Ratings Roundup: Validus Re, IPC Re, Meritz

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based Validus Reinsurance, Ltd. Best also affirmed the ICR of “bbb-” of Validus Holdings Ltd. as well as the indicative ratings of “bbb-“, “bb+” and “bb” of senior debt, subordinated debt and preferred stock shelf registration, respectively, of Validus Holdings. The outlook for all the ratings is stable. Best said: “The ratings reflect Validus’ solid risk-adjusted capitalization, favorable operating performance since inception, experienced management team and prudent operating strategies. The ratings also consider the support of Validus Holdings, which provides financial flexibility as a publicly traded company. Partially offsetting these strengths is Validus’ susceptibility to high severity losses, which is inherent in a catastrophe-focused property reinsurer. However, the company’s risk-adjusted capital remains at levels that have been stress tested to absorb significant catastrophe losses, mitigating this concern. The stable outlook reflects the expectation that operating performance and risk-adjusted capitalization will remain supportive of the current rating levels. Despite its relatively short existence, Validus’ risk management has proven effective thus far as evidenced by its overall operating performance during 2008 and since its inception in 2005. Validus operates as a Bermuda-based reinsurance company focused primarily on property catastrophe, marine and offshore energy coverage on a worldwide basis.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the reinsurance subsidiaries of Bermuda-based IPC Holdings Ltd. (IPCRe). The affirmations also apply to IPCRe Limited (Bermuda) and IPCRe Europe Limited (Dublin, Ireland). In addition Best affirmed the ICR of “bbb” and the indicative ratings for securities available under shelf registration, which include the “bb+” on the preferred stock, the “bbb” on the senior unsecured debt and the “bbb-” on the subordinated debt of IPCRe. However, Best said the “outlook for all ratings is negative. The rating affirmations reflect IPCRe’s strong balance sheet and well established presence within the property catastrophe reinsurance market. The company has maintained a strong position in the property catastrophe reinsurance market since inception, retains many long-term client relationships and has had strong employee retention.” Best observed that, “IPCRe had a relatively strong underwriting year compared to its peers through the first nine months of 2008 and continues to maintain a strong risk-adjusted capital position.” Best explained the negative out look as due to “IPCRe’s delayed initiative regarding a formal enterprise risk management (ERM) framework,” which in Best’s view, “has affected the company’s ability to optimize its capital resources. Long-term return on equity measures for IPCRe remain in the mid single-digit range. While many of IPCRe’s metrics are skewed as a result of the unprecedented losses associated with hurricanes Katrina, Rita and Wilma in 2005, in the three years since the storms it does not appear that IPCRe has optimized its use
of capital, which could have resulted in stronger, consistent and sustainable returns.”

A.M. Best Co. has revised the rating outlook to negative from stable for South Korea’s Meritz Fire & Marine Insurance Co., Ltd. and has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-“. Best said the “ratings reflect Meritz’s enhanced underwriting performance due to the improved loss ratio of motor and long-term insurance businesses, its stable market profile and investment performance.” Best explained that the outlook revision to negative “reflects the recent deterioration of capitalization. Due to the rights offering in August 2007, Meritz’s local solvency ratio stood at 235 percent as at fiscal year 2007. However, as at September 2008, the local solvency ratio dropped to 166 percent due to the company’s purchase of treasury stocks and the increase in valuation losses of invested assets.” However Best did indicate, that even though the Company’s local solvency ratio decreased, it “believes that capitalization would gradually improve in the mid to long-term, supported by a sound operating performance. To protect itself from short-term volatility, Meritz is considering exchanging treasury stocks with other companies or issuing subordinated bonds to improve its local solvency ratio. During fiscal year 2007, Meritz recorded a sound underwriting performance with a combined ratio of 103 percent. Although the commercial business loss ratio deteriorated during fiscal year 2007 due to increased small to medium-sized claims, the satisfactory improvement in the loss ratio of motor and long-term business helped the company’s overall combined ratio. The company’s efforts to restructure the motor business portfolio and focus on sales of pure protection type products of long-term insurance showed sound underwriting results.”