Acceptance Credit Rating Affirmed
Standard & Poor's Rating Services affirmed its "B+" counterparty credit rating on Acceptance Insurance Cos. Inc. (Acceptance). It also affirmed its ratings on AICI Capital Trust I and American Growers Insurance Co. (AGIC) and revised all outlooks to positive from stable. At the same time, S&P lowered and subsequently withdrew, at management's request, its ratings on Acceptance Insurance Co. (AIC).
Acceptance will record another unprofitable year because of losses at AIC and the service on the subordinated debt that it issued to AICI Capital Trust I and that supports the Trust's service on its preferred securities. At this time of year, it is impossible to predict AGIC's profitability because weather and market conditions have yet to develop to the point where such a forecast is possible.
If 2002 is an average year for multi-peril crop insurance (MPCI), AGIC should be soundly profitable. Longer-term, AIC will become progressively less important to Acceptance, and the fundamentals of AGIC, which S&P views as good, will become more important.
Royal & Sun Alliance Ratings Lowered
A.M. Best Co. lowered the financial strength rating to "A-" from "A" of Royal & Sun Alliance Insurance Group plc (R&SA), United Kingdom, and its core subsidiaries. Concurrently, it downgraded the "BBB+" and "BBB" ratings of the group's subordinated debt and preferred stock to "BBB" and "BBB-," respectively. The negative outlook was retained.
The ratings reflect the group's very good but reduced risk-adjusted capitalization, improving operating performance, excellent business position in its key markets and modest long-term debt leverage. Offsetting factors include the ongoing potential for reserve deterioration in its U.S. operations and challenges associated with raising new capital.
A.M. Best is closely reviewing the core status of the U.S.-based subsidiary companies comprising the Royal & SunAlliance USA Insurance Pool following a significant deterioration in their stand-alone risk-adjusted capital position. Capitalization will be reviewed again upon the conclusion of an independent, third-party study of the group's U.S.-based loss reserves.
R&SA's consolidated risk-adjusted capital base continued to deteriorate following a total loss of 1.20 billion British pounds ($1.84 billion) at year-end 2001, further falls in equity markets and the revised 66 million pounds ($101 million) reserve strengthening for the World Trade Center (WTC) claim. R&SA has already realized 725 million pounds ($1.11 billion) of the 800 million pounds ($1.22 billion) capital-release program announced in January 2002, but it needs additional funds to expand its general insurance business if it is to fully capitalize on the current attractive rating environment while complying with its own risk-based capital guidelines. At present, the company is exploring new ways of raising capital and has not discarded the possibility of a rights issue.
There is still potential for a material asbestos and environmental reserve deficiency on the group's U.S. operation, despite the asbestos reserve strengthening announced in January 2002. A.M. Best is closely monitoring the development of these reserves, and any developments will be important factors in the re-assessment of the negative outlook.
Hartford Offering Rated 'A'
S&P Ratings Services said that it assigned its "A" rating to Hartford Financial Services Group Inc.'s (HIG) $300 million senior unsecured notes offering. The proceeds are a drawdown on an existing shelf registration and are expected to be used to refinance $300 million of public debt due to mature later this year. As a result, S&P expects HIG's financial leverage (debt plus preferred stock outstanding as a percent of capitalization) to remain unchanged.
As of June 30, 2002, HIG's financial leverage—excluding other comprehensive income—was about 31 percent, within S&P's expectations. Similarly, fixed-charge coverage is expected to remain adequate in the 4.75 times (x)-5.25x range.
HIG is a diversified insurance holding company that has developed a strong franchise in the U.S. asset accumulation and property/casualty insurance markets, as demonstrated by its better-than-average profitability compared with many of its competitors. In addition, the capital adequacy of the property/casualty insurance operations, though not a strength of the organization, is expected to improve as management takes steps to address this issue.
Zurich Downgraded
A.M. Best Co. downgraded the financial strength rating of Zurich Financial Services (ZFS) and its core operating subsidiaries to "A" from "A+." A.M. Best has also downgraded the ratings on debt issued or guaranteed by Zurich Insurance Company to "A" and "A-" from "A+" and "A" respectively and the debt issued by several subsidiaries within the group to "BBB+" from "A-." All ratings have been placed under review with developing implications.
These actions follow the confirmation of A.M. Best's concerns with the group's ability to restore earnings momentum to levels commensurate with a Superior-rated company and to replenish its capital base. Reported half-year losses of USD 2 billion and the need to strengthen non-life insurance and reinsurance reserves will significantly erode the overall group's risk-based adjusted capital.
A.M. Best is currently discussing with management a series of proposed measures, including raising up to USD 2.5 billion of new equity, divesting non core operations and cutting its equity exposure to 10 percent. Resolution of the under-review status will be predicated on the outcome of the proposed capital raising and A.M. Best's view of the group's ability to complete the proposed re-structuring in a timely manner.
Lloyd's Outlook Stable
A.M. Best Co. affirmed the financial strength rating of "A-" of the Lloyd's market with a stable outlook. Lloyd's has a financial size category of XV.
Lloyd's excellent business profile, excellent capitalization and high standards of regulation influence the affirmation. Offsetting factors are the market's weak financial performance; uncertainty caused by the sheer magnitude of losses Lloyd's faces certain issues arising from its Chairman's Strategy Group proposals, and long-term uncertainty over the ultimate adequacy of Equitas' reserves.
Lloyd's benefits from its high-profile global brand and network of licenses and representative offices and has a leadership profile in many specialist classes of business and a strong relationship with its main market, the U.S. Current market conditions are expected to be particularly advantageous for Lloyd's, because it has a strong profile in many of the lines of business that now are experiencing the most marked improvements in premium rates.
Lloyd's maintains an excellent level of capital on a risk-adjusted basis. Funds supporting underwriting at year-end 2001 increased 17.5 percent on year-end 2000 to 21.8 billion pounds ($31.8 billion). The market has taken steps to rebuild the Central Fund in the wake of the WTC loss by increasing the premium levy from 1.1 percent to 2 percent and paying the funds generated into the Central Fund in 2002 and 2003; 111 million pounds ($162 million) was paid in the first two quarters of 2002. Lloyd's risk-based capital model remains a sophisticated method for allocating capital in the market and at least meets best-practice standards in the insurance industry.
