Ratings: Heddington, Bosna Re, Arden Re, Syndicate 609, Asia Capital Re (notes)

June 13, 2013

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Bermuda-based Heddington Insurance Limited, both with stable outlooks. The ratings reflect Heddington’s” superior capitalization, consistently positive operating results and the role that it plays as a captive insurance company of Chevron Corporation,” said Best. However, the rating agency also indicated that the rating factors “are partially offset by Heddington’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low frequency but high severity. This is somewhat mitigated by the captive’s good loss history supported by strong investment income and parental support provided by high yield loans to affiliated companies. Heddington has sufficient capital resources to meet its underwriting related obligations, as measured by Best’s Capital Adequacy Ratio (BCAR).” Best also noted that the “ratings are based on the consolidated results of Heddington. The ratings further recognize the company’s strong enterprise risk management controls and underwriting expertise, the loss controls included in the structuring of insurance coverages offered by Heddington, as well as the cost effective manner in which those services are delivered. Heddington also gains from Chevron’s global scope, which provides it with a favorable geographic distribution of assumed risks. In its role as a captive insurer, Heddington, along with Iron Horse Insurance Company (another active Chevron captive), currently provides broad and competitive global insurance products for Chevron and its subsidiaries. The insurance needs of Chevron are supplied through these captive operations (where appropriate) and the commercial market.” Best pointed out that “Heddington and the other Chevron captives provide comprehensive coverage above Chevron’s internal retentions, while Heddington’s reinsurance is placed through a corporate wide plan with the world’s leading providers of capacity, resulting in a diversified and balanced distribution of reinsurers.” In conclusion Best said: “There is a small likelihood that positive rating actions could take place within the next 12 to 24 months based on Heddington’s stand-alone characteristics. However, negative rating actions may result from material loss of capital that does not support the ratings or the captive’s profile is diminished within Chevron.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Bosnia and Herzegovina (BH)-based Bosna Reosiguranje d.d. Sarajevo (Bosna Re), both with stable outlooks. Best said the “ratings reflect Bosna Re’s dominant position within its domestic market, BH, consistently positive operating results and adequate risk-adjusted capitalization.” As offsetting factors Best cited the company’s “relatively high exposure to illiquid equity investments and high concentration risk to cedants. The ratings also consider Bosna Re’s exposure to country risk associated with its operation in BH.” Best noted that “Bosna Re remains the dominant reinsurer in BH, with a market share of around 85 percent. The company’s strong competitive position is protected by the high barriers to entry into the BH market through regulatory constraints and associated costs of operating in a small market, and its long-standing relationship with its cedants, some of which are also its shareholders. Given the size of the BH market, Bosna Re is reliant on a small number of cedants for business volume. In 2012, 55 percent of gross written premiums (GWP) were derived from its top three shareholders.” Best added that it “understands that Bosna Re will focus on maintaining its competitive position in its domestic market in the medium term. This is in contrast to its previous strategy, which was centered on the expansion into former Yugoslavian states. Domestic business accounts for approximately 80 percent of GWP.” Best also said it “recognizes Bosna Re’s exposure to the weakened economic and political conditions in BH, but believes that the company’s dominant profile will provide a safeguard against any adverse effects on its solid rating fundamentals. Bosna Re’s earnings profile remains stable. Operating results are supported by consistently positive technical results (since 2007), with a five-year average combined ratio of 94 percent, and solid investment earnings.” Best said it expects Bosna Re’s earnings to remain at a similar profitable level, due to stability in its business mix and the limited opportunities available to support growth in scale of its operations within its domestic market.” The ratings report described Bosna Re’s risk-adjusted capitalization as “marginal.” Best indicated, however, that in terms of Best’s Capital Adequacy Ratio (BCAR) analysis it “considers the application of higher asset risk charges to Bosna Re’s investment portfolio. These asset risk charges are higher in relation to charges applied to investment portfolios of other insurers operating in more stable markets. The company’s portfolio largely consists of investments derived from BH and is therefore subjected to the highest asset charges in the BCAR model. Additionally, Bosna Re’s risk-adjusted capital position remains constrained by its investments in associates, which represents 44 percent of consolidated shareholders’ funds at year-end 2012. Despite the above factors, risk-adjusted capitalization is expected to remain supportive of Bosna Re’s rating levels, owing to the modest growth prospects in the next two to three years, given the depressed economic environment in BH.” In conclusion Best said: “Positive rating actions are unlikely given the current weak economic conditions in BH. Negative rating actions could occur if there is deterioration in the quality of investments or in Bosna Re’s financial profile, resulting in deterioration in risk-adjusted capitalization. Additionally, further deterioration in country risk factors associated with the company’s operations in BH could negatively affect Bosna Re’s ratings.”

A.M. Best Co. has placed under review with negative implications the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based Arden Reinsurance Company Ltd. and the ICR of “bbb-” of the parent company, Arden Holdings, Ltd. Best said the rating actions “follow the recent announcement that Arden Holdings has entered into a definitive agreement with Enstar Group Limited for the acquisition of Arden Re. Enstar will purchase Arden Re for approximately $79.6 million. The transaction is anticipated to close by the end of the fourth quarter of 2013, subject to regulatory approval.” Best added that the ratings” will remain under review pending the completion of the transaction and A.M. Best’s review of the future business plan and capitalization of Arden Re.”

A.M. Best Europe – Rating Services Limited has commented that the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Lloyd’s Syndicate 609 “remains unchanged following the recent announcement that Enstar Group Limited and Arden Holdings Ltd. have entered into a definitive agreement under which Enstar will acquire Atrium Underwriting Group Limited (see above).” Atrium is a wholly owned subsidiary of Arden Holdings Ltd. Atrium owns Atrium Underwriters Limited, which is the managing agent for Lloyd’s Syndicate 609 and Atrium 5 Limited, a Lloyd’s corporate member that provides a share of syndicate 609’s capital.” Best said the “ratings of syndicate 609 are underpinned by the financial strength of the Lloyd’s market and are unaffected by the acquisition. For the 2013 year of account, Atrium 5 Limited provides 25 percent of syndicate 609’s capacity. The remaining capacity is provided by third party capital providers, largely traditional Lloyd’s names.”

A.M. Best Asia-Pacific Limited has assigned a debt rating of “bbb” to the proposed issuance of up to SGD 300 million [US$239 million] subordinated notes due 2043 (and callable 10 years from issue date) to be issued by Asia Capital Reinsurance Group Pte. Ltd., and has assigned the notes a stable outlook. “The subordinated notes will bear interest at a fixed rate, which will be determined through a book-building process, up to the first call date of 10 years from issue date, thereafter reset every 10 years at the 10-year Singapore Swap Offer Rate (SOR) plus initial credit spread,” Best said. “As a result of this proposed debt issuance, Asia Capital 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. Asia Capital Re intends to utilize the proceeds for general corporate purposes.”

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