Ratings Roundup: Heritage, Euler Hermes (US)

December 22, 2011

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Calif.-based Heritage Indemnity Company, both with stable outlooks. The ratings of Heritage “reflect its strong capitalization, favorable operating results and national geographic diversification,” best explained. The company’s operations are enhanced by the financial flexibility provided to Heritage through its ultimate parent, Wells Fargo & Company. As partial offsetting factors Best cited Heritage’s “narrow auto warranty product focus and the recent trend of declining operating performance, which was driven by increased losses associated with a specific brand of recreational vehicle warranty (since eliminated), and higher underwriting expenses due to larger corporate expense allocations. Heritage writes vehicle service contract coverage throughout the United States, including the District of Columbia. Negative rating actions could occur if there is a sudden, unexpected and material decline in Heritage’s risk-adjusted capitalization, a sustained deterioration in operating performance or diminished liquidity measures. The integration risks and business profile changes associated with potential future transactions also could lead to either positive or negative pressure on the company’s ratings, depending on the details of the transaction.”

A.M. Best Co. has placed under review with negative implications and affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of Euler Hermes American Credit Indemnity Company, which is based in Maryland. Best explained the rating actions “follow the downgrade of the ICR and the placing of the ratings under review with negative implications of the group’s ultimate parent company, Allianz Societas Europaea (Allianz SE). The actions on Allianz SE’s ratings resulted from the company’s exposure to investments in several peripheral euro zone economies, Italy in particular, as well as its investment exposure to euro zone banks.” Best added that it has been actively monitoring the continued deterioration of the sovereign creditworthiness of several euro zone countries and the negative economic outlook for the region and released reports on the insurance industry exposure to these events in September and November of this year. The perceived strain on the economies of these countries – most notably Italy and Spain – and companies operating within their borders is growing rapidly with very little evidence of a solution being formulated to address near-term concerns. The rationale for taking rating action at this point is largely attributable to the current level of credit and liquidity risk for insurers operating within these countries, including Allianz SE.” best added that the ratings for Euler Hermes ACI and its parent, Allianz SE, will remain under review with negative implications while it “examines these companies’ exposure to a prolonged adverse economic environment within the euro zone.” Best reiterated its concerns about the “exposure to Italy and Spain’s sovereign bonds and the potential for contagion into other asset classes, particularly holdings of European bank securities.” In addition, Best said it would “assess the likely impact of a prolonged financial crisis and recessionary environment on these carriers’ market position and ongoing business operations. Upward rating actions are unlikely at this point. Negative rating actions could occur if there were a worsening of risk-adjusted capitalization at Allianz SE tied to investment losses or a deterioration of the operating environment in key territories. Additionally, negative rating action could be taken if Euler Hermes ACI is deemed not sufficiently strategically important to the global operations of Allianz SE to receive continued rating enhancement.”

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