A.M. Best, Fitch Ratings, Moody’s Investors Service and Standard & Poor's announced ratings updates. The following are some of the most recent:
Moody's has placed the Ba2 subordinated debt rating of American International Group Inc. on review for possible upgrade in light of the company's recently completed divestitures of its international life insurance units. The initial public offering (IPO) of AIA Group Limited (AIA Group) and the sale of American Life Insurance Co. (ALICO) are important milestones in AIG's government-backed restructuring effort. Moody's also assigned provisional ratings to AIG's "well-known seasoned issuer" shelf registration (senior unsecured debt at (P)A3, negative outlook).
AIG's core insurance operations generated pretax operating income (before net realized capital gains (losses)) of $2.1 billion for 3Q 2010, which was fairly consistent with the prior two quarters and within rating expectations. The company reported a net loss of $2.4 billion attributable to AIG in 3Q 2010 as compared to a net loss of $2.7 billion in 2Q 2010. In each period the net loss was driven largely by the costs of government funding arrangements as well as non-cash charges within discontinued operations, Moody’s says.
AIG's subordinated debt rating currently sits five notches below the senior debt rating, signaling the risk of a coupon deferral or restructuring of the subordinated debt in the event of another market downturn. Moody's says its rating review will focus on (i) the stabilization of AIG's core insurance businesses over the past several quarters, (ii) the recapitalization plan announced at the end of September and targeted for completion by the end of 1Q 2011, and (iii) AIG's progress in divesting or unwinding non-core businesses, most importantly the divestitures of AIA Group and ALICO.
"We expect to narrow the notching between the senior and subordinated debt ratings as AIG completes its recapitalization and moves toward independence," said Bruce Ballentine, Moody's lead analyst for AIG.
As part of the rating review, Moody's says it will consider the likely extent of government ownership and support beyond the recapitalization and how that might affect creditors. The typical notching for a fully independent insurer is a one-notch differential between senior and subordinated debt ratings, according to the rating agency.
Allied World Assurance Co.
Standard & Poor's today assigned its 'BBB' unsecured senior debt rating to Allied World Assurance Co. Holdings Ltd.'s proposed $300 million 10-year note issuance.
The rating assignment is supported by the group's strong competitive position, strong operating performance and strong capitalization, according to S&P. These positive factors are partially offset by softening pricing conditions in many of Allied World's lines of business, the group's relatively short operating history in certain lines of business (particularly in certain areas where it has made acquisitions or more significantly expanded in recent years) and resulting limited internal loss experience in these lines, as well as its appetite for growth and expansion, which could contribute to further significant shifts in its risk profile.
Allied World's third-quarter earnings were within S&P’s expectations, with a strong year-to-date combined ratio of 85.6% and net income of $571 million as of Sept. 30, 2010.
The ratings agency expects some of the proceeds of the issuance to be used to repurchase shares. Allied World's financial leverage (total debt plus preferreds to total capital) as of Sept. 30, 2010, stood at 13%. Following the note issuance and share repurchase actions, we expect financial leverage to remain supportive of the ratings, at about 20%. Fixed charge coverage is expected to remain above 6x.
Moody's has assigned a Baa1 rating and stable outlook to the 10-year, 5.50% senior notes that will be issued by Allied World Assurance Company Holdings Ltd. These notes constitute a drawdown under the company's SEC shelf registration. In the same action, Moody's has affirmed the parent company's senior debt rating, the provisional ratings of the shelf and the A2 insurance financial strength ratings of the insurance operating subsidiaries.
Moody's says Allied World will use the majority of the proceeds to repurchase common shares and warrants from certain founding shareholders, who are affiliates of Goldman Sachs. The aggregate repurchase price will be $222.6 million.
The Baa1 senior debt rating is based on the parent company's acceptable debt leverage. Pro forma for the new debt issuance and share repurchases, the group's adjusted debt-to-total capital ratio will increase to 21.9% at September 2010 (from 15.1% at December 2009, including operating lease commitments), putting it at the high end amongst Bermuda insurers, Moody’s says. This is balanced by a comfortable level of underwriting leverage at the operations and the expectation of ample credit support from the operating subsidiaries.
Blue Cross Blue Shield of Florida
Fitch Ratings affirmed its Issuer Default Rating (IDR) of 'A' on Blue Cross Blue Shield of Florida (BCBSF) and its 'A-' ratings on BCBSF's surplus notes. The Rating Outlook remains Negative.
