Ratings Recap: Am. Physicians, RenRe No. Am. (debt), Century/Brandywine, Ky. Growers

March 19, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of American Physicians Group and its primary member, American Physicians Assurance Corporation, the lead subsidiary of American Physicians Capital Inc. (APCapital). Best also affirmed the ICR of “bbb-” of APCapital and the FSR of ‘B+’ (Good) and ICR of “bbb-” of APSpecialty Insurance Corporation. The outlook for all ratings is stable. All of the companies are domiciled in East Lansing, Mich. The ratings reflect the group’s “conservative balance sheet, its business position as a leading specialty provider of medical professional liability coverage within its four core states and its favorable operating performance over the last five years, said Best. “Improved underwriting profitability and stable investment results also have allowed American Physicians to maintain a solid risk-adjusted capital level despite funding APCapital’s capital management strategies via extensive stockholder dividends.” The outlook takes into account American Physicians’ “guidance for 2010, favorable earnings prospects over the near term and Best’s expectation that risk-adjusted capital levels will remain near current levels.” The ratings further consider the “financial flexibility afforded by APCapital, its ready access to the capital markets, strong interest coverage and modest financial leverage (total debt/total capital), which as of year-end 2009 was 9.9 percent. In recent years, the dividend stream from American Physicians has been utilized to repurchase stock, redeem trust preferred debt and fund stock dividends.” Best also indicated that it expects that “APCapital’s future demands on subsidiary capital will be neutralized by earnings.” Partially offsetting these positive rating factors are the group’s “poor historical operating performance prior to 2004 and the inherent market risks associated with the medical professional liability sector with regard to price competition, legislative (tort) reform, loss cost trends and regulatory challenges. Recently, some of these risks have become elevated to an extent as a result of the continued soft market conditions and the Illinois Supreme Court decision that declared caps on non-economic damages unconstitutional.” APSpecialty’s rating affirmations recognize its dormant status and adequate capitalization but uncertainty as it pertains to its ultimate business prospects going forward.

Standard & Poor’s Ratings Services has assigned its ‘A’ senior debt rating on RenRe North America Holdings Inc.’s (RRNAH) $250 million senior unsecured notes due in March 2020. The rating on the notes is based on the “explicit support in the form of an unconditional and irrevocable guarantee provided by RenaissanceRe Holdings Ltd.” to the benefit of the senior note holders. Therefore, the rating on RRNAH’s notes is the same as the counterparty credit rating on RNR. As a result, we expect both of these ratings to move in tandem. RNR will use the proceeds from the issuance of the $250 million notes as a liquidity/credit facility, which is favorable relative to existing sources of liquidity, including bank lines of credit. RNR will deposit these proceeds into a segregated and newly established custodial account. They will be invested in high-quality securities, in accordance with the investment guidelines. The duration of the invested assets will closely match that of the notes. Despite RNR’s intention to segregate the proceeds from the $250 million issuance so that they are readily accessible as a liquidity/credit facility, we view the borrowings as financial leverage. RNR has complete access to the funds, which the company can use for working capital, capital expenditures, acquisitions, and other general corporate purposes. After issuing the $250 million senior notes, RNR’s year-end 2009 pro forma debt plus preferred-to-capital ratio will be 23.2 percent, with a fixed-charge coverage ratio of 11.0x. In 2009, operating results were very strong. RNR generated EBITDA of $1.03 billion and a combined ratio of 45.3 percent, compared with $304 million and 79.0 percent, respectively, in 2008. The initial assessment of losses from the Chilean earthquake and the European windstorm Xynthia could be material and hamper RNR’s first-quarter 2010 results. Nonetheless, we expect that these losses will be an earnings event rather than a capital event, since the company still expects to report a profit for the period. We believe that these losses are within our expectations compared with RNR’s significant property catastrophe book of business, which constituted about 63 percent of total gross premiums written in 2009. Catastrophe losses early on in 2010 have put a dent in RNR’s catastrophe budget for the year, similar to its peers. However, a large revenue base and judicial use of reinsurance/retrocession protection should mitigate potential earnings volatility. A.M. Best Co. assigned a debt rating of “a-” to the notes and a stable outlook. It also explained the basic reasons for doing so, which are similar to the analysis given by S&P. Best added: “As a result of the debt issuance, RenRe’s unadjusted financial leverage is projected to be in the low to mid 20 percent range. The company’s fixed charge coverage is expected to remain strong and fully supportive of the additional debt service requirements. RenRe intends to use the proceeds of the senior note issuance for general corporate purposes.” Best also said it “anticipates that RenRe will use the proceeds in a judicious manner as part of its overall capital management program. The debt rating reflects RenRe’s outstanding risk management techniques and strong capitalization. Furthermore, RenRe continues to maintain its superior market reputation as a leader in state-of-the-art property catastrophe modeling and risk optimization.”

A.M. Best Co. has withdrawn the financial strength ratings (FSR) of ‘B-‘ (Fair) and issuer credit ratings (ICR) of “bb-” of Century Reinsurance Company and Brandywine Group, both of Philadelphia, and has assigned an NR-5 (Not Formally Followed) to the FSRs and an “nr” to the ICRs. Effective December 31, 2009, Century Reinsurance Company was merged into its parent company, Century Indemnity Company, a wholly owned indirect subsidiary of ACE Limited, with Century Indemnity Company being the surviving entity. Century Indemnity Company and Century Reinsurance Company were the sole members of the Brandywine Group. The FSR of ‘B-‘ (Fair) and ICR of “bb-” of Century Indemnity Company are unchanged at this time.

A.M. Best Co. has downgraded the financial strength rating to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Kentucky Growers Insurance Company, both with stable outlooks. These rating actions reflect the company’s “decline in risk-adjusted capitalization over the past two years, which was driven by significant underwriting losses,” Best explained. “Kentucky Growers’ volatile underwriting results and generally weak operating returns are due primarily to its geographic concentration in Kentucky, which exposes it to frequent and severe weather-related events and competitive market conditions. Nonetheless, Kentucky Growers maintains an adequate risk-adjusted capital position due to its low underwriting leverage and conservative investment portfolio that historically has generated steady investment income.”

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