Clarendon Outlook Stable

Standard & Poor’s Ratings Services revised its outlook on Clarendon National Insurance Co. and two of its subsidiaries—Clarendon America Insurance Co. and Redland Insurance Co.—to stable from negative.

At the same time, S&P affirmed its “A+” counterparty credit and financial strength ratings on these three companies (collectively referred to as Clarendon). It also raised its counterparty credit and financial strength ratings on Insurance Corp. of Hannover (ICH) to “A+” from “BBB+”. The outlook on ICH is stable.

The ratings on Clarendon are based on its strategic importance to its parent, Hannover Re; significantly improved risk controls; strong competitive position; strong and improved capital adequacy; and strong operating performance. Offsetting these positive factors are the continued risks associated with Clarendon’s program business model and its high level of reinsurance utilization. S&P also indicated it views ICH as core to its parent, Clarendon, based on its full operational integration and strong parental support.

The revised outlook on Clarendon reflects the resolution of 82 percent of prior reinsurance disputes, loss portfolio transfers of its poorly performing businesses and S&P’s expectation of continued strength in earnings and capital adequacy.

The rating agency expects Clarendon’s operating results to improve substantially over the next two years, with its statutory combined ratio at 95 percent to 98 percent (including the estimated impact of Hurricane Charley in third quarter 2004) and pretax ROR of at least 8 percent to 10 percent. It also expects Clarendon’s capital adequacy to remain at the current level of 152 percent or improve modestly.

According to S&P, Clarendon improved its risk controls significantly during the past couple of years, focusing primarily on gross underwriting profitability. Also, Clarendon’s capital adequacy is strong and supportive of the current ratings in accord with S&P’s capital adequacy model. Furthermore, Clarendon’s historical operating performance is strong, as demonstrated by its five-year (1999 – 2003) average statutory combined ratio of 92 percent and 98 percent in 2003. S&P, however, views program business as riskier than a traditional insurer’s business, as the two key functions of underwriting and claims are typically outsourced to third-party administrators and managing general agents. Finally, Clarendon’s higher dependence on reinsurance compared with traditional insurers also adds volatility, as collections associated with reinsurance recoverables could become more of an issue.