Best, S&P React to Ariel Re Sale of Bermuda, Zurich Units

Both A.M. Best and Standard & Poor’s issued bulletins following the announcement that Ariel Re was selling off its Bermuda-based reinsurance business to Arrow, a unit of investment Bank Goldman Sachs, and its trade credit and surety (C&S) operations, which are based in Zurich, to Bermuda-based Arch Capital Holdings.

Best affirmed Ariel Re’s financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-“, as well as the ICR of “bbb-” of the parent company, Ariel Holdings, Ltd., both with stable outlooks. Best said its ratings were based on the company’s “strong level of risk-adjusted capitalization, favorable operating performance and solid enterprise risk management capabilities.”

Standard & Poor’s Ratings Services, however, took a dimmer view. It placed its ‘A-‘ counterparty and financial strength ratings on Ariel Re on its CreditWatch with negative implications.

Best noted that Ariel Re’s strengths are partially offset by its “limited business profile,” following the announcement that it has entered into a definitive agreement with Goldman Sachs for the eventual sale of its Bermuda-based property, marine and aviation businesses.

As a result of this transaction, Best pointed out that “Ariel Re will be a much smaller entity with a significantly reduced risk profile.” However, Best also noted that Ariel Re would “continue to assume the business underwritten by its Lloyds affiliate, Atrium Underwriting Group Limited, under an existing quota share arrangement that will remain in force. This business has historically proven to be very profitable for Ariel Re and it will in effect be managed by the successful management team at Atrium Underwriting Group Limited, subsequent to the closing of the transaction, which is expected during the second quarter of 2012.”

In addition Best noted that when the sales are completed plans call for Ariel Re to be renamed Arden Re, “as the Ariel brand name will be sold to Goldman as part of the announced transaction. The risk-adjusted capitalization, subsequent to the close of the transaction, also is expected to remain supportive of the current ratings and considers the counter party credit exposure that will result from a loss portfolio transfer of underwriting liabilities to Goldman’s Lloyds syndicate. This credit exposure also is somewhat mitigated by collateral that will be held through the run off of these obligations.”

S&P credit analyst Jason Porter stated: “The CreditWatch listing reflects our prospective view of Ariel Re’s business profile following the closing of a proposed sale of the majority of Ariel Re’s operations to Arrow (not rated).”

S&P also pointed out that the “agreement between Ariel Re and Arrow effectively removes all operations, unearned premiums, and loss reserves from Ariel Re, excluding the credit and surety (C&S) operations and Atrium quota share.” The C&S operations [which have also been sold – to Arch Capital] and Atrium “will be the only remaining sources of businesses for the company. Also, the company’s capital base will be significantly smaller, but we expect it to remain strong enough to support ongoing operations.

“However, the reduction of internal underwriting operations and capital diminishes our view of the company’s future competitive position. With the Ariel Holdings Ltd.’s CEO (George Rivaz), the majority of the staff, and most of Ariel Re’s operating assets moving to Arrow, the company will be left with fewer managerial resources. Also, with the movement of personnel and assets, the enterprise risk management functions of the organization will be substantially reduced.”

In anticipation of the sale of Ariel Re’s C&S business, which was announced shortly after this bulletin was issued, S&P said it would leave “only the Atrium quota share with Ariel Re. The operating performance of Atrium has been good in the past, providing Ariel Re an ongoing stream of operating profits. However, we view the existing structure of the Atrium quota share agreement as uncertain.”

S&P also noted that it believes the sales will reduce “Ariel Re’s financial flexibility,” adding that, “upon closing of the proposed sale, we will likely lower Ariel Re’s ratings, which we expect will remain investment grade. The closing is targeted for April 1, 2012. In the interim, we will monitor Ariel Re for any significant developments.”

Best’s somewhat more positive outlook reflects its “expectation that the overall operating results will remain positive and the risk-adjusted capital levels will continue to be supportive of the current ratings.”

Best also said it would “continue to monitor this transaction through to its closing. Should there be any material departure from the Arden Re business plan that was shared with A.M. Best, which is not anticipated, the current ratings will be re-evaluated.”

“Rating factors that could lead to Ariel Re’s ratings being upgraded would be the continuation of a long-term, consistently strong operating profitability and the maintaining of excellent risk-adjusted capital levels. The rating factors that could lead to a negative outlook or rating downgrades include unfavorable operating profitability trends, outsized investment losses and a significant decline in the company’s risk-adjusted capital that would not be supportive of the current rating level.

Sources: A.M. Best, Standard & Poor’s