Best Affirms Quanta Group’s ‘A-‘ Ratings; Outlook Negative

A.M. Best Co. announced that it has affirmed the financial strength ratings (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Bermuda-based Quanta Reinsurance Ltd. (Quanta Re) and its subsidiaries. Best said all the ratings have been removed from under review and assigned a negative outlook.

In a separate bulletin Best said it has affirmed the financial strength rating of “A-” (Excellent) and issuer credit rating (ICR) of “a-” of Quanta Europe Ltd., which is based in Dublin, Ireland, and removed the ratings from under review. Best noted that Quanta Europe’s prospective capitalization is strongly dependent on an explicit 65 percent quota share agreement from Quanta Re, while the company’s ratings benefit from “explicit and unlimited parental support.”

Concurrently, Best assigned an ICR of “bbb-” to Quanta Re’s parent, Quanta Capital Holdings Ltd. and a securities rating of “bb” to the $75 million 10.25 percent Series A non-cumulative perpetual preferred shares Quanta issued yesterday. These ratings also have been assigned a negative outlook.

“These ratings reflect the completion of Quanta’s common stock and preferred shares offerings yesterday and the capital funds these offerings have provided to support the group’s current ratings,” said Best. “The ratings also consider recent senior management changes and the strategic initiatives being implemented to allocate capital to business lines supported by specialized underwriting expertise.

“In 2005, Quanta has increasingly focused on its specialty insurance lines where it has experienced underwriters and technical underwriting expertise. In recent weeks, following its substantial losses from hurricanes Katrina, Rita and Wilma, the group has accelerated the reduction of its writings of reinsurance property and technical property business–largely through portfolio transfers–and de-emphasized the writing of casualty reinsurance business–in part, through a reinsurance commutation.”

Best noted: “The group’s reduced property book, in combination with expected enhanced reinsurance coverage, effective January 1, 2006, will substantially reduce its net exposure to catastrophe losses and lower its risk-adjusted capital requirements. Following anticipated substantial losses in the fourth quarter 2005, largely related to hurricane Wilma and, to a lesser degree, severance costs, A.M. Best’s expectations are focused on substantially improved profitability in 2006. A.M. Best will closely monitor the group to ensure targeted results are attained.”

Best cautioned, however that these “positive rating factors are offset by the significant challenges and uncertainties associated with the successful execution of management’s revised business plans and ability to diversify and grow Quanta’s businesses profitably. In its first two years of operations, Quanta has fallen far short of profitability and capital level projections, instead reporting substantial losses, albeit in large measure associated with catastrophe losses.

“The significant changes in business and senior management over this period (including the recent appointment of Robert Lippincott, III as interim chief executive officer), while generally viewed favorably by A.M. Best for the long term, have created near-term uncertainties. These uncertainties are related to the stability of Quanta’s operations, market positioning, the profitability of the group’s existing book of business and its ability to generate profitable business going forward.

“In the near term, there also exist the risks for upward development of Quanta’s Katrina, Rita and Wilma hurricane losses–particularly related to hurricane Katrina where Quanta has exhausted its reinsurance coverage–and charges related to the changes in its business plans. In addition, Quanta is currently operating with a far above-average expense ratio, which it is addressing and expects to significantly lower in 2006, although to a level that will still be high.

“Quanta’s proforma debt plus preferred-to-total capital at September 30, 2005, adjusted for its $75 million preferred shares and $62 million common stock offerings (including anticipated over-allotment), was about 24 percent, above its actual debt-to-total capital as of that date of about 14 percent. These ratios increased from about 9 percent at year-end 2004 primarily due to Quanta’s reported net losses during the first nine months of 2005 and $20 million of pooled trust preferred securities offered in February 2005. Despite the continued net losses expected to be reported in the fourth quarter 2005, debt plus preferred-to-total capital is anticipated to remain stable at approximately 24 percent at year-end.”

Best said it “expects Quanta will maintain approximately one year of interest and dividend payments–approximately $14 million–in cash at the holding company in 2006.”