Ratings Recap: Channel Re, Bluewater, Flagstone Re, Casiopea Re, Aviva

June 5, 2008

Standard & Poor’s Ratings Services has lowered its financial strength rating on Channel Reinsurance Ltd. to ‘AA’ from ‘AAA’, removed the rating from CreditWatch with negative implications and assigned a negative outlook. “The downgrade reflects the fact that, in our view, Channel Re faces much-reduced near-term business volume prospects, given that its sole source of business is MBIA Insurance Corp. (MBIA),” S&P explained. The rating agency added that “Channel Re also faces lower earnings prospects and has significantly lower financial flexibility in meeting the ‘AAA’ capital shortfall identified by Standard & Poor’s in February 2008.” S&P said the “negative outlook reflects our view that, given the unprecedented level of mortgage market deterioration that has occurred, we remain circumspect about assigning stable outlooks to insurers even if they have sufficient capital when measured against our projected stress case losses. Accordingly, we will still assign negative outlooks to those firms with significant exposure to residential mortgage-backed securities (RMBS) with 2005, 2006, and 2007 vintages.”

Standard & Poor’s Ratings Services has lowered its insurer financial strength ratings and long-term counterparty credit rating on Norway-based nonlife insurer Bluewater Insurance ASA to ‘BB+’ from ‘BBB-‘ with a stable outlook. “The rating action reflects our heightened concerns about Bluewater’s risk controls, following recent discussions with the company,” stated credit analyst Ali Karakuyu. “It also reflects the greater-than-expected deterioration in the company’s competitive position in both the non marine and the marine sector, demonstrated by the significant fall in gross written premiums during the first quarter of 2008.” He added: “In our opinion, the higher-than-expected deterioration in Bluewater’s underwriting performance in 2007 was partly due to the company’s weak underwriting risk controls. As a result, Bluewater’s combined ratio rose significantly higher than most of its peer group to 140 percent in 2007 from 104 percent in 2006.”

A.M. Best Co. has affirmed the financial strength ratings of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Bermuda-based Flagstone Reinsurance Limited and Flagstone Reassurance Suisse SA. Best also affirmed the ICR of “bbb-” of Flagstone’s parent, Flagstone Reinsurance Holdings Limited (The Group). The outlook for all ratings is stable. “The affirmation of the ratings reflect The Group’s strong risk-based capitalization, solid operating results to date and continued development of the organization’s operating platforms as it matures through its start-up phase.” Best also explained that the “strong level of risk-adjusted capitalization” reflects its stricter guidelines for P/C catastrophe companies and new formations. “The affirmations also consider The Group’s diversification into new territories and lines of business via strategic investments,” said Best.

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of Luxembourg-based Casiopea Re S.A., the reinsurance captive of Spain’s Telef√≥nica S.A., with a stable outlook. “The ratings reflect Casiopea Re’s excellent current and prospective risk-adjusted capitalization, strong operating performance and improving business diversification,” said the bulletin. Best also indicated that it “believes that Casiopea Re’s business portfolio is better diversified with the integration of the O2 handsets portfolio, which accounted for a significant proportion of total gross written premiums in 2007, although the material damage and business interruption book was still dominant. Geographically, the business spread also improved and the main markets are now the United Kingdom, Spain and Central and South America.”

A.M. Best Co. has assigned a debt rating of “a-” to the Tier 2-dated fixed/floating rate subordinated notes to be issued by the UK’s Aviva Plc under its existing €5 billion ($Euro Note Program, with a stable outlook. “The amount is expected to be around £800 million and is to be used for the refinancing of maturing debt of the Aviva group,” said Best. “The debt leverage is therefore to remain stable and in line with the current rating.”

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