Ratings Recap: AEGIS, Lloyd’s Syndicate 1225, PaCRe

June 19, 2014

A.M. Best has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating to “a” from “a-” of Bermuda-based Associated Electric & Gas Insurance Services Limited (AEGIS), and has revised its outlook on both ratings to stable from positive. “The rating upgrades recognize AEGIS’ strong risk-adjusted capitalization, which is appropriate for its current investment and insurance risks, a historically favorable long-term financial performance, as well as an experienced management team and the utilization of comprehensive enterprise risk management processes,” Best explained. “Reserving practices are adequate for the hazards insured and losses incurred.” As partial offsetting factors Best cited the “the volatility inherent in AEGIS’ underwriting results, given the high severity risk profile and concentration risk of the energy market it serves.” Best’s report pointed out that “due to the long-tail nature of its business and its role as a mutual insurer, AEGIS typically relies on investment earnings to support overall net income where its underwriting results are managed toward the break-even level, reflective of low profitability. AEGIS generally prices its business on a “total return” basis, i.e., the planned use of its investment results to support underwriting pricing. Nonetheless, management continues to focus on improving its operating performance through various risk management strategies, including rate adjustments and refining its underwriting criteria. Given its forecasted business growth, AEGIS’ risk-adjusted capitalization is expected to remain strong in the near term.” Best added that the “ratings reflect AEGIS’ improved risk-adjusted capitalization and operating performance in the past five years after it had encountered a significant loss of surplus in 2008, which was caused by a combination of poor underwriting results and significant investment losses resulting from the financial crisis. The company’s surplus has significantly rebounded from 2008 levels and is currently within an appropriate value-at-risk, i.e., risk tolerance/appetite level. AEGIS is well positioned at its current rating level. However, the ratings may be subject to negative rating pressures if the company’s risk-adjusted capitalization declines to a level below Best’s expectations, resulting from significant deterioration in operating performance,” the report concluded.

A.M. Best has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a+” of Lloyd’s Syndicate 1225, which is managed by AEGIS Managing Agency Limited [See above], both with positive outlooks. Best said the “ratings of syndicate 1225 reflect the financial strength of the Lloyd’s market, which underpins the security of all Lloyd’s syndicates. In addition, the syndicate benefits from its association with Associated Electric & Gas Insurance Services Limited (AEGIS), which is the ultimate parent of its main capital provider, AEGIS Electric & Gas International Services Limited.” The report also noted that the “syndicate has a record of good operating performance in recent years, as demonstrated by a five-year average combined ratio of 89 percent. In 2013, the syndicate achieved a strong result, reporting a profit before tax of £45.8 million [$78 million] and a combined ratio of 81 percent, reflecting good performance in the specialty, property and casualty lines. In a benign year for claims, the largest loss was from Canadian flooding and major losses were absorbed by the syndicate’s catastrophe and large loss budget for the year. For 2014, a combined ratio in the region of the syndicate’s five-year average is anticipated.” Best also explained that the “syndicate writes a well-diversified portfolio comprising both property and casualty business. Diversification has improved significantly in recent years, due to a combination of growth in new classes and a reduction in energy and utility lines, which previously dominated the book. Syndicate 1225 maintains a good business profile and considerable expertise in energy and utility insurance despite this reduction, supported by its association with AEGIS, which is a Bermudian mutual serving U.S. utility and energy companies. Partly offsetting these strengths is the potential for earnings volatility due to exposure to catastrophe losses and the effect of exchange rate movements on the expense ratio. A factor that may lead to positive or negative rating actions for the syndicate is a change in the ratings of Lloyd’s, which currently has an FSR of A (Excellent) and an ICR of “a+” with a positive outlook.”

A.M. Best has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings of “a-” of Bermuda-based PaCRe, Ltd., both with stable outlooks. Best said the “ratings reflect PaCRe’s excellent risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR), its experienced underwriting team, and independent management by AlphaCat Managers Ltd., a business unit within Validus Holdings, Ltd. Additionally, PaCRe’s ratings are based on the overall business plan of writing upper layer property catastrophe business combined with assets managed by the investment expertise of Paulson & Company Inc. Positive underwriting performance for PaCRe’s first two years in business were negatively impacted by unrealized investment losses as the result of macroeconomic factors.” As partially offsetting factors Best cited the “start-up nature of PaCRe along with the greater investment risk that is associated with this type of investment strategy. In addition, PaCRe’s business plan will be challenged by established reinsurers as well as other alternative investment reinsurers entering the market, and more capacity into an already overcapitalized reinsurance marketplace could pressure underwriting margins.” Best also, observed that, although it is “concerned about the possibility of PaCRe being exposed to a simultaneous adverse underwriting and asset event, this concern is mitigated by its low underwriting leverage, strong capitalization, as well as the strength of Validus Holdings, Ltd.’s underwriting performance and Paulson & Company Inc.’s 20-year successful investment track record. The assets of PaCRe are managed by Paulson & Company, a New York-based, SEC-registered, multi-strategy event arbitrage investment advisor. Rating factors that could result in positive rating actions would be PaCRe meeting and/or exceeding its business plan over the long term. Rating factors that could result in negative rating actions would be PaCRe not executing its business plan over the long term and/or if the company experiences outsized underwriting or investment losses.”

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