Standard & Poor's set the ratings for two property-focused Bermuda reinsurers to "A-minus" this morning, downgrading IPC Re from "A" and affirming Montpelier Re.

Commenting on the IPC Re downgrade (and simultaneous downgrades of credit ratings for the holding company of the reinsurance operations), S&P highlighted lack of diversification as a key issue.

The New York-based firm said IPC Re's "chosen narrow business focus" puts constraints on its strategic flexibility and makes it "more vulnerable to external factors that are beyond its control than are its diversified peers."

S&P also noted that significant concentration of catastrophe risk exposes the company to high levels of earnings and capital volatility, stating that this is "more in line with an 'A-minus'" business profile.

"This belief is reinforced by the possibility that the recent uplift in the frequency and severity of weather-related events might persist," S&P said.

William Wilt, an analyst for Morgan Stanley, recommended in a research note that investors buy IPC "on weakness if investors overreact" to what he termed a "belated rating action." Mr. Wilt was quick to point out that there was no new information in the S&P announcement other than the rating action.

"Five hundred fifty five days after placing ratings of IPCR on negative outlook, S&P leapt to action and downgraded the company's financial strength ratings," he wrote. "Apparently...armed with new details about the possibility of a persistent rise in the frequency and severity of hurricanes...S&P now believes the reinsurer's earnings and capital volatility is more in line with an A-minus," he said.

S&P also said that although IPCRe's operating performance improved in 2006, the company's overall operating returns over the past six years were lower than what the rating agency had expected.

While the outlook for IPC Re's ratings is stable, Montepelier Re, which S&P affirmed at A-minus, remains on negative outlook.

As with IPC Re, S&P highlighted the "relatively high volatility inherent" in Montpelier Re's property-focused business profile. The rating agency also noted some risks related to the fact that management "now more seriously considers opportunities to geographically expand the company's operating platform."

Still, S&P said that in the past two years, Montpelier has implemented significant changes to reduce the group's risk exposure and volatility following significant losses from Hurricanes Katrina, Rita, and Wilma in 2005. "The negative outlook reflects S&P's uncertainty with regard to Montpelier's future earnings level given an evolving corporate strategy and business platform," S&P said in its announcement.

As for the affirmation of the rating itself, Laline Carvalho, S&P credit analyst, said, "The ratings reflect Montpelier's strong market position and scale within the Bermudian reinsurance market and improved operating performance in 2006," noting, however, that the latter was helped by a mild property catastrophe season.

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S&P Drops IPC Rating To A-Minus

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