Ratings Roundup: Arden Re, GBG

March 6, 2013

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based Arden Reinsurance Company Ltd. and has also affirmed the ICR of “bbb-” of the parent company, Arden Holdings, Ltd., also based in Bermuda. The outlook for the ratings is stable. “The ratings of Arden Re (formerly Ariel Reinsurance Company Ltd) reflect its strong level of risk-adjusted capitalization, favorable operating performance and solid enterprise risk management capabilities,” Best said. As partial offsetting factors Best cited “Arden Re’s limited business profile following the sale of its insurance and reinsurance operations to The Goldman Sachs Group, Inc. (Goldman) and the sale of its Zurich-based credit and surety operations to Arch Capital Holdings Ltd. in April 2012.” Best said that as a result of these transactions, “Arden Re is a much smaller entity with a significantly reduced risk profile. Arden Re continues to assume the business underwritten by its Lloyd’s affiliate, Atrium Underwriting Group Limited (Atrium), under an existing quota share arrangement that remains in force. This business has historically proven to be very profitable, and Arden Re will in effect be managed by the successful management team at Atrium.” Best also noted that “Arden Re’s risk-adjusted capitalization remains supportive of its current ratings and considers the counterparty credit exposure that resulted from the loss portfolio transfer of underwriting liabilities to the Goldman Lloyd’s syndicate. This credit exposure also is significantly mitigated by collateral, which will be held through the run-off of these obligations.” Best explained that the outlook for the ratings reflects its expectation that “Arden Re’s overall operating results will remain positive and its risk-adjusted capital level will continue to be supportive of the current ratings.” Best said: “Upward movement in the ratings is unlikely at the present time. The rating factors that could lead to a negative outlook or a downgrading of the ratings include unfavorable operating profitability trends, outsized investment losses and a significant decline in risk-adjusted capital that would not be supportive of the current rating level.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Guernsey-based GBG Insurance Limited, both with stable outlooks. The ratings of GBG reflect its “good level of prospective risk-adjusted capitalization, its good anticipated financial performance and modest business profile,” Best said. As an offsetting factor Best noted “the high level of debt within GBG’s ultimate parent, Saxton Lane Company Limited.” Best said “GBG’s risk-adjusted capitalization stabilized at an adequate level in 2012 as the capital and surplus increase by $4.2 million (through the increase in retained earnings of an equal amount) was largely offset by the higher levels of net premiums and reserves. Capitalization is expected to strengthen over the medium term through the retention of earnings, while both the insurance and investment risks are expected to remain low prospectively. However, a net premium income growth significantly in excess of the company’s business plans, a lower than expected profitability or an increase in risk profile are all likely to add pressure to GBG’s level of risk-adjusted capitalization. GBG’s financial leverage is currently comfortably within the limits for its ratings.” In addition Best noted that GBG’s overall results significantly improved last year following its “below expectation performance in 2011. A good level of profitability is expected over the medium term given the actions the company has taken to improve the quality of its technical account since 2011. Technical results are expected to continue to be driven by commission and fee income, as GBG retains only a low amount of insurance risk.” Best indicated that as a “specialized health insurer operating within the relatively fragmented international expatriate health and life insurance market, GBG remains small compared to larger multi-lines competitors. However, the company has been expanding both its insurance business portfolio and customer base, and premium income is expected to double in the next five years. GBG, which historically insured employees of international schools, is increasing its share of corporate business by successfully targeting small to mid-sized companies worldwide. Saxton Lane remains highly leveraged. At June 30, 2012, it held senior debt of $7.7 million on shareholders’ funds of around $8.7 million and goodwill of $3.8 million. Saxton Lane’s level of leverage is expected to improve going forward as the group generates and retains profit and potentially reduces its debt as well.” Best said that over time, “a strengthening of GBG’s business profile along with sound underwriting results, a continued strong level of risk-adjusted capitalization and a deleveraging at Saxton Lane are likely to have a positive impact on its current rating level. Failure to generate and retain profit, a significant deterioration of risk-adjusted capitalization or an increase of the leverage at the holding company or GBG could put negative pressures on the current ratings.”

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