S&P Lowers Kingsway's Ratings to 'B'; on CreditWatch/Negative

Standard & Poor's Ratings Services has lowered its long-term counterparty credit and senior unsecured debt ratings on Toronto-based specialty insurance provider Kingsway Financial Services Inc. S&P also lowered the debt ratings on Kingsway's subsidiaries to 'B' from 'BB', and has placed all of the ratings on CreditWatch with negative implications.

"The downgrade follows Kingsway's Feb. 9 announcement that it expects to report a significant fourth-quarter loss due to further underwriting losses at its lead U.S. operating company, Lincoln General Insurance Co., impairments to goodwill, a further reassessment of its tax asset, and net realized losses on its investment portfolio," explained credit analyst Foster Cheng [See also IJ web site - http://www.insurancejournal.com/news/international/2009/02/09/97735.htm]. "The CreditWatch placement reflects our uncertainty that additional losses could percolate or financial figures in the announcement could worsen," he added.

S&P pointed out that "Kingsway expects a net loss of US$324 million-US$344 million. This would bring the full-year loss to US$369.5 million-US$389.5 million, which represents about 40% of the company's shareholder's equity.

"Kingsway attributed part of this loss to continued unfavorable reserve developments at Lincoln General. For the quarter, the company expects this to be about US$70 million, bringing the full-year negative reserve development at the subsidiary to about US$149 million. Since fourth-quarter 2006, the unfavorable reserve developments at Lincoln General (not rated) have totaled about US$433 million."

S&P did recognize a "positive side," citing Kingsway's introduction of "several strategic initiatives to help derisk the company and bring it back to profitability. These include plans to divest away its common equity exposure and thus reduce balance-sheet volatility and regulatory capital requirements associated with holding equities; exit noncore or unprofitable lines of business at Lincoln General and Southern United Fire Insurance Co. (not rated); and sell off other noncore assets (including putting them into run-off) to free up more capital. Furthermore, in an attempt to rebuild profitability, the company also plans on making significant cost reductions that it hopes will significantly reduce its future cost base."

S&P said it views "all these initiatives as positive toward rebuilding the company and franchise, we believe Kingsway probably should have made them earlier and are not significant enough to bring it back to profitability in the short term."

The rating agency also indicated that it "continues to question the quality of governance and senior management oversight at Kingsway, and view the company's enterprise risk management as 'weak'.

"We expect to resolve the CreditWatch placement following our review of the company's 2008 annual report. If, at that time, there are additional material items not already mentioned in the announcement, or if the audited financial figures are materially different from the items mentioned, we could lower the ratings further."

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XL Capital Posts $1.43 Billion Q4 Loss; $2.63 Billion Full Year

Bermuda-based XL Capital posted a $1.43 billion fourth-quarter net loss Tuesday, and said it will cut its dividend and slash 10 percent of its staff.

The quarterly loss was due to soured investments, hedge fund losses, and a charge to restructure its investment portfolio to reduce risk, it said.

XL, which hopes to reduce expenses by up to $120 million a year by 2010, trimmed its quarterly dividend to 10 cents a share from 19 cents. The company had about 4,000 employees at the end of 2007.

XL hired Goldman Sachs last December to explore its possible sale.

XL's quarterly net loss was equal to $4.36 a share, and compared with a loss of $6.88 a share, or $1.22 billion, a year earlier. It had a full-year 2008 loss of $2.63 billion.

The latest results included a $400 million investment portfolio restructuring charge, a $900 million noncash charge for impaired goodwill, net realized losses of $568.9 million on investments, and another $214.2 million in losses from hedge fund investments.

"No one is happier to see 2008 behind us," said Chief Executive Michael McGavick. He added that the company had "ample capital" to keep its ratings.

Operating income, the measure most commonly used by analysts, rose to $189.5 million, or 58 cents a share, compared with $98 million, or 55 cents per share, a year ago. The latest result beat the average analyst target of 54 cents a share, according to Reuters Estimates.

Its shares, down more than 90 percent in the last 12 months, rose about 8.6 percent in late electronic trading after closing down 14.5 percent in the regular session.

XL said it was glad it severed ties with a money-losing bond insurer [SCA] it had partly owned.

"We are becoming again an XL with the simple and defining mission of being a global provider of specialty property and casualty insurance and reinsurance," McGavick said.

XL was formed in Bermuda, a large insurance and reinsurance market, in 1986 in response to a severe shortage of liability insurance in the United States.

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S&P: Fortis Insurance on Credit Watch, Negative; Holding Co./'Developing'

Standard & Poor's Ratings Services has revised its implications to negative from developing on the CreditWatch placement of its 'A' long-term counterparty credit and insurer financial strength ratings on Fortis Insurance Belgium (FIB).

"The negative implications reflect increasing uncertainties about the ultimate organization of Fortis group and its resulting creditworthiness, and our belief, as we review FIB's stand-alone credit profile, that the possibility for an upgrade is remote," explained credit analyst Lotfi Elbarhdadi.

In addition S&P has maintained its "CreditWatch with developing implications" for its 'BBB-' long-term counterparty credit ratings and 'A-3' short-term counterparty credit ratings on Fortis SA/NV and Fortis N.V., the group's two holding companies. "The developing implications for the holding companies indicate the remaining upside potential for the long-term rating, assuming they head a strongly rated insurance-led group," said S&P.

