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Orlich upbeat despite Transatlantic downgrade

The drag of Transatlantic Holdings' relationship with majority shareholder American International Group (AIG) was evident in the downgrade of its core operating companies' financial strength ratings from AA- to A+ by Standard & Poor's last week.

The agency also cut counter-party credit ratings on the reinsurer from A- to BBB+ and revised its outlook for the property casualty specialist to stable and removed its ratings from CreditWatch, where they had been placed with negative implications since September last year.

Although Transatlantic Re's chief executive Robert Orlich said he was "disappointed" by the actions, in a 20 January letter to staff he said he was hopeful that the ownership uncertainty would soon be resolved and this would allow the reinsurer to recapture the higher rating in the future. "S&P have laid out a clear roadmap to our improving our rating. Positive actions will follow if we perform as they expect and, once the ownership situation is resolved", he explained.

He continued: "Our job then is clear, to continue to demonstrate the strength of our brand in the market, as we continue to work to resolve our ownership issue. I have every confidence that we will do both. I am looking forward to a successful 2009 and beyond".

S&P said its actions reflected Transatlantic's "inability to meet operating performance expectations over time", and concerns over the implications of American International Group (AIG)'s up-for-sale 59 percent stake in the company.

In his letter, Orlich responded to S&P concerns over the reinsurer's historic underwriting returns. "The volatility of our results is generally less than our peers. In addition, it's worth noting that we have never lost money in any year since our formation in 1986", he explained.

S&P also said that the continuing uncertainty surrounding the majority ownership stake - now worth approximately $1.34bn - "could put constraints on the company's financial flexibility in the coming months."

The ailing insurance giant formally placed its stake in the reinsurer up for sale in September last year and the sale process is understood to being managed by the insurer's advisers, Blackstone and JP Morgan. The reinsurer has also itself formed a special committee to advise on the procedure.

Responding to the delay in the sale process last year, ratings agency AM Best affirmed Transatlantic Re's A financial strength rating and moved its status from the shorter term outlook of "under review with negative implications" to the longer term "negative outlook".

Historically, S&P has rated Transatlantic Holdings on a stand-alone basis and ratings have not factored in support related to AIG's majority ownership, but the agency said that the new relationship triggered by AIG's sale of its majority stake would limit Transatlantic's financial flexibility "in the event of a sudden need for capital replenishment".

S&P added that it believes the uncertainty surrounding AIG's majority ownership "has not materially affected TRH's position among clients and brokers in the market", but said it will continue to monitor the situation closely.

But it said that significant departure of staff or clients over the next 12-18 months would result in further negative pressure on its rating for Transatlantic.

S&P pointed to the disparity between Transatlantic's diversified mix of business, strong reputation, very strong liquidity and disciplined underwriting culture and its apparent inability to see these advantages translating into a strong "peer-leading" operating performance over time.

The agency anticipates Transatlantic's premium volume to "decline slightly" in 2009 as a result of further expected deterioration in exchange rates, and "a possible reduction in business assumed from AIG affiliates".

If Transatlantic demonstrates its ability to preserve its strong competitive position in the market, S&P said it could revise its outlook for the reinsurer to positive "in the next 18 to 12 months".

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