Ratings Roundup: United (Aon), Fairfax, Sirius

October 1, 2010

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings of “a-” of Cayman Islands-based United Insurance Company and its subsidiary, United Re (Europe) S.A., domiciled in Luxembourg. The outlook for all of ratings is stable. The ratings reflect “United’s adequate capitalization, strong strategic relationship with its sponsoring shareholders and its market presence as an alternative risk capacity vehicle,” Best explained. United and all its captive clients are managed by Aon Global Insurance Managers or are self managed captives and/or are shareholders of United. Best said it would continue to “monitor United’s ability to manage its large ceded balances, over 80 percent of which are secured by letters of credit or other forms of collateral posting.”

Standard & Poor’s Ratings Services has assigned its ‘BB’ global scale and ‘P-3’ Canadian scale ratings on Toronto-based Fairfax Financial Holdings pending issuance of up to C$250 million [US$244.2 million] in preferred shares, with an option on an additional C$50 million [$44.8 million] available to the underwriters. S&P noted that Fairfax “intends to issue the preferred shares from its current $2 billion universal shelf filing. It will use the proceeds to augment its cash position, to increase short-term investments and marketable securities held at the holding company, to retire outstanding debt and other corporate obligations, and for general corporate purposes. The ratings on Fairfax reflect its strong business and financial profiles. Fairfax, through its insurance operating subsidiaries–including Odyssey Reinsurance, Northbridge Financial units, Crum & Forster, and Zenith Insurance–maintains a competitive presence in the North American commercial insurance marketplace, as well as in the global reinsurance market.” S&P also noted that during the first six months of 2010, “Fairfax reported strong pretax operating income of US$822 million, largely as a result of realized investment gains, compared with $373 million in the first six months of 2009. Its combined loss and expense ratio in the first half of 2010 was somewhat high at 106.3 percent, primarily because of early 2010 catastrophe losses, compared with 98.5 percent in the first six months of 2009. Upon completion of the issuance, Fairfax’s total financial leverage will be approximately 26 percent, which is in our expected range of 25 percent to 30 percent, and EBIT fixed-charge coverage (excluding realized gains) will be about 1.1x, compared with a trailing three-year average of 0.8x.”

A.M. Best Europe – Rating Services Limited has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a” of Sweden’s Sirius International Insurance Corporation (publ). Best explained that the revised outlook reflects Sirius’ “improved risk-adjusted capitalization and consistent operating performance after absorbing the property catastrophe business from its affiliate, White Mountains Re Bermuda, Ltd (WMRe).” Best added that it anticipates that the “improvement in Sirius’ risk-adjusted capitalization in 2009 will be maintained, effectively absorbing additional volatility arising from the transfer of US property catastrophe business previously written by WMRe Bermuda. The improvement in risk-adjusted capitalization in 2009 resulted from Sirius’ solid operating performance and prudent earnings retention policy. Sirius’ claims paying ability continues to be enhanced by a safety reserve which, in accordance with Swedish insurance regulations, can only be released to cover insurance losses and is funded from the company’s cumulative retained pre-tax earnings. Sirius’ safety reserve at year-end 2009 amounted to SEK 9.6 billion, up SEK 510 million compared to the previous year.”However, best said it expects a “deterioration in Sirius’ technical ratios in 2010 as a consequence of natural and man-made catastrophe losses (Chile earthquake, windstorm Xynthia, Deepwater Horizon oil rig) but expects the company’s combined ratio for the year to remain below 100 percent (85.9 percent in 2009). Further ahead, Sirius is expected to continue its strong underwriting performance reflected in a five-year combined ratio of 88 percent for 2005-2009. Results are also likely to continue to be supported by stable investment returns. Sirius maintains a good business profile in the reinsurance market, writing business through an international network of branch offices.” In Best said it “expects Sirius’ gross written premiums to decrease approximately 10 percent from SEK 8.6 billion [$1.28 billion] in 2009, largely as a result of a planned reduction of intra-group business, which now accounts for around 30 percent of the company’s total premium income (45 percent in 2009). Sirius continues to focus on shorter tail lines, with property reinsurance currently generating nearly 40 percent of gross written premiums.”

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