Ratings Roundup: Stoneheath Re, Insurance Australia, Toa Re

A.M. Best Co. has removed from under review with negative implications and affirmed the debt rating of “bb+” on $350 million non-cumulative perpetual preferred securities (preferred securities) issued by Stoneheath Re (issuer), a Cayman Islands exempted company. The assigned rating outlook is stable. “Stoneheath Re is licensed as a restricted Class B reinsurer under the laws of the Cayman Islands and was formed to provide multi-year reinsurance capacity to certain insurance and reinsurance subsidiaries (ceding insurers) of XL Capital Ltd (XL Capital) (Cayman Islands),” Best explained. ” The terms of the reinsurance agreement between Stoneheath Re and XL Capital provide that upon a payment by the issuer to the ceding insurers, triggered by a catastrophic event, XL Capital will issue and deliver to Stoneheath Re Series D preference ordinary shares of XL Capital (XL preferred securities) in an amount equal to the payment made by Stoneheath Re. Cash from the issuance of preferred securities by Stoneheath Re, which previously had been deposited into a trust account and subsequently disbursed as claim payments, will be replaced by the XL preferred securities.”

Standard & Poor’s Ratings Services has affirmed its ‘A+’ ratings on Insurance Australia Group Ltd. (IAG) and the ‘AA-‘ ratings on IAG’s core operating companies, including Insurance Australia Ltd. and IAG New Zealand Ltd. The rating outlooks on IAG and the core operating companies remain stable. “These rating actions follow IAG’s announcement of a net loss after tax of about A$261 million [US$223 million] for the 2008 fiscal year, affected by one-off write-downs and restructuring costs,” S&P explained. “The results were also affected by higher claim costs from natural perils as well as mark-to-market impact of widening credit spreads.” Credit analyst Thomas Cherian observed: “While acknowledged as poor results, difficulties in the U.K. business and the sustained impact of volatile weather and investment market conditions were already factored into our ratings downgrade on May 7, 2008.” S&P then added: “The rating affirmation reflects the group’s excellent market positions in Australia and New Zealand, where a majority of its portfolio is in short-tailed lines in which pricing is starting to harden. The group has also maintained conservative reinsurance and reserving practices. The risk management framework continues to be robust and the group is expected to simplify the business model going forward with a heightened focus on expense management, underwriting discipline, and profitability. However, although IAG continues to hold capital well above the regulatory minimum, it is not capitalized to a level consistent with the rating.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and the issuer credit rating (ICR) of “aa-” of Japan’s Toa Reinsurance Company, Limited with a stable outlook. Best also affirmed the FSR of ‘A’ (Excellent) and the ICR of “a” of The Toa Reinsurance Company of America (TRA) (headquartered in Morristown, NJ). The outlook for both ratings is stable. Best said: “These rating actions reflect Toa Re’s superior capitalization, excellent underwriting performance in the recent two years and established market presence in Japan. Toa Re’s superior risk-adjusted capitalization is reflective of its Best’s Capital Adequacy Ratio (BCAR) and low underwriting leverage. The company also strengthened its BCAR ratio over the past two years by disposing of its listed equity. The domestic equity investment decreased to 28.9 percent of total assets as of fiscal year 2007 from 41.8 percent as of fiscal year 2004.” In addition Best noted that “Toa Re improved its business portfolio by reducing participation in the competitive motor business while increasing quality lines of business (e.g., life business). The combined ratios in fiscal year 2006 and fiscal year 2007 stood at 85.1 percent and 89.8 percent, respectively. The low combined ratio was attributed to the lack of a major catastrophe event in Japan and to the improved underwriting results over the past two years.”