Best Lowers, Withdraws Omega Specialty Ratings; Affirms Lloyd’s Syndicate 958

April 11, 2012

A.M. Best Europe – Rating Services Ltd. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a+” of Lloyd’s Syndicate 958, which is managed by Omega Underwriting Agents Limited. The outlook for both ratings remains stable.

 However, Best also announced that it has downgraded the FSR to ‘B++’ (Good) from ‘A-’ (Excellent) and ICR to “bbb” from “a-” of Bermuda-based Omega Specialty Insurance Company Limited (OSIL), and has removed the ratings from under review with negative implications and assigned a negative outlook.

Concurrently, Best withdrew OSIL’s ratings at the request of its ultimate holding company, Bermuda-based Omega Insurance Holdings Limited (Omega), following a decision to cease underwriting third-party business through OSIL.

Best has also maintained the under review with negative implications status of the ICR of “bbb” of Omega, as well as the under review with negative implications status of the ICR of “a-” and FSR of ‘A-’ (Excellent) of Omega’s subsidiary, Omega US Insurance, Inc. (Omega US), headquartered in Schaumburg, Illinois.

Best explained that the rating downgrades for OSIL “are due to the significant reduction in the company’s risk-adjusted capitalization as a result of weak operating performance in 2010 and 2011 and the anticipated withdrawal of capital from OSIL to its parent by way of dividends.” Best added that the negative outlook reflects its expectation that “risk-adjusted capitalization will be further reduced following the group’s decision to cease underwriting third-party business through OSIL.”

Best also explained that the “ratings of Omega, OSIL and Omega US were placed under review with negative implications on 29 March 2011 following the announcement by Omega of a materially weaker than expected operating performance in 2010, which raised concerns regarding the group’s risk management processes.

“Additional uncertainty arose from the fact that various parties had expressed an interest in acquiring the Omega group. Subsequently, Omega’s management team has taken positive action to alleviate Best’s concerns regarding the group’s risk management processes.”

The report did point out that “actuarial and risk management teams have been strengthened and greater use made of catastrophe modeling software. Catastrophe exposed business has been reduced, with offshore energy and retrocessional business no longer underwritten, and a more effective reinsurance program put in place.

“Moreover, in September 2011, a partial cash offer for the group was recommended to shareholders. In the event, however, the expected deal was not realized, and Omega’s management started 2012 with plans to take the business forward on a sustainable footing. Nevertheless, during March 2012, further approaches to acquire the group were made.

“In the light of this new uncertainty in respect of the ownership of the group, the ratings of Omega and of Omega US remain under review with negative implications.” Best added that it would “continue to monitor closely any developments relating to the group’s ownership.”

Turning to the ratings for Lloyd’s Syndicate 958, Best said they “reflect the financial strength of the Lloyd’s market, which underpins the security of all Lloyd’s syndicates. In addition, syndicate 958 benefits from the financial flexibility provided by Omega. Omega Dedicated Limited, Omega’s corporate member at Lloyd’s, provides 50.9 percent of the capacity of syndicate 958 for its 2012 year of account, and OSIL underwrites a 20 percent quota share of the syndicate.”

In addition Best noted that on an annual accounting basis, “syndicate 958 recorded a loss in 2011 of £ 52.3 million [$83.16 million], with a combined ratio of 132 percent, reflecting the impact of the natural catastrophes throughout the year, including the New Zealand and Japanese earthquakes, US tornadoes and Thai flooding.”

However, the report also indicated that a “good profit is expected for 2012, assuming a more normal catastrophe experience in the year and taking into account the reduced risk profile of the book of business. On a traditional year of account basis, the 2009 year of account closed with a return on capacity of 8.3 percent, reflecting the generally benign catastrophe experience during that year, offset by the impact on the 2009 account of the Chilean earthquake and Deepwater Horizon oil rig explosion in early 2010. For both the 2010 and 2011 years of account, losses of between 5 percent and 15 percent are forecast, taking into account the series of natural catastrophes and large loss events in those years.”

Best also pointed out that Syndicate 958 has a “good business profile within the London market as a specialist underwriter of short-tail, small to medium-sized property risks, predominantly located in the United States (more than half of gross written premiums in 2011 were derived from US business). In addition, the syndicate benefits from its presence in the European market through Omega Europe GmbH, a wholly owned subsidiary of Omega that operates solely as a coverholder to the syndicate.

“Future operating performance by the syndicate that is consistently better than the Lloyd’s market could lead to a positive rating action for the syndicate, while a negative action on the Lloyd’s market ratings would lead to negative pressure on the syndicate’s ratings. A positive rating action for Omega’s rating is unlikely, but negative pressure would arise if consolidated risk-adjusted capitalization was significantly reduced.”

Source: A.M. Best

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