Ratings Roundup: Top Layer Re, Ardellis, BEST RE

May 22, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit rating (ICR) of “aa-” of Bermuda-based Top Layer Reinsurance Ltd., both with stable outlooks. Best said the ratings “reflect the substantial amount of support Top Layer receives from its co-owners,” namely State Farm Mutual Automobile Insurance Company – currently with an FSR of ‘A++’ [Superior] and an ICR of “aa+” – and Renaissance Reinsurance Ltd. (RenRe) – currently with an FSR of ‘A+’ [Superior] and an ICR of “aa-” (See related article). “Since Top Layer’s inception in 1999, the company has generated outstanding operating results, which are due to the property catastrophe underwriting expertise of RenRe, combined with very few catastrophes significant enough to impact the programs written in Top Layer’s core markets,” Best continued. “Top Layer’s business scope is limited to the assumption of high excess layers of non-U.S. property catastrophe risks underwritten on a global basis. The company experienced its first and second loss years in its history in 2010 and 2011, and it has performed in line with how it was designed.” Best also noted that “Top Layer maintains a modest amount of on-balance sheet capital relative to the high excess layers of property catastrophe risks it assumes. The company’s capital profile is rather unique from a qualitative and quantitative perspective, but fundamentally Top Layer offers clients credit security in the layers of a reinsurance program where credit security is paramount. Top Layer’s capitalization is enhanced through various contractual obligations, resulting in substantial capital support and reinsurance protection from State Farm and, to a much lesser degree, RenRe. The occurrence of losses will trigger capital calls for State Farm and RenRe to replenish Top Layer’s capital. Moreover, State Farm provides Top Layer with $3.9 billion excess of $100 million stop-loss reinsurance protection. This coverage is significantly larger than the aggregate exposures Top Layer undertakes in each of its geographic zones.” Best also said it “acknowledges that Top Layer’s ratings are largely dependent upon the support it receives from State Farm and RenRe,” which it monitors “on an ongoing basis and continues to assess how any developments may impact Top Layer’s ratings.” Best indicated that factors, which could result in a revision of Top Layer’s outlook to positive or an upgrading of its ratings are a “continuation of very long-term profitability and a continuation of support from its owners. Factors that could lead to a revision of the outlook to negative or a downgrading of the ratings would be an increased frequency of losses that would cause A.M. Best to question the strategy or risk management, and if RenRe/State Farm reduce their commitment to Top Layer.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based Ardellis Insurance Ltd., both with stable outlooks. Best said Ardellis’ ratings reflect its “conservative underwriting leverage, strong level of capitalization and profitable operating results driven by its excellent underwriting performance.” As partial offsetting factors best cited Ardellis’ “relatively high retention and limited profile as a single parent captive of Universal Forest Products Inc. (UFP).” Best explained that Ardellis “provides coverage for general liability, auto liability, workers’ compensation, property and certain employee health benefits. Ardellis has maintained very conservative underwriting leverage ratios as surplus has remained strong to support its business volume. The company has posted low loss and loss adjustment expense ratios, reflecting UFP’s effective risk management. The ratings also recognize Ardellis’ balance sheet strength and conservative underwriting leverage measures.” Best said “rating drivers that could lead to a positive outlook or an upgrading of Ardellis’ ratings are material and sustained improvement in its underwriting performance and capitalization. Additionally, improved overall risk management and reduced overall net exposure could lead to an upgrade. Rating drivers that could lead to a negative outlook or a downgrading of the ratings are material deterioration of capital from either the company’s claims or investments, a reduced level of capital that does not support the ratings or an increase in net retention.”

A.M. Best Europe – Rating Services Limited has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Malaysia’s BEST RE (L) Limited, and has assigned a negative outlook due to the “deterioration in risk-adjusted capitalization, in addition to Best’s concerns over the level of support provided to BEST RE from its parent company, the U.A.E.-Based Islamic Arab Insurance Company (Salama).” Best pointed out that “during 2011, faster than anticipated growth in premium income significantly increased BEST RE’s capital requirements. At the same time, growth in available capital has been below A.M. Best’s expectations. BEST RE’s gross written premiums increased by 21 percent from $368.0 million to $444.8 million, while its capital base grew by less than 1 percent from $145.8 million to $146.3 million.” However, Best also noted that “despite losses incurred as a result of the floods in Thailand during 2011, BEST RE maintained a net profit for the financial year of $400 million.” Best also said it had affirmed BEST RE’s ratings “as recently as December 2011, and factored into the affirmations was an expected capital injection of $50 million from Salama during the first three months of 2012. This capital injection did not materialize as was anticipated; however, a reduction in business volume over the medium term combined with sound underwriting results may alleviate concerns regarding BEST RE’s capital position. Looking forward negative rating actions are likely if BEST RE is unable to improve its level of risk-adjusted capitalization and maintain it at a satisfactory level, or if Best revises its treatment of the rating enhancement provided by Salama. A stabilization of the ratings is likely if BEST RE improves its level of risk-adjusted capitalization and comfort is provided regarding the level of support provided by Salama.

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