Asia Capital Re moves off credit watch but Thai flood loss concerns remain

Standard & Poor’s (S&P) has removed Singapore-based reinsurer Asia Capital Re’s A- financial strength rating from credit watch negative in the wake of its $150m capital-raising programme.

However, the outlook for the rating is negative, with the rating agency primarily concerned about potential adverse development in the carrier’s Thailand flood losses.

At the end of last year Asia Capital Re said it expected its exposure to the flood to be in the region of $55m, net of reinsurance and reinstatement premiums and before tax. However, this was based on a market share of about 1% on a total industry loss of around $10bn.

Earlier this month S&P estimated current gross losses for insurers from the floods in Thailand to be between $16bn and $18bn, warning that higher-than estimated losses could result in negative rating actions for Asian carriers (, Mar 2).

The rating agency said deterioration in Asia Capital Re’s net loss estimates of more than 10% from the current level would be likely to trigger a downgrade review.

However, it added that it expected ultimate loss amounts to take up to a year to be fully reflected, with it also suggesting the loss amount could also be lower than the current estimate.

S&P said its affirmation of Asia Capital Re’s A- rating reflected its view that a new quota share retrocession programme and commitment from existing shareholders supported the carrier’s current credit profile.

Shareholders have subscribed to a contingent share issue amounting to $156m.

It added that the Thailand flood losses had hit the company hard, with Asia Capital Re expected to report a bottom-line loss in fiscal year 2011.

”We expect Asia Capital Re’s material exposure to the floods to have affected its underwriting result in fiscal 2011 and lowered its capitalisation by about 10%,” said S&P credit analyst Paul Clarkson.

”We consider Asia Capital Re’s purchase of the new quota share retrocession as a relief arrangement that is supportive of its capital.

“In addition, we view its current shareholders’ commitment through the contingent share issue subscription as another supporting factor on its capitalisation.”

Asia Capital Re chief executive John Tan said he was encouraged that the carrier’s “business responses to S&P’s earlier concerns” had “satisfied the rating agency sufficiently to remove the credit watch on the company”.

“At Asia Capital Re, we are focused on building a sustainable business,” he said.

“Our prudent, proactive and multi-pronged approach to de-risk our portfolio, optimise our risk management and enhance our financial flexibility has the full backing of or shareholders, staff and other stakeholders.”

Asia Capital Re said it expected S&P to make a revision to its negative outlook on the carrier when the rating agency had a clearer view of the stability of the company’s capital base.

As of September 30 last year, the reinsurer said the capital base of its holding company totalled $708m.

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