Fitch's rating rationale for BCBSF includes the company's well-established and leading position in the Florida health insurance market, extensive provider networks, good operating performance and strong capitalization, as well as its long history of providing health benefits to the residents of Florida.
Fitch says BCBSF's Negative Rating Outlook reflects the significant uncertainty surrounding federal health reform legislation. Despite the passage of the Patient Protection and Affordable Care Act (PPACA), at this time there remains sufficient ambiguity over implementation of important aspects of the new law for Fitch to maintain its Negative Outlook on BCBSF and the entire health insurance sector.
The company's operating profile reflects a strong balance sheet and capitalization relative to its peers, with very modest leverage and good liquidity. This strength reflects the partial recovery of fixed-income asset values from lows in late 2008 and early 2009, Fitch says.
Earnings as of June 30, 2010, are significantly improved from the same period in 2009. Fitch attributes this to favorable prior-year reserve development and lower-than-expected health care utilization as reflected in a medical loss ratio of 78.4% through June 2010 compared to 82.6% reported for the first six months of 2009. Earnings for the second half of 2010 are expected to be lower due to the anticipated seasonal effect of increased benefit payments as members have exhausted their deductibles and the company pays a larger portion of claims.
A.M. Best Co. revised the status of under review with developing implications to under review with positive implications and affirmed the financial strength rating of B+ (Good) and issuer credit rating of “bbb-” of Casco Indemnity Co.
The rating actions follow the announcement that Casco and Ohio Mutual Insurance Co. have entered into a stock purchase agreement to acquire N.E. Corp. and its wholly-owned subsidiary, Casco. The under review status with positive implications reflects the perceived benefit to Casco of being ultimately owned by Ohio Mutual Insurance Co., which offers Casco greater financial flexibility and resources.
A.M. Best plans to resolve the under review status upon the completion of the transaction, which is expected to be completed by year-end 2010.
A.M. Best Europe – Rating Services Limited has upgraded the financial strength rating to A- (Excellent) from B++ (Good) and the issuer credit rating to “a-” from “bbb+” of CIGNA Life Insurance Company of Europe SA-N.V. (CLICE). The ratings have been removed from under review with positive implications and assigned a negative outlook.
The upgrade reflects a growing level of capital commitment from CLICE’s ultimate parent company, CIGNA Corp., and the negative outlook reflects the rating outlook of CIGNA Corp., A.M. Best says.
The acquisition of Vanbreda International NV by the CIGNA group is likely to bring significant volumes of complimentary and profitable new business to CLICE over the medium term. A.M. Best says it considers that CLICE’s level of risk-adjusted capital is likely to remain strong as its business profile grows, with direct capital injections from the parent when needed. The agency also says it considers that the business plans of CLICE clearly demonstrate a growing level of commitment from the CIGNA group.
A.M. Best has commented that the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of Erie Insurance Group (Erie) and its members are unchanged following the announcement that Erie Indemnity Co. (Erie Indemnity) has entered into a definitive agreement with Erie Insurance Exchange (the Exchange) for the sale of Erie Indemnity’s three wholly owned property/casualty subsidiaries—Erie Insurance Co., Erie Insurance Company of New York and Erie Insurance Property & Casualty Co.—to the Exchange for an aggregate purchase price equal to the subsidiaries’ GAAP book value as of Dec. 31, 2010.
Additionally, A.M. Best has commented that the FSR of A (Excellent) and ICR of “a” of Erie’s life affiliate, Erie Family Life Insurance Co., is unchanged following the announcement of Erie Indemnity entering into a definitive agreement for the sale of its 21.6% ownership interest in Erie Family Life to the Exchange for a per share purchase price equal to 95% of Erie Family Life’s GAAP book value per share as of March 31, 2011. All companies are domiciled in Erie, PA, except where specified.
The sale of the property/casualty subsidiaries is scheduled to close by Dec. 31, 2010, and the sale of Erie Indemnity’s equity interest in Erie Family Life is scheduled to close by March 31, 2011. Both transactions are subject to regulatory approval.
Under the new structure, the Exchange will own all property/casualty and life operations, and Erie Indemnity will continue to function as the management company.
Following the completion of the sale, A.M. Best will withdraw the ICR of “a
+” of Erie Indemnity due to it no longer owning any risk-bearing insurance entities.
The FSR of A+ (Superior) and ICRs of “aa-” are unchanged for Erie Insurance
Group and its following property/casualty members:
ν Erie Insurance Exchange
ν Erie Insurance Co.
ν Erie Insurance Company of New York
ν Erie Insurance Property & Casualty Co.
