Farmers Group Subsidiaries Acquired from AIG

Fitch Ratings downgraded to A+ from AA- the insurer financial strength (IFS) ratings of the group of personal lines insurers acquired by Farmers Group Inc. (FGI) from American International Group Inc. (AIG) and subsequently transferred from FGI to the Farmers Exchanges. Fitch also downgraded to BBB+ from A- the $100 million of senior unsecured notes issued by 21st Century Group that were also transferred to the Farmers Exchanges from FGI. Fitch removed all of these ratings from rating watch negative and assigned a negative rating outlook.

Fitch's ratings actions follow AIG's announcement that it closed on the sale of the personal lines insurers to FGI, a subsidiary of Zurich Financial Services (ZFS), in a transaction that was announced on April 16, 2009. Fitch placed the ratings on negative watch at that time, and said that the companies' ratings would likely be downgraded to a level more commensurate with ZFS' ratings upon the transaction's close. Fitch's current rating on ZFS' insurance subsidiary is A+ and the rating outlook is negative.

Fitch believes the ratings of the personal lines companies benefit from Farmers' relationship with ZFS given the management agreement between FGI and Farmers, the significant levels of reinsurance between ZFS subsidiaries and Farmers, and investments made by ZFS subsidiaries in surplus notes issued by Farmers. Fitch also notes positively that FGI provides Farmers with a $250 million liquidity facility. Because the ratings of the personal lines companies are grouped with Fitch's ratings for ZFS, the Negative Outlook for these entities reflects capital pressures throughout the ZFS organization and challenges in rebuilding capital in the current financial environment.


Flagstone Re 

Fitch Ratings affirmed its ratings on Flagstone Reinsurance Holdings Ltd. and subsidiaries (collectively Flagstone), and removed the ratings from rating watch negative. The rating outlook is stable.

Fitch's rating actions reflects its view that Flagstone is no longer actively pursuing the acquisition offer it made to IPC Holdings Ltd. on July 1. On July 9, IPC announced that its board of directors had approved a definitive amalgamation agreement with Validus Holdings Ltd. 

Fitch placed the ratings on rating watch negative on July 6 due to concerns about how a combination of Flagstone and IPC's insured portfolios would affect the combined entities' risk-adjusted capitalization. At that time Fitch noted that IPC had received competing bids from other entities and that if IPC were to reject Flagstone's offer, Fitch would remove the ratings from rating watch.


Greek Catholic Union of the USA 

A.M. Best Co. affirmed the financial strength rating (FSR) of C- (Weak) and issuer credit rating (ICR) of “cc” of Greek Catholic Union of the USA. The outlook for both ratings is negative.

Concurrently, A.M. Best has assigned a category NR-4 to the FSR and an “nr” to the ICR in response to a request from GCU's management.


ING Groep NV 

According to the Wall Street Journal, Standard & Poor's Ratings Services lowered its credit ratings on the six U.S. life-insurance units of ING Groep NV, citing their importance to the company, along with their risk profile and recent performance and change in operating focus.

ING reportedly experience a poor first quarter, as impairments on real-estate and equity investments hit its insurance operations, while its banking business remained profitable despite heavy provisions against loan losses.

S&P, which lowered its ratings on the insurance units by one notch to A+, said ongoing performance pressures in both the banking and insurance operations may continue hurting results, according to the Journal.


IPC Holdings Ltd. and its Subsidiaries 

A.M. Best Co. downgraded the FSR to A- from A and ICR to “a-” from “a” of IPCRe Limited (Bermuda) and IPCRe Europe Ltd., which are reinsurance subsidiaries of IPC Holdings Ltd. The ratings continue to be under review with negative implications following the recent announcement of the definitive agreement between IPC and Validus Holdings Ltd. A.M. Best also downgraded IPC’s ICR to “bbb-” from “bbb” and the indicative ratings for securities available under shelf registration to “bb” from “bb+” on preferred stock, “bbb-” from “bbb” on senior unsecured debt and to “bb+” from “bbb-” on subordinated debt of IPC. These ratings remain under review with negative implications.

