Best Affirms Greenlight Re and Affiliates Ratings; Outlook Stable

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Greenlight Reinsurance, Ltd., as well as the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Greenlight Re’s affiliate, Greenlight Reinsurance Ireland Limited.

In addition Best affirmed the ICR of “bbb” of Greenlight Re’s holding company, Greenlight Capital Re, Ltd. The ICR of Greenlight Capital Re is “strictly based on the holding company’s methodology since the company does not carry debt,” Best explained.

The outlook for all of the ratings is stable. All of the companies are domiciled in the Cayman Islands, unless otherwise specified.

The ratings of Greenlight Re are “based on its excellent risk-adjusted capitalization, experienced management team and the disciplined implementation of its overall business strategy,” said Best. “The ratings also recognize the company’s exceptional enterprise risk management as it aggressively manages risks on both sides of the balance sheet.”

Partially offsetting these strengths are the “challenges Greenlight Re faces writing profitable business in a market with increased capacity and further competition from new reinsurance companies with a similar alternative investment strategy. Also detracting from the company’s strengths is the leverage resulting from an investment portfolio that is primarily composed of publicly traded equity securities. However, this concern has been diminished as Greenlight Re’s investment portfolio has performed well over time.”

Best explained that “Greenlight Re operates as a Cayman Islands-based broker market reinsurer writing a combination of property, casualty and specialty reinsurance business. It has been successful in building its underwriting team’s infrastructure and adding new business using a partnership-oriented approach to underwriting. This underwriting approach allows Greenlight Re to focus on a small number of large relationships, which enables pricing and structuring on a deal-by-deal basis.

“Underwriting and investment assumptions are combined to develop a risk profile on both sides of the balance sheet. Catastrophe aggregate downside limits are in place and capped at the board level. Greenlight Re’s underwriting results to date are favorable, and its large surplus base supports the current and expected growth in premium volume. The underwriting acumen of the team performed well as the company took very minimal catastrophe losses in 2011, which proved to be a high cat event year.”

While Greenlight Re’s “capital footprint entails 100 percent common equity with no use of debt,” Best said it is “somewhat concerned with the asset risk represented by its equity-based investment portfolio.”

However the rating agency also noted that this concern is mitigated by the “absence of financial leverage, the partially hedged nature of the investment portfolio and the experience of the investment manager.

“The risk of the investment portfolio was stressed in 2008 when it lost 17.8 percent, followed by a return of 32.1 percent in 2009. More than 80 percent of the invested assets are in highly liquid investments and generally no position can be greater than 20 percent of invested assets.”

Best explained that its “rating approach involves assessing Greenlight Re’s risk correlations across the enterprise by subjecting its capitalization to concurrent adverse stress test events. The company’s robust risk-adjusted capitalization withstands substantial amounts of strain when subjected to these various stress scenarios.

“Positive rating actions may result from continued improvements in Greenlight Re’s operating results, lower adverse development, continued lack of cat losses and a continued positive investment performance.

“Negative rating actions may result from continued abnormal adverse development, severe negative investment results, significant loss of surplus and/or poor underwriting performance.”

Source: A.M. Best

Topics Trends Underwriting Reinsurance