Ratings Roundup: S&P Lowers Eureko; A.M. Best Lowers Gerling and Trenwick

October 21, 2002

Standard & Poor’s has lowered its ratings on the Netherlands-based Eureko insurance group to single-‘A’-plus from double-‘A’-minus, while A.M. Best announced that it has lowered its ratings on Gerling-Konzern Globale Ruckversicherung AG (GKG) to B++ (Very Good) from A- (Excellent) and its ratings on Bermuda-based Trenwick Group and most of its core subsidiaries to B+ (Very Good) from A- (Excellent).

S&P also lowered its ratings on Eureko’s holding companies, Eureko B.V. and Achmea Holding N.V., to triple-‘B’-plus from single-‘A’-minus, and its short-term counterparty credit and CP ratings on Achmea Holding N.V. to ‘A-2’ from ‘A-1’, as well as a similar downgrade on the company’s Portugese operation, Seguros e Pensoes GERE S.G.P.S. S.A. to triple ‘B.’ “In addition, all ratings were placed on CreditWatch with negative implications,” said S&P.

“The rating actions and CreditWatch placements reflect the uncertainties created by an ongoing strategic review of operations by the recently restructured management team at Eureko, as well as the crystallization of Standard & Poor’s concerns that operating performance and capitalization might not be sustainable at a level consistent with a higher rating category,” stated S&P credit analyst David Laxton.

The report noted a recent Euro 1.5 billion ($1.47 billion) writedown of goodwill on InterAmerican the leading Greek insurance and asset management group, acquired by Eureko in 2001
“The ratings remain underpinned by Eureko’s very strong business position in its core franchises in Dutch life, non-life, and health insurance, as well as prospects for good technical underwriting performance going forward,” said S&P

But Laxton warned that “If Eureko’s capital and operating performance have been permanently impaired relative to Standard & Poor’s previous expectations, and if operational and financial strategies remain uncertain, the ratings on Eureko are likely to be further lowered, although they are expected to remain within the single-‘A’ range.”

Best had previously affirmed its rating on GKG, Gerling’s reinsurance arm, last August. S&P, however, downgraded its ratings on the company to triple-‘B’ at the beginning of September.

The bulletin explained that it was taking the action because in Best’s opinion “GKG is likely to cease writing new non-life reinsurance business as there is only a remote possibility that it will be able to find a buyer prior to the 2003 renewal season.”

The company “will continue to write world-wide life reinsurance and the portfolio is expected to be transferred into a separate entity,” Best indicated. It also said that it believed that “if GKG’s non-life reinsurance portfolio was to be placed into run-off, it will be managed in an orderly manner whilst maintaining a risk-adjusted capitalization commensurate with the current B++ rating.”

The ratings, however, will remain under review with negative implications pending GKG’s “final decision on the future of the company and the outcome of its negotiations regarding the sale of the life reinsurance operation,” while Best “will continue its discussions with GKG’s management and will review the current rating level once the final structure has been evaluated.”

Best had placed Trenwick’s ratings under review last August. It announced the decision to lower them as being a result of its “concerns about the increased operating leverage in Trenwick’s core operating subsidiaries, along with the limited financial flexibility maintained by the group as a whole.”

The announcement took account of the procedures taken by management to reduce operating and financial leverage, but indicated that Best “believes that Trenwick remains constrained in its ability to generate a level of capital from ongoing businesses that is consistent with its prior ratings.”

It also noted that “obligations associated with the scheduled maturity of a $75 million senior note (due in April 2003) place further pressure on the organization’s capital resources and believes that its negotiating position with its various creditors is becoming increasingly tenuous.”

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