Ratings Recap: Darwin, Cincinnati Financial, Arch Indemnity, Prospect

A.M. Best Co. has placed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Darwin Group and its members under review with positive implications. Best also said the FSR of ‘A- (Excellent) and ICR of “a-” of Chicago-based Vantapro Specialty Insurance Company “remain under review, and the implications have been revised to developing from negative.” Best took the rating action following the announcement that Allied World Assurance Company Holdings has entered into a definitive agreement to acquire Darwin (See IJ web site – site – https://www.insurancejournal.com/news/national/2008/06/30/91483.htm). Best added that the “under review status also reflects the pending implementation of a substantial quota share reinsurance agreement” between Darwin and Allied World Assurance Company, a subsidiary of Allied World Holdings. “Vantapro was originally placed under review pending the implementation of a substantial quota share reinsurance agreement between Vantapro and its immediate parent, Darwin National Assurance Company (Delaware). Vantapro also is expected to be party to the quota share reinsurance agreement with Allied World.”

Standard & Poor’s Ratings Services has lowered its counterparty credit rating on Cincinnati Financial Corp. (CFC) to ‘BBB+’ from ‘A’. S&P has also lowered its counterparty credit and insurer financial strength ratings on CFC’s operating companies to ‘A+’ from ‘AA-‘, and has removed all of these ratings from CreditWatch, where they were placed on June 20, 2008. The outlook, however, is negative. CFC’s operating insurance companies (Cincinnati Insurance Co., Cincinnati Casualty Co., Cincinnati Indemnity Co., and Cincinnati Life Insurance Co.) are collectively referred to as CIC. “The rating actions reflect CIC’s weakened capitalization, weakened current and prospective operating performance, increased market competition, and reduced liquidity,” explained credit analyst Tom E. Thun. S&P added: “The organizations’ rating characteristics that now support the operating company financial strength ratings are its ‘A’ level capital, extremely strong and loyal agency force, strong competitive position, improved technological efficiencies, and improved and adequate enterprise risk management (though it was developed too late to capture the two-fold impact of catastrophes and equity declines). The two-notch lowering of the rating on CFC reflects the change in the ratings on its operating companies and an adjustment to a standard gapping differential from a nonstandard one. The negative outlook on CFC and CIC reflects Standard & Poor’s ongoing concern that the company’s aggressive position in stocks and its reliance on dividend income from its investments could continue to affect capitalization and earnings through the remainder of 2008 and possibly into 2009.”

Standard & Poor’s Ratings Services has assigned its ‘A’ counterparty credit and financial strength ratings to Arch Indemnity Insurance Co., a Nebraska-based insurance subsidiary of Arch Capital Group Ltd. S&P also affirmed its ‘BBB+’ counterparty credit rating on Arch Capital, a Bermuda-based holding company underwriting insurance and reinsurance business through its operating subsidiaries. In addition, S&P affirmed its ‘A’ counterparty credit and financial strength ratings on Arch’s Capital’s operating subsidiaries. The outlook on all these companies is stable. “The ratings on Arch Indemnity reflect the explicit support that the group is providing through a quota-share arrangement, in which Arch Indemnity cedes 100 percent of its premiums and related liabilities to Missouri-based Arch Insurance Co., Arch Capital’s main primary insurance writer in the U.S.,” explained credit analyst Laline Carvalho. S&P said that over the medium term it “expects Arch Indemnity to focus on the underwriting of a modest amount of workers’ compensation insurance, and will underwrite part of the excess workers’ compensation business acquired by Arch Capital in December 2007 through the acquisition of Wexford Underwriting Managers.” S&P also indicated that the “ratings on Arch Capital and related operating subsidiaries (collectively referred to as Arch) are based on Arch’s strong competitive position, strong operating performance, strong and coherent management team and strategy, and extremely strong capital adequacy. Offsetting these positive factors are softening market conditions in casualty and property lines and the group’s lack of history in operating through a soft cycle, as well as potential reserve risk because of the significant proportion of casualty writings.”

Standard & Poor’s Ratings Services has removed its ‘B-‘ long-term counterparty credit rating on Prospect Medical Holdings Inc. from CreditWatch with negative implications, where it was placed Jan. 17, 2008, and affirmed the rating with a stable outlook. S&P also said “the recovery rating assigned to the company’s first-lien senior secured debt (consisting of a five-year, $10 million revolver due August 2012 and a seven-year, $95 million term loan due August 2014) was unchanged at ‘1’ (indicating very high recovery in the event of default), and the debt ratings were affirmed at ‘B+’.” Credit analyst Joseph Marinucci added: “The rating affirmation reflects Prospect’s improved liquidity and financial flexibility and the emergence of a more stable debt service capacity. Furthermore, we believe that Prospect is adequately positioned to sustain its competitive position in the Southern California marketplace.”