ν Flagship City Insurance Co.
A.M. Best Co. assigned an issuer credit rating (ICR) of “bbb” to Global Indemnity plc. The firm also affirmed the financial strength rating (FSR) of A (Excellent) and ICRs of “a” of Wind River Reinsurance Co. Ltd. (Wind River Re) and its U.S. subsidiaries.
Concurrently, A.M. Best affirmed the ICR of “bbb” and debt ratings of the intermediate parent holding company, United America Indemnity Ltd. (UAI). Global Indemnity is the newly formed ultimate parent holding company of Wind River Re. The outlook for all ratings is stable.
The ratings reflect the strong capitalization and diversified portfolio of specialty products provided on both an admitted and non-admitted basis by Wind River Re and its U.S. subsidiaries, A.M. Best says. The ratings also reflect the long-term historical profitability of the U.S. subsidiaries, which began operating under a single pooling agreement as of Jan. 1, 2009, whereby they pool their premiums and liabilities and cede 50% of their combined net retained liabilities to Wind River Re. Wind River Re also continues to build a book of unaffiliated, third-party reinsurance business to complement the affiliated business. At the end of 2009, on a gross basis, the third-party business comprised just over 21% of Wind River Re’s total written premiums, with that proportion expected to increase in 2010.
The FSR of A (Excellent) and ICRs of “a” have been affirmed for Wind River
Reinsurance Co. Ltd. and its following subsidiaries:
ν Diamond State Insurance Co.
ν Penn-America Insurance Co.
ν Penn-Patriot Insurance Co.
ν Penn-Star Insurance Co.
ν United National Casualty Insurance Co.
ν United National Insurance Co.
ν United National Specialty Insurance Co.
A.M. Best affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of Hiscox Insurance Co. Inc. (HICI). The ratings of HICI are based on the consolidation of HICI and its inactive subsidiary, Hiscox Specialty Insurance Co. Inc. The outlook for both ratings is stable.
The ratings of HICI’s Bermuda based affiliate, Hiscox Insurance Co. (Bermuda) Limited (Hiscox Bermuda) are extended to HICI. A.M. Best says that this rating enhancement is based on HICI’s role and strategic importance to the Hiscox group, and the implicit and explicit support provided by the Hiscox group in the form of quota share reinsurance with Hiscox Bermuda and a guarantee on all third-party reinsurance recoverables with the Bermudian ultimate parent holding company, Hiscox Ltd. The ratings also reflect the implied commitment to be provided by Hiscox group in the future in order to support HICI’s expansion in the United States.
Moody's downgraded the insurance financial strength (IFS) ratings of Manulife Financial Corp.'s subsidiaries to A1 from Aa3. These subsidiaries include Manufacturers Life Insurance Co. (MLI) and John Hancock Life Insurance Co. Short-term ratings were affirmed. The rating outlook for Manulife's subsidiaries is stable. These rating actions conclude the reviews for downgrade initiated on August 5, 2010.
"The challenges of securing large rate increases while avoiding anti-selection to deal with higher morbidity and claims in the long-term-care block and diminished financial flexibility drove the downgrade" said Peter Nerby, a Moody's SVP.
The rating agency said the downgrades follow MFC's announcement of a nearly $1 billion net loss in 3q10 and incorporated the following business developments. First, Manulife's acknowledgement of higher morbidity experience within its U.S. long-term-care block and the resulting need for an average rate increase exceeding 40% in coming months. Also, the company faces the challenge of redesigning products to restore earnings power, combined with the possibility of continued earnings volatility until the firm's enhanced market-risk hedging program is substantially complete, Moody’s says.
Fitch, however, affirmed the ratings of Manulife Financial Corp. (MFC) and its primary insurance related operating subsidiaries, including The Manufacturer's Life Insurance Co. (MLI) and John Hancock Life Insurance Co. The Rating Outlook is Stable.
The rating action follows Fitch's review of MFC's release of third quarter financial results and discussions with management. MFC reported a net loss of $947 million for the third quarter of 2010 and a net loss of $2.2 billion for the nine months ended Sept. 30, 2010. Key drivers of the reported third quarter results included approximately $2 billion in annual assumption and methodology changes and a $1 billion write off of goodwill, related to the repositioning of its U.S. life business. In addition, MFC also announced that further write-offs related to goodwill under International Financial Reporting Standards (IFRS) conversion at Jan. 1, 2011 could exceed $2.2 billion.
