GHL group, its strong competitive advantage in the Caribbean markets, consistently positive gains from operations and its more than adequate level of risk-adjusted capitalization. Partially offsetting these factors are the impact of GHL’s leveraged balance sheet exposure, its evolving business profile and limited new business growth opportunities in the Trinidad and Tobago markets. The ratings of GGIL recognize its leading regional market presence, historically profitable operating performance, adequate capitalization and the support and commitment of GHL. GGIL is the largest property/casualty writer in the Caribbean with a major presence in Trinidad and several other markets in the region. Partially offsetting these strengths is the increased frequency of catastrophic events in the region, the company’s reliance on reinsurance to protect its earnings and surplus and the increasingly competitive regional markets in which GGIL operates.”

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