Ratings Recap: Solid, Jevco, Argus Group, Munich Re (bonds)

April 2, 2012

A.M. Best Europe – Rating Services Limited has upgraded the financial strength rating to ‘B++’ (Good) from B+ (Good) and the issuer credit rating to “bbb” from “bbb-” for Sweden’s SOLID Forsakringsaktiebolag, both with stable outlooks. Solid’s ratings reflect its “improving risk-adjusted capitalization, strong operating performance and good business profile as a niche extended warranty insurer,” Best explained. In 2011, risk-adjusted capitalization is expected to improve following a significant reduction in inter-group transactions. Best noted that “Solid has revised its reinsurance strategy and as a result, has cancelled reinsurance cover on its extended warranty/accidental damage portfolio, which was principally provided by an unrated affiliated reinsurer. Additionally, Solid’s exposure to its affiliate bank, Resurs Bank AB, is expected to reduce to around 35 percent of total investments in 2011 (2010: 66 percent of total investments). Risk-adjusted capitalization continues to be enhanced by the safety reserve, which in accordance with Swedish insurance regulations, can only be released to cover insurance losses and is funded from the company’s cumulative retained pre-tax earnings.” Best added that “Solid is expected to report an increase in technical earnings in 2011, primarily as a result of increased retention following the change in its reinsurance strategy, as well as the favorable performance on its extended warranty portfolio. As Solid continues to diversify into other lines of business, such as personal motor and personal property, the loss ratio is expected to increase from the 38.2 percent reported in 2010. Solid maintains a good niche position within the Swedish extended warranty market. Net written premium (NWP) is expected to significantly increase in 2011 to around SEK 1.2 billion [$181.5 million] (2010: SEK 678.4 million [$102.66 million] as the company increases its retention on its extended warranty/accidental damage portfolio, as well as expands its other lines of business, such as personal motor and property. In 2012, the motor portfolio is expected to account for over 10 percent of NWP. Following a recent ruling by the Swedish Market Court, multi-year policies are no longer permitted, and as such, Solid must now write extended warranty business on an annual basis. This may potentially affect premium volumes going forward; however, this is offset by the improved pricing and risk selection flexibility that this change offers. Upward rating pressures may result from an improvement in Solid’s business profile outside of its niche market, as well as further increases in risk-adjusted capitalization, principally driven by a reduction in its exposure to Resurs Bank. Downward rating pressures may be triggered by a deterioration in Solid’s underwriting and/or overall results, as well as a deterioration in risk-adjusted capitalization. In addition, an increased reliance on affiliated companies may have a negative impact on the ratings.”

A.M. Best Co. has upgraded the issuer credit rating (ICR) to “bbb+” from “bbb” and affirmed the financial strength rating of B++ (Good) of Quebec-based Jevco Insurance Company, as well as the ICR to “bb+” from “bb” of Jevco’s publicly traded parent, Ontario-based The Westaim Corporation. Best has also revised the outlook on the ratings to positive from stable. The ratings of Jevco “reflect its excellent risk-adjusted capitalization, favorable operating performance and market expertise,” Best said. “In addition, the ratings reflect the benefits derived from the financial flexibility and explicit support of Westaim. The positive outlook acknowledges Best’s expectation that Jevco will continue to produce favorable operating trends while maintaining a solid level of risk-adjusted capitalization.” As partial offsetting factors, Best cited the “soft commercial market conditions and strong competitive market pressures in non-standard auto and commercial auto.” In addition, although there are potential legacy reserve issues with Jevco being a former subsidiary of Kingsway Financial Services, Inc., Best said it “anticipates that the residual financial effects of this former relationship have become less material. Factors that could lead to the upgrading of Jevco’s ratings include a continued strong operating performance and stable reserve development while maintaining strong risk-adjusted capitalization. The rating of Westaim is based on the overall financial strength of Jevco, its main operating company in Canada.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of B++ (Good) and issuer credit ratings (ICR) of “bbb” of Bermuda-based Argus Insurance Company Limited, Somers Isles Insurance Company Limited and Bermuda Life Insurance Company Limited, all of which are subsidiaries of Argus Group Holdings Limited. Best has also revised the outlook to negative from stable and affirmed the ICR of “bb” of Argus Group. All companies are domiciled in Hamilton, Bermuda. Best said the “negative outlook reflects the decline in liquidity and financial flexibility of the Argus Group. Over the last three years, the Argus Group has recorded negative net income and a decline in capital mainly attributed to asset valuation write downs. Although losses have declined, the reduced asset valuations pressure the overall liquidity of the group as well as that of its subsidiaries. More positively, the “consolidated net losses have moderated, and insurance subsidiary asset quality and capital levels are improving. Additionally, the earnings results for the insurance operations continue to be positive, and premiums and fee-based income have shown a good level of growth. Bermuda Life, the organization’s domestic life, annuity and pension subsidiary, is again reporting positive net earnings and is anticipated to show additional improvement based on its operating performance and a more stable investment portfolio. Somers Isles, the group’s domestic health insurer, has reported stabilization in its loss ratio as a result of product design, rate actions and medical management programs undertaken by the company. Argus Insurance, the group’s domestic property/casualty writer, continues to record favorable underwriting results.” Best also indicated that, although the company “maintains more than adequate risk-adjusted capitalization, Best remains concerned with potential liquidity issues if a catastrophe loss or multiple catastrophe losses occur. Argus Group’s outlook could be revised to stable if there is a successful transition of the invested assets portfolio to more liquid and higher quality investments that better match the liabilities of each insurance entity; or there is increased liquidity at the holding company. Key rating factors that could result in negative rating actions include unfavorable earnings from operations, additional losses due to asset valuation or any further decline in capital levels on a consolidated basis or at the insurance subsidiary level.”

A.M. Best Co. has assigned a debt rating of “a+” to both the £450 million [$722 million] 6.625 percent and €900 million [$1.203 billion] 6.25 percent subordinated fixed-to-floating rate bonds, due 2042 issued by Munich Reinsurance Company. The outlook assigned to both ratings is stable. “The GBP denominated bonds will bear interest at a fixed rate of 6.625 percent and the Euro denominated bonds at a fixed rate of 6.25 percent up to the first call date of May 26, 2022. If not called on this date, interest payments on both bonds will convert to a floating rate based on a three month inter-bank offered rate plus a margin of 4.95 percent (which includes a step-up of 100 basis points),” Best explained. “Both sets of bonds are callable at Munich Re’s discretion on May 26, 2022 or on any floating interest payment date, thereafter, in whole but not in part. The bonds also may be called in whole but not in part, with the occurrence of certain events as defined in the prospectus. Interest payments for both issues also may be deferred. As a result of this debt issuance, Munich Re’s unadjusted financial leverage is projected to be at the 20 percent level and remains fully supportive of its current rating level. Fixed charge coverage also is expected to remain strong and in line with historical earnings performance. Proceeds from the bond issuances will be used to repurchase outstanding bonds and for general corporate purposes.”

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