S&P Rates Arch’s Flatiron Re ‘BBB-‘

Standard & Poor’s Ratings Services announced that it has assigned its ‘BBB-‘ counterparty credit rating to Flatiron Re Ltd. and its ‘BB+’ senior secured debt rating to Flatiron Re’s $256 million term loan facility, both with a stable outlook.

S&P noted that “Flatiron Re is a limited-life, special-purpose Class 3 reinsurance company domiciled in Bermuda and set up specifically to offer reinsurance to Arch Reinsurance Ltd. (Arch Re; A-/Stable/–).”

“The ratings on Flatiron Re are based on peril modeling supportive of investment-grade outcomes, Arch Re’s brief but solid track record in managing property catastrophe risk, and Flatiron Re’s predetermined risk tolerances,” stated S&P credit analyst James Doona.

S&P noted, however, that these “positive factors are offset in part by Flatiron Re’s limited corporate powers, as the company can neither refuse business from Arch Re nor change the underwriting arrangement; its high financial leverage; and the structural subordination of the bank debt relative to policyholder claims.”

The rating agency explained how the arrangement between Arch Re and Flatiron works as follows: “Flatiron Re may borrow up to $520 million from a consortium of banks for a term of at most five years, receive equal amounts of equity from investors in its parent holding company, and–after setting aside a small portion to cover transaction costs–invest the proceeds in a portfolio of investment-grade securities within a collateral trust account.

“The assets in the collateral account provide Arch Re with a source of indemnity cover for losses relating to its property catastrophe lines of business and other related lines. The assets will be managed with duration consistent with that of its obligations. Arch Re will make quarterly premium payments to Flatiron Re through a quota share reinsurance treaty under which Flatiron Re’s liability will attach simultaneously with that of Arch Re and otherwise follow the fortunes with respect to the business retroceded to Flatiron Re.

“The lending bankers and the holding company investors are subject to Arch Re’s credit risk because Arch Re is the premium payer, to market and currency risks related to the assets in the trust account, to leverage inherent in the capitalization of Flatiron Re, and the outcome of the peril modeling. The outlook on Flatiron Re will likely parallel the outlook on Arch Re.”