Ratings Recap: Berkley (Notes), Integon/Maiden, American Southern, Odyssey Re, Westward

September 11, 2009

Standard & Poor’s Ratings Services has assigned its ‘BBB+’ senior debt rating on W.R. Berkley Corp.’s proposed issue of approximately $300 million senior unsecured notes, which are due in 2019. WRB will use the net proceeds of the issue to retire its $150 million aggregate principal amount 5.125 percent senior notes due in September 2010, as well as for general corporate purposes. S&P noted that the “debt issue will result in a temporary increase in financial leverage and a decrease in fixed-charge coverage until the September 2010 notes are repaid. However, excluding the debt proceeds earmarked for the repayment of the September 2010 notes, credit measures are consistent with rating expectations. The ‘BBB+’ counterparty credit rating on WRB and the ‘A+’ counterparty credit and financial strength ratings on WRB’s operating companies (collectively referred to as Berkley) are unaffected. The outlook on all of these companies remains stable. S&P explained that the “ratings reflect Berkley’s very strong operating performance; strong, well-diversified competitive position; and strong liquidity. Offsetting these strengths are WRB’s somewhat aggressive historical financial leverage and operating company capital levels that, although currently well supportive of the rating, have trended below the rating level as the companies pursued growth opportunities.” The rating agency also said the “outlook is stable because the consistently very strong earnings from the solidly positioned, diversified subsidiaries offset WRB’s modestly aggressive financial profile. An adverse change to WRB’s very strong earnings profile or a diminished view of its enterprise risk management (ERM) at the operating company level could result in an outlook revision to negative. Alternatively, we could revise the outlook to positive if WRB, while sustaining its very strong earnings profile, improves its ERM to the strong level and demonstrates a consistent track record of capitalization and financial leverage more appropriate for a higher rating. Capital adequacy at the operating company level will remain strong, with holding company financial leverage, excluding proceeds earmarked to retire future debt obligations, remaining at less than 35 percent. Although we expect difficult market conditions to pressure WRB’s top-line and bottom-line operating performance, the company will sustain very strong operating performance, with a combined ratio of less than 96 percent (very strong for this stage of the insurance cycle) and fixed-charge coverage, excluding realized investment gain/losses and investment fund losses, exceeding 8x.z

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Integon Specialty Insurance Company, which has subsequently been renamed, Maiden Specialty Insurance Company, (MISC), (both of Winston-Salem, NC). Best said the affirmations follow receipt of the approved intercompany quota share reinsurance agreement between MSIC and its affiliate, Maiden Reinsurance Company (MRC) of Maryland Heights, Mo. The outlook assigned to the ratings is stable. Best explained: On September 1, 2009, Integon Specialty’s was purchased by Maiden Holdings, Ltd. (Maiden Holdings) of Hamilton, Bermuda, through its downstream holding company, Maiden Holdings North America, Ltd., also located in Bermuda, from GMAC Insurance Management Corp. (GMAC-IMC). “The ratings reflect MSIC’s strategic importance to Maiden Holdings in forming a dedicated U.S. reinsurance platform providing treaty, accident and health and specialty facultative reinsurance,” said Best. “Additionally, the ratings reflect Maiden Holdings’ financial commitment and strong balance sheet, as well as management’s commitment to maintain underwriting discipline as former GMAC reinsurance business is written through MSIC. In support of the transaction, Maiden Holdings’ management raised approximately $260 million through a trust preferred offering.” Best also pointed out that on June 11, 2009, “the FSR and ICR of Integon Specialty were placed under review with negative implications, due to a previously signed agreement to sell the company to Maiden Holdings. On June 12, 2009, A.M. Best affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of MRC with a stable outlook.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of American Southern Group and its members. These ratings apply to American Southern Insurance Company (Topeka, KS) and its wholly owned and 100 percent reinsured subsidiary, American Safety Insurance Company (Atlanta, GA). Best also affirmed the FSR of ‘B++’ (Good) and ICR of “bbb+” of Bankers Fidelity Life Insurance Company also located in Atlanta. Concurrently, Best affirmed the ICR of “bbb-” of the parent company, Atlantic American Corporation. The outlook for all ratings is stable. Best said “American Southern’s ratings reflect its strong risk-adjusted capitalization, long history of demonstrated profitability, management’s disciplined underwriting approach and local market knowledge. Somewhat offsetting these positive rating factors is American Southern’s history of paying substantial stockholder dividends, which historically have been used to service the debt held at Atlantic American. The stable outlook reflects A.M. Best’s expectations that a solid level of profitability will be maintained over the near term, further supporting risk-adjusted capitalization. The affirmation of Bankers Fidelity’s ratings recognizes its ongoing favorable operating results, while conducting business in the competitive senior life/health insurance market. The company continues to emphasize the sale of senior life and niche individual life business, while maintaining its Medicare supplement presence. The ratings also consider the financial leverage and interest coverage of Atlantic American. Leverage measures improved significantly in 2008 as the parent retired a portion of its outstanding preferred stock and bank debt with the proceeds from the sale of two former affiliates (Georgia Casualty & Surety Company and Association Casualty Insurance Company). In all, adjusted debt-to-capital and interest coverage ratios were roughly 22.2 percent and 1.0 times, respectively, at June 30, 2009. Interest coverage is slightly below expectations for the given rating level; however, this is offset by the insurance operating companies’ ability to historically generate sufficient earnings to cover debt obligations at the parent company. In addition, the parent also holds roughly $19 million of cash and short-term investments as of June 30, 2009.”

A.M. Best Co. has commented that the financial strength rating of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Odyssey Reinsurance Group and its members are unchanged. Best also commented that the ICR of “bbb” and debt ratings of Odyssey Re’s parent, Odyssey Re Holdings Corp. (ORH) are unchanged following the announcement that Fairfax Financial Holdings Limited intends to acquire all of the outstanding shares of ORH’s common stock that it currently does not own. [See IJ web site – https://www.insurancejournal.com/news/international/2009/09/09/103604.htm and https://www.insurancejournal.com/news/international/2009/09/09/103605.htm].
Fairfax currently owns 72.6 percent of ORH’s outstanding common shares. Under the terms of Fairfax’s current proposal, Fairfax intends to purchase the remaining minority held shares of common stock at a purchase price of $60 per share to be funded through an equity offering by Fairfax. Fairfax has stated that following the closing of the transaction, it plans for ORH to run as a decentralized, independent company with no expected changes to its business strategy and senior management team. The Fairfax proposal is currently being reviewed and evaluated by an independent special committee of the Board of Directors of Odyssey Re. There can be no assurance that any transaction will be approved by the special committee or consummated. Odyssey Re ranks as the 15th largest reinsurer in the world based on 2008 gross premiums written.”

A.M. Best Co. has withdrawn the financial strength rating (FSR) of ‘B+’ (Good) and issuer credit rating (ICR) of “bbb-” of Westward Insurance Company of San Diego, Calif. Subsequently, Best assigned an NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR. Best noted that “effective December 18, 2008, Westward was purchased by Western Insurance Holdings, Inc. (San Diego, CA) from Westward Life Insurance Company (Phoenix, AZ). While Westward was purchased as a shell company, A.M. Best continues to evaluate its strategic position and possible future use within the Western Insurance Holdings, Inc. organization.”

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