Ratings Roundup: Aviva/Delta Lloyd, Montana Re (cat bonds), Montpelier Re (notes), Arab Orient

May 9, 2011

A.M. Best Europe – Rating Services Limited has commented that the ratings for the UK’s Aviva plc and its subsidiary companies remain unchanged as a result of Aviva’s announcement to sell a portion of its holding in the Netherlands-based Delta Lloyd NV. Best explained that the partial disposal of Aviva’s stake in Delta Lloyd “will lead to a drop in the group’s holding from 58.2 percent of ordinary share capital to 43.1 percent. The placing will generate anticipated net proceeds of £370 million [$605.62 million] for the group.” Best also noted that “despite the drop in ownership rights, Aviva will retain two directors on the supervisory board of Delta Lloyd as per the agreement established at the time of the partial-IPO that took place in November 2009.” In Best’s opinion, Delta Lloyd “makes a significant contribution to the group’s profitability. However, given its significant equity holdings, Delta Lloyd’s profitability historically has been more sensitive to market movements than the rest of the group. Furthermore, the transaction is consistent with the partial-IPO and the strategy that Aviva has articulated in the past of focusing on twelve key markets. In terms of Aviva’s level of risk-adjusted capitalization, the implications of the transaction are broadly neutral as a decline in Aviva’s net asset position is offset by a fall in investment and underwriting risks.”

A.M. Best Co. has placed under review with negative implications the debt ratings of “bb-“on $100 million Series 2009-1 Class A and “b” on $75 million Series 2009-1 Class B principal-at-risk variable rate notes (collectively, the notes) due December 7, 2012, issued by Cayman Islands-based Montana Re Ltd. The rating actions “are in response to the release of RiskLink Version 11 U.S. Hurricane Model (RiskLink Version 11) by Risk Management Solutions Inc. (RMS), the calculation agent and modeling firm involved in the transaction,” said Best. “The updated model incorporates significant new datasets and scientific developments on U.S. hurricane risk. RMS expects an increase in wind risk for all hurricane states on an industry-wide basis.” Best added that it has “made a request (through the administrator) for new attachment and exhaustion probabilities and expected loss percentage associated with the notes using RiskLink Version 11.” Best also said it “may take further rating action after a review of the updated results. The notes provide Flagstone Réassurance Suisse S.A. with up to $100 million protection against U.S. hurricanes for the Class A notes and $75.0 million protection against U.S. hurricanes and earthquakes for the Class B notes. These protections are based on a modified property claim services index trigger on a per occurrence basis covering a three-year period (November 30, 2009 to November 30, 2012).”

A.M. Best Co. has assigned a debt rating of “bb” to the recently issued $150 million, 8.875 percent fixed rate perpetual non-cumulative preferred shares callable quarterly after five years of Bermuda-based Montpelier Re Holdings Ltd (MRH). and has assigned a stable outlook. The proceeds from the offering will “provide additional resources for MRH to take advantage of underwriting opportunities in the insurance and reinsurance markets,” Best explained. With the issuance of the perpetual preferred shares, Best noted that “MRH’s existing financial leverage remains within an acceptable range that is supportive of its current ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of the United Arab Emirates Arab Orient Insurance Company (PSC), both with stable outlooks. Best said the ratings “continue to be supported by the company’s superior risk-adjusted capitalization, excellent franchise within the UAE, conservative investment strategy and the consistently strong profitability.” As offsetting factors Best cited the “high level of reinsurance dependence and the geographic concentration of business within the UAE.” The rating agency also observed that “Orient has maintained its strong position in the UAE insurance market, ranking as the third-largest by gross written premium. Growth in premiums has been consistently sound and is expected to continue with the company leveraging off of its position within the Al-Futtaim Group. Despite Orient’s very strong capital position, it continues to post excellent returns on capital and surplus, which combined with high levels of profit retention, have and should continue to support internal capital generation. Furthermore, the company’s particularly conservative investment strategy provides protection from market volatility and thus supports the stability of its earnings.” Best also indicated that, although “premium retention remains fairly low, with 70 percent ceded to reinsurers, Orient remains focused on underwriting, with technical profits driving net income. Furthermore, credit risks assumed are mitigated by the generally sound ratings of the company’s panel of reinsurers. Management has embarked upon a strategy of geographical diversification; however, in the short term, business is likely to remain concentrated in the UAE. Such concentration risk is mitigated by the low exposure to catastrophic events.”

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