Moody’s assesses CALIC, Charleston Re and Arrow Re

Moody's Investors Service has harmonised the insurance financial strength (IFS) ratings on the insurance companies owned by Goldman Sachs Group (GS, senior unsecured debt at Aa3), collectively referred to as the GS Insurance Group, at A2. To align the ratings, Moody's upgraded the IFS rating of Commonwealth Annuity and Life Insurance Company (CALIC) to A2 from A3 and downgraded the IFS ratings on Columbia Capital Reinsurance Company (Columbia Capital) and Charleston Capital Reinsurance, (Charleston Re) to A2 from A1 and Arrow Reinsurance Company (Arrow Re) to A2 from Aa3.

The outlooks on the insurance companies in the GS Insurance Group are stable.

The rating agency commented that the alignment of the ratings at A2 reflects the integration of the companies with one another and with GS, and the expectation that the companies will continue to receive strong financial and operational support from GS.

"The downgrade of Arrow Re is largely based upon a reduction in the Keepwell Agreement provided by its parent, GS, to $250m from $1bn in combination with a plan to reinsure variable annuity (VA) guarantees—including guaranteed minimum withdrawal benefits and guaranteed minimum death benefits,” said Scott Robinson, Moody's vice president and senior credit officer.

He added: “The previous Aa3 rating had reflected a $1bn keepwell that was supporting an entity with minimal liabilities. Notwithstanding the reduction, we believe that the size of the new Keepwell combined with $50m of hard capital will provide sufficient support for new business opportunities that the company is exploring."

Moody's noted that the A2 IFS rating assumes that Arrow Re will not need to draw down on the $250m Keepwell Agreement to support organic growth. Additionally, the rating incorporates the expectation that the company will maintain hard capital of at least $50m as it grows its VA business to $1bn. Afterwards, the company is expected to maintain strong levels of hard capital at the 99.5% conditional tail expectation — an amount sufficient to absorb the average of the worst 0.5% of losses expected to be realised on the insured risks based on Monte Carlo simulation analysis. The rating agency added that the ratings assume that the company will continue to be owned by GS and integrated with that firm's robust risk management and financial reporting systems.

Robinson added: "The harmonisation of the ratings of the GS operating insurance companies reflects our belief that the companies will receive strong ongoing financial and operational support from GS. The companies, which have common senior management from GS, all leverage GS's resources to assist in the management of different aspects of their respective businesses."

The rating agency added that it expects that financial support will continue to be provided by appropriately sized Keepwell Agreements and capital contributions at each of the operating companies.

CALIC benefits from a $350m Keepwell Agreement from its parent GS, while Columbia Capital and Charleston Re benefit from $200m Keepwell Agreements.

According to Moody's, any of the following would place upward pressure on the ratings of the GS Insurance Group entities: an upgrade of the parent, GS; successful implementation of its business plan with ROE's in the low double digits or higher combined with in increase in the diversification of business; or an increase in the Keepwell Agreements relative to new business written. The following would place downward pressure on the ratings of the GS Insurance Group entities: a downgrade of the parent, GS; a reduction in the level of parental support; a material change in the business plan; or a drawdown on any of the Keepwell Agreements.

Moody's noted that the standalone ratings of the GS Insurance Group entities -- ratings ignoring the explicit and implicit support provided by GS --are Baa1. Hence, the Keepwell Agreements and implicit support by GS increase the ratings by two notches.

On November 26, 2006, Columbia Capital and Charleston Re were assigned A1 IFS ratings based on strong financial support from Goldman Sachs Group, Inc. On March 1, 2005, Moody's affirmed the Aa3 IFS rating of Arrow Re and changed the outlook to stable from developing. On January 19, 2006, Moody's upgraded the IFS rating of Allmerica Financial Life Insurance & Annuity Company (AFLIAC) to A3 from Ba1, with a stable outlook. AFLIAC was later renamed CALIC.

The following ratings were downgraded with a stable outlook:

Arrow Reinsurance Company Ltd. -- insurance financial strength rating to A2 from Aa3;

Columbia Capital Life Reinsurance Company -- insurance financial strength rating to A2 from A1;

Charleston Capital Reinsurance, LLC -- insurance financial strength rating to A2 from A1.

The following rating was upgraded with a stable outlook:

Commonwealth Annuity and Life Insurance Company -- insurance financial strength rating to A2 from A3

GS is engaged primarily in investment banking, trading and principal investments, and asset management and securities services. For the full year 2007, GS reported net revenues of $46.0bn and pre-tax income of $17.6bn.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay senior policyholder claims and obligations punctually.