Ratings Roundup: JRG Re, ASSA/Lion Re, TP Re

January 24, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Bermuda-based JRG Reinsurance Company, Ltd. and its U.S. affiliates, Ohio-based James River Insurance Company(JRIC), James River Casualty Company, based in Richmond, Virginia and North Carolina based Stonewood Insurance Company. All of these ratings have stable outlooks. Best said the “rating affirmations of JRG Re reflect its strong risk-adjusted capitalization, experienced management team and solid business profile. The ratings also reflect the earnings prospects from the company’s efforts to gradually grow its third-party working layer reinsurance business from U.S.-based specialty insurers to supplement its business that is derived from significant quota share reinsurance agreements with its onshore affiliates.” As partial offsetting factors Best cited the “challenges presented by the competitive, prevailing casualty reinsurance market and the recent deterioration in its underwriting results as a result of workers’ compensation and assumed crop reinsurance losses.” Best said the stable outlook reflects its belief that the “profitability of the affiliated business portfolio can be sustained in the current market given the strength of its excess and surplus lines operations, along with the remedial actions management has taken on the workers’ compensation book at Stonewood. JRIC also has stopped assuming crop business, which will remove a source of volatility and losses that has been evident in JRG Re’s recent underwriting results.” However, Best also said it has downgraded the FSR to ‘A-‘ (Excellent) from ‘A’ (Excellent) and the ICRs to “a-” from “a” of JRG Re’s remaining U.S. affiliates, Stonewood National Insurance Company and Stonewood General Insurance Company, and has removed the ratings from under review with negative implications and assigned a stable outlook. The ratings for Stonewood National and Stonewood General were placed under review following the announcement that James River Group, Inc. would acquire these companies as shells from Infinity Insurance Company. The companies above are domiciled in Columbus, Ohio. Best further explained that the rating actions taken on the organization’s U.S. affiliates are based upon Best’s “group rating methodology and consider the roles and strategic importance of the affiliates to the entire organization. The ratings also reflect the explicit support provided by JRG Re in the form of significant quota share reinsurance and the implied commitment provided by JRG Re in the future. Effective January 1, 2013, all U.S. affiliates participate in an intercompany pooling agreement and 70 percent of the pool’s net business is then ceded to JRG Re. Collectively, the pool maintains solid capitalization, has produced strong operating results and will continue to comprise the majority of the premiums of JRG Re.” Best also noted that “while JRG Re is well positioned at its current rating level, positive rating actions could take place if risk-adjusted capital remains strong and underwriting profitability is restored and sustained. Conversely, negative rating actions could occur if JRG Re’s operating performance, and consequently, risk-adjusted capitalization falls below Best’s expectations. The U.S. affiliates’ ratings receive full rating enhancement due to the explicit and implicit support provided by JRG Re; and therefore, are directly correlated to the ratings of JRG Re.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Panama-based ASSA Compania de Seguros, S.A. and the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Bermuda-based Lion Reinsurance Company Limited. The outlook for all of the ratings is stable. Best said the ratings reflect “ASSA’s continued excellent operating results, favorable capitalization and strong business profile. ASSA maintains a well-diversified book of business that includes both property/casualty and life/health products. ASSA is ultimately owned by Grupo ASSA, S.A., a publicly traded financial services holding company on the Panama stock exchange.” Best also noted that “ASSA has shown disciplined underwriting in a highly competitive market, while its risk-based capitalization remains fully supportive of its current ratings and outlook. ASSA’s underwriting profitability is complemented by consistent levels of investment income, which has enabled it to steadily appreciate surplus while still providing Grupo ASSA with dividend payments. ASSA also benefits from established risk management systems and strong reinsurance programs across most lines of business.” As partial offsetting factors Best cited “ASSA’s risk concentration in a geographically limited insurance market along with operating in a country, that Best said it “considers to have an elevated level of country risk compared to ASSA’s ratings. Additionally, the Panamanian insurance market is becoming increasingly competitive as local and large outside insurers continue to compete for market share.” Best said “positive rating actions could occur if ASSA maintains its consistently strong underwriting performance and long-term profitability in conjunction with an upgrading of Panama’s country risk tier. Negative rating triggers could include a significant decline in ASSA’s risk-based capitalization, sustained adverse operating performance or a downgrading of Panama’s country risk tier.” In addition Best