Standard & Poor’s Ratings Services announced that it has assigned its “BB” preferred stock rating to Odyssey Re Holding Corp.’s $50 million Series A and $50 million Series B perpetual preferred stock issue. S&P noted that this is “an update to the proposed $100 million Series A issue rated on Oct. 11, 2005.”
The rating agency also said it has “affirmed its ‘BBB-‘ counterparty credit rating on ORH and affirmed its ‘A-‘ counterparty credit and financial strength ratings on ORH’s operating subsidiaries: Odyssey America Reinsurance Corp., Clearwater Insurance Co., and Hudson Specialty Insurance Co. The outlook is stable.”
“The ratings are based on the operating companies’ (collectively referred to as Odyssey Re) strong competitive position, improved operating performance, and strong liquidity,” stated S&P credit analyst Steven Ader. “Partially offsetting these factors are the group’s capital adequacy (though improving), asset risk that is high relative to similarly rated peers, a relatively short track record of strong operating earnings since its IPO in 2001, and 81 percent ownership by lower-rated Fairfax Financial Holdings Ltd. (FFH).”
Odyssey Re, S&P notes, is the 18th-largest reinsurer in the world based on 2004 reinsurance premiums. It therefore “continues to realize the benefits of its opportunistic strategy as demonstrated by strong revenue growth in a favorable premium environment and much-improved underwriting results in the past four years. During this period, the group’s business-mix diversification improved significantly, not only geographically, but also by line of business and distribution source.”
S&P indicated that it “expects premiums to flatten in 2005, reflective of declining premium rates and management’s desire to adhere to strict underwriting guidelines.”
Concerning the impact on the company from Hurricanes Katrina and Rita losses, S&P said it expects the losses to “be consistent with other diversified peers with a combined ratio approximating 110 percent and a pretax ROR (before investment gains) of negative 2 percent as continued strong current accident year results are offset by hurricane losses and continued modest reserve additions for prior years.”
Odyssey Re’s capital adequacy, which reflects the $100 million October common equity and $100 million preferred equity issuance, “is expected to improve to a strong level by year-end 2005, with continued modest improvement in 2006, said S&P. “Financial leverage (as measured by debt plus preferreds to total capital) subsequent to the fourth quarter 2005 equity and hybrid issuances and redemption of $109.1 million of convertible bonds, is expected to increase to 23 percent (18 percent debt/total capital) with double leverage approaching 120 percent by year-end 2005.”
S&P also indicated that “the potential for a revision to a positive outlook exists if Odyssey is successful in posting strong operating performance in 2006 and if capital adequacy continues to improve well into the strong level following our ongoing assessment of reserve adequacy.” The current stable outlook is “partially tied to lower rated Fairfax Financial Holdings Ltd. (FFH owns 81 percent of ORH).”
“Alternatively, if Odyssey is unsuccessful in meeting our expectations or if FFH’s financial strength was to materially diminish, Standard & Poor’s will consider adverse ratings actions,” the announcement concluded.
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