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Monday, May 29 2017 @ 11:30 PM AST

Curacao re-insurer downgraded at S&P, withdraws



S&P Global Ratings today lowered its insurer financial strength and counterparty credit ratings on Curacao-based reinsurer Nationale Borg Reinsurance N.V. (NBRe) to 'BBB+' from 'A-'. We then withdrew the ratings at the company's request. At the time of the withdrawal, the outlook was stable.

We also lowered our insurer financial strength and counterparty credit ratings on The Netherlands-based Nationale Borg-Maatschappij N.V. (NBM) to 'BBB+' from 'A-'. We then withdrew the ratings at the company's request. At the time of the withdrawal, the outlook was negative.

Prior to the withdrawals, we removed all ratings on NBRe and NBM from Credi*censored*ch developing, where they had been placed on Nov. 28, 2016.

The downgrades follow our review of NBRe and the reinsurer's former 100% owner NBM since AmTrust Financial Services Inc. (AFSI) completed its acquisition of the entities on May 31, 2016, following receipt of regulatory approval. AFSI is a multinational insurance group, offering specialty property/casualty insurance products. On Nov. 23, 2016, AFSI transferred its participation in NBRe to its Bermuda-based subsidiary, AmTrust Equity Solutions.

We believe that the creditworthiness of NBRe and NBM has weakened as a result of the acquisition, mostly because of AFSI's high financial leverage, which rose to about 43% at year-end 2016, from 37% at year-end 2015, driven by the preferred stock issuance and existing debt from entities acquired in 2016. We expect AFSI's financial leverage will remain above 40% over the next two to three years. Our opinion is also constrained by the group's high intangibles to equity ratio at 67% at year-end 2016, reflecting the highly acquisitive nature of the insurance group. These factors prompted us to revise downward our view on NBRe's and NBM's financial flexibility to less than adequate.

Thanks to their long presence in the industry and technical capabilities, NBRe and NBM have a strong know-how of and a sound reputation in the Dutch surety and international trade credit, surety, and political risk reinsurance market. Since the acquisition, we have noted an increasing integration of NBRe and NBM in AFSI's structure, strategies, and brand name. We expect NBRe's and NBM's competitive position to benefit over the longer term from the group's larger balance sheet, strong reputation in the markets where it operates, wider business and geographic diversification, and economies of scale. Also, NBRe's and NBM's stand-alone solvency levels have improved on the back of a sizable quota-share reinsurance agreement with the new parent, as well as full retention of earnings.

At the time of the acquisition, AFSI had committed with the Dutch regulator to maintain a buffer between NBM's solvency capital and the minimum required. We also note that NBRe is subject to the Curacao regulation, which prescribes a minimum absolute level of capital and does not foresee risk-based assessments. In addition, since the acquisition, ownership of NBRe has been transferred to AmTrust Equity Solutions. Moreover, we understand that AFSI plans to merge NBM into its Ireland-based entity AmTrust International Underwriters, DAC (AIU) and will continue to operate in The Netherlands and in Belgium as branches. These developments, together with the quota share agreement, lead us to view NBRe's and NBM's financial risk profiles (in particular, financial flexibility) as closely interrelated with that of AFSI.

At the time of the withdrawal, the stable outlook on NBRe reflected our view that over the next 24 months NBRe will maintain a stand-alone financial risk profile at least in our upper adequate category. We also believe that NBRe could in the medium to long term benefit from the group's reputation and know-how.

At the time of the withdrawal, the negative outlook on NBM reflected that, upon regulatory approval, the insurer will be merged into AIU. NBM is expected to cease to exist and become a branch. If the merger materializes, we believed that the combined entity's creditworthiness, including the group support, could be equal to or lower than our 'BBB+' rating.

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