A.M. Best Affirms RenRe Subsidiaries’ Ratings; Downgrades Trenwick Group

February 4, 2003

A.M. Best Co. announced that it has affirmed the financial strength ratings of A+ (Superior) on Bermuda’s RenaissanceRe Holdings Ltd.’s operating subsidiaries, notably Renaissance Reinsurance Ltd., the lead company.

In a separate announcement Best joined other rating agencies (See IJ Website Feb. 3), in downgrading the financial strength ratings of Bermuda-based Trenwick Group Ltd. and its ongoing operating subsidiaries to C (Weak). It also that it has “withdrawn the financial strength ratings of Trenwick’s operating companies–which are now in runoff–and assigned each a NR-3 rating (Rating Procedure Inapplicable).”

Best also affirmed RenRe’s existing debt ratings and has assigned debt ratings of “a” to $100 million 5.875% senior unsecured notes offering due 2013 and “bbb” to $100 million 7.30% perpetual preference shares offering both recently announced by RenaissanceRe under its existing shelf registration. “The outlook for all the ratings is stable,” said Best.

The ratings reflect “RenaissanceRe’s leading position in the worldwide property catastrophe reinsurance marketplace,” said Best, citing the company’s “excellent capitalization, its track record of exceptional underwriting performance, superior risk management techniques as well as its seasoned and experienced management team,” as key considerations.

While the report noted that RenRe’s earnings were susceptible to “large catastrophic events,” it also indicated that this exposure was “partially mitigated by its disciplined and analytical underwriting approach and its increased level of underwriting fee income.” It also has a strong balance sheet, said Best, “augmented by an investment portfolio with over $2.8 billion of high quality assets that are conservatively managed and laddered to ensure adequate liquidity.”

As many other analysts have noted, RenRe could offer a textbook course on how a property reinsurer should be managed. Best’s report said that “Unlike many of its peers, RenaissanceRe maintained its underwriting discipline in the soft market period of the late 1990s through 2000, which has enabled it to benefit from the current hardening market conditions without having to adjust for pricing or reserve deficiencies of the past.”

It concluded, “the company is exceptionally well positioned to continue to capitalize on the rate hardening in the reinsurance marketplace and will continue to generate superior operating results.”

Trenwick on the other hand presents a wholly different picture. Best cited the recent announcement (See IJ Website Jan. 31) that it had strengthened loss reserves by $107 million in fourth quarter of 2002, following a $90.7 million strengthening in the third quarter, as the main reason for lowering the company’s ratings. The additional reserve “further depletes the low levels of surplus still remaining within the operating companies and elevates operating leverages to unacceptable levels,” said Best.

It added that “Trenwick has no capacity to settle and is in renegotiation discussions with its creditors related to its $75 million senior note obligations, which are due April 1, 2003. Failure to renegotiate this note by March 1 will put Trenwick in default of its Letter of Credit (LOC) facility, which is necessary to support its Lloyd’s operations.” This could “impede the group’s ability to sustain its remaining underwriting operations over the long term, which includes its Lloyd’s facility and a fronting arrangement between Trenwick America Corporation and Chubb Re.” It added that “These ongoing businesses are Trenwick’s only operations potentially capable of generating revenue and improving the group’s weak financial position.”

The rating agency said it would continue to monitor the situation, and, “due to the considerable uncertainties all ongoing ratings remain under review with negative implications.”

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