The ratings of IPC were initially assigned a negative outlook in December 2007 based on concerns regarding the company’s enterprise risk management and its impact on capital optimization, which could drive stronger, sustainable long-term results. In order to seek out capital optimization, the IPC Board of Directors and its management had been pursuing a merger or acquisition strategy. However, the business profile of IPC has deteriorated over the last several months, during which time IPC has been party to a failed transaction and the target of a hostile take over, the rating agency says.


Life Insurance Corp. (International) B.S.C. 

A.M. Best Co. affirmed the FSR of B++ (Good) and the ICR of “bbb+” of Life Insurance Corp. (International) B.S.C. The outlook for both ratings is stable.

The ratings reflect LIC International’s strong risk-adjusted capitalization and the good and improving profitability, A.M. Best says. Offsetting factors are the narrow business profile, restricted to non-resident Indians (NRI) in the Gulf Cooperation Council (GCC) region, and the lack of an in-house enterprise risk management function.


Principal National Life Insurance Co.

A.M. Best Co. assigned an FSR of A+ and an ICR of “aa-” to Principal National Life Insurance Co. (PNL), an indirect subsidiary of Principal Financial Group Inc. (PFG) The outlook assigned to both ratings is negative. Existing financial strength, issuer credit and debt ratings for PFG and its subsidiaries are unchanged.

PFG intends to utilize PNL to write individual fixed (term and UL) life insurance products in all states except New York. PNL’s target market is consistent with that of PFG’s key life/health subsidiary, Principal Life Insurance Co. (PLIC), which currently has an FSR of A+ (Superior) and ICR of “aa-” (negative outlook for both ratings). PNL is expected to start offering fixed products during the third quarter of 2009, and will essentially replace PLIC as the group’s main writer of new individual life policies outside of New York.

A.M. Best expects PNL to maintain adequate capital for its current ratings. To manage risk and capital, there is a coinsurance agreement between PNL and PLIC, whereby all business written by PNL will automatically be ceded 100% to PLIC. That is, PNL will not retain any reserves associated with the business it writes, according to the rating agency. Additionally, PFG has stated that it will maintain capital and surplus within PNL in an amount that meets or exceeds the requirements necessary to maintain certificates of authority in the 49 states where it is licensed.


Scandinavia Insurance Co. LLC

A.M. Best Co. downgraded the FSR to C++ from B and the ICR to “b+” from “bb+” of Scandinavia Insurance Co. LLC, following the arbitration process, concerning major disputes over the assets of the company.

Subsequently, A.M. Best has withdrawn the ratings at the company’s request and assigned a category NR-4 to the FSR and an “nr” to the ICR.


Validus Holdings Ltd. and its Affiliate 

A.M. Best Co. placed the FSR of A- (Excellent) and ICR of “a-” of Validus Reinsurance Ltd. under review with negative implications. A.M. Best also placed the ICR of “bbb-” and the indicative ratings of “bbb-” on senior debt, “bb+” on subordinated debt and “bb” on the preferred stock of Validus Holdings Ltd. (Validus Holdings) under review with negative implications.

On July 9, 2009, Validus Holdings signed a definitive agreement to acquire the outstanding stock of IPC Holdings Ltd. in exchange for a .9727 common voting share of Validus Holdings for each IPC common share and cash consideration of $7.50 per share. The under review status reflects the uncertainties associated with this transaction including the execution risk in completing the deal as well as integrating both companies.

Additionally, A.M. Best remains concerned with the heightened risk profile of the combined entity due to the significant property catastrophe business written by Validus Holdings and IPC. This concern is exacerbated by the timing of the transaction during the Atlantic wind-storm season, which may result in undesirable correlations in a severe event.

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