However, the rating agency also indicated that they "reflect the possibility of a substantial downgrade arising from the uncertainties around the ultimate organization, cash position, and legal risk that may emerge from the Fortis shareholder meeting on Feb. 11, depending upon the outcome of the vote. Also factored in is the potential resulting pressure on the group's financial profile, including liquidity, from other noninsurance assets and liabilities of the holding companies.

"We expect to resolve or update the CreditWatch on FIB in the coming weeks. Our decision will depend on the results of our stand-alone review of FIB and our view of the effect of the outcome of the shareholder meeting on the group's overall creditworthiness. Our decision will also depend on whether the Belgian government would provide support if the shareholders reject the proposed agreement. If we come to negative conclusions in these areas, we could downgrade FIB by one or two notches.

"Upon resolving or updating the CreditWatch on FIB, we expect to follow with an update on the holding companies. We expect the upside potential for the ratings on the holding companies to be limited to one or two notches. But we believe the downside potential to be several notches because of the above mentioned uncertainties and heightened risk from the noninsurance assets and liabilities, including in case the agreement subject to vote is rejected by the shareholders."

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Validus Re Opens Singapore Office

Bermuda-based Validus Holdings has announced the opening of an Asia-Pacific reinsurance representative office located in Singapore. The new office will represent Validus Reinsurance, the Group's Bermuda-based reinsurance operation, which focuses on short-tail classes of business, including property, marine, and other specialty.

Marc Haushofer, an experienced Asian sector specialist, has joined Validus Re as Chief Representative and head of the new Asia-Pacific representative office. He is the former CEO of Munich Re's Singapore Branch Office for South-East Asia and former Deputy Chairman of the Singapore Reinsurers' Association. He has approximately 25 years of insurance and reinsurance industry experience, with nearly half of this time dedicated to the Asian marketplace.

Haushofer indicated he is looking forward to Validus "exciting phase of its development."

Conan Ward, Chief Underwriting Officer of Validus Re, commented: "We're delighted to have someone of Marc's caliber joining Validus Re. Marc will be critical to furthering our goals throughout Asia and enhancing our relationships with our existing client base in the region. The opening of our Singapore representative office demonstrates Validus' recognition of the importance of the Asia-Pacific marketplace."

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Fitch Sets Out Ratings Evaluation Criteria Focused on Investment Crisis

Fitch Ratings announced that it is "continuing its evaluation of insurance ratings globally, focusing on the impact of declines in investment portfolio market values, and other market pressures, related to the current recessionary economic environment."

Fitch had previously moved its Rating Outlook for most insurance regions and sectors globally to 'Negative', with Outlook changes made for specific sectors or regions at various dates during the second half of 2008.

The rating agency said it "expects downward rating activity to continue throughout 2009, with a heightened level of activity over the next several months. Ultimate ratings migration will be broad-based, potentially impacting over half of Fitch's rated universe of insurance ratings, but will also likely be shallow. In the vast majority of cases, Fitch expects downgrades will be limited to one or two notches. Downgrades will impact insurer financial strength (IFS) ratings of insurance operating companies, and both long- and short-term debt and hybrids security ratings of holding companies."

Fitch also indicated that it "believes that the insurance industry thus far has fared better throughout the current financial crisis than other financial institutions, including financial guarantors, mortgage insurers, broker/dealers and commercial banks. This primarily reflects much lower liquidity exposures, lower exposures to subprime assets (including lower exposure to structured finance CDOs and credit default swaps) and generally stronger balance sheets at the onset of the crisis.

"Nonetheless, many insurers are feeling significant pressures from the financial crisis, mainly via sharp declines in the market values of their investment holdings, and via diminished financial flexibility as capital markets remain closed to a number of companies and very expensive for those with access. In addition, certain products that are exposed to the capital markets -- such as variable annuities within the U.S. life sector -- are creating the potential for material increases in reserves.

"These pressures are manifesting themselves through heightened earnings volatility, reduced investment portfolio liquidity and quality, and material declines in book capital. Fitch expects fourth quarter 2008 results to be particularly acute with respect to increases in unrealized and realized losses on insurers' fixed income and common stock portfolios, and book capital under IFRS and US-GAAP based accounting (in which investment holdings are generally marked-to-market)."

However, Fitch added that it "expects the extent of downgrades to be greater among life insurers than non-life companies. This reflects life companies' higher investment leverage, exposures to products such as variable annuities, and higher yet generally manageable liquidity exposures. The ratings impact will also likely vary by region. For example, Japanese insurers tend to have larger direct common stock investment exposures compared to companies in other parts of the world.

"Fitch is using estimated loss factors to aid in the assessment of investment valuation issues in the current environment. These estimates are being used in conjunction with various forms of pro-forma risk-based capital modeling. Fitch is also focusing its reviews on liquidity, as well as various idiosyncratic risks that may exist in ancillary businesses or linked to risk concentrations."

The role for government capital, which has so far been limited "to a select number of cases (including AEGON and ING in the Netherlands, and AIG in the U.S.)," will continue to play a role. Fitch said it "believes the potential for government provided capital is real for some other of the larger, stronger insurance companies. For example, a number of U.S. life insurers have made applications under TARP. If provided, government funded capital or other forms of financial support could potentially temper downward ratings actions.

"A final important aspect of Fitch's ongoing analyses will be potential mitigants available to management to address current challenges. These include use of hedging strategies (considering both the extent of hedge benefit versus heightened counterparty exposure and any basis risk), policyholder dividend adjustments, crediting rate adjustment through experience accounts, use of reinsurance, and unlocking hidden asset valuations. For some companies strong operating earnings and rates of internal capital formation could act as an important risk mitigant.

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