Fitch views the reported negative third quarter operating results as falling marginally outside Fitch's expectation and reducing the current capital cushion, 2010 profitability and financial flexibility. Offsetting these factors in Fitch's view are MFC's strategic plans and actions to strengthen reserves, reduce capital and earnings volatility through a time-based hedging strategy in the next 12 to 24 months; and plans to reposition its U.S. businesses in terms of product pricing, design and risk.
A.M. Best removed from under review with negative implications and affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the primary life/health insurance subsidiaries of MetLife Inc. Concurrently, A.M. Best has removed from under review with negative implications and affirmed the ICR of “a-” and the existing debt ratings of MetLife.
Additionally, A.M. Best has removed from under review with positive implications and upgraded the FSR to A+ (Superior) from A (Excellent) and the ICR to “aa-” from “a” of the newly acquired, American Life Insurance Co. (ALICO). All ratings have been assigned a negative outlook. (Please see link below for a detailed listing of the companies and ratings.)
The rating actions follow MetLife’s Nov. 1, 2010 acquisition of ALICO from American International Group, Inc. (AIG). The upgrading of the ratings of ALICO reflects its stable earnings stream, favorable risk-adjusted capital position and franchise value in a number of international markets.
The rating actions also reflect A.M. Best’s view that ALICO will provide MetLife with meaningful new sources of earnings diversity as this acquisition will greatly enhance MetLife’s global life insurance presence, specifically in the Japanese market. While A.M. Best recognizes the potential long-term growth prospects and meaningful diversification this acquisition brings to MetLife, it believes challenges exist with respect to MetLife effectively rebranding ALICO’s products, the heightened expenses associated with the integration, execution risks and the significant intangibles brought to MetLife’s balance sheet by this acquisition. A.M. Best will continue to monitor the effects of this transaction on earnings, top line growth and capital adequacy going forward, noting that the acquisition of ALICO shifts MetLife’s operating profile to be more heavily dependent on international markets.
Standard & Poor's raised its counterparty credit rating on ProAssurance Corp. to 'BBB' from 'BBB-', and said that its outlook is stable.
The upgrade reflects S&P’s view of PRA's financial profile, supported by its strong operating performance, capital adequacy, investments, and financial flexibility. The company's performance continues to meet S&P’s expectations, with net income of $78.5 million in the first half of 2010 and $82 million in 2009. The company also continues to benefit from favorable reserve developments related to prior accident years while maintaining adequate reserves. In addition, its financial leverage and coverage charges ratios remain strong for the rating.
Further supporting the rating is the company's strong competitive position, which the acquisitions of Mid-Continent General Agency Inc. (now operating as ProAssurance Mid-Continent General Underwriters), PICA Group, and Georgia Lawyers Insurance Co. (since merged into ProAssurance Casualty Co.). in 2009 have bolstered. The planned acquisition of American Physicians Service Group, which should close in early December 2010, will moderately enhance PRA's market position, diversify its revenue stream geographically, and provide it with meaningful footprints in Texas and incremental business in Oklahoma and Arkansas in the long term, S&P says.
Partially offsetting these positive factors is the company's modest geographic concentration by state, S&P says, although PRA is nationally diversified. In addition, PRA has a business concentration in the medical malpractice niche (though it is slowly diversifying). This concentration subjects the company to systemic risks as a result of regulatory reform and changing industry trends, which have had a significant impact on the company's underwriting results. PRA also has some integration and inherent business risks, such as potential inadequate reserves and capital related to recent acquisitions.
A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating (ICR) of “a-” of Valiant Insurance Co. and Valiant Specialty
Insurance Co. The ratings remain under review, and the implications have been revised to positive from developing.
The rating affirmations reflect the recent change in ownership of Valiant Insurance and Valiant Specialty through the purchase of 100% of the capital stock of Valiant Insurance Group, Inc. by First Mercury Insurance Co. (FMIC), a subsidiary of First Mercury Financial Corp. (FMFC) from Ariel Holdings Ltd. The ratings also recognize the implementation of 100% quota share reinsurance agreements between FMIC and Valiant Insurance and FMIC and Valiant Specialty, resulting in the assignment of a Financial Size Category of IX to both companies.
The ratings of Valiant Insurance and Valiant Specialty remain under review now with positive implications, reflecting the current under review with positive implications status of FMIC following the recent announcement that FMFC and Fairfax Financial Holdings Ltd. (Fairfax) have entered into a merger agreement, whereby Fairfax will acquire all of the outstanding shares of FMFC’s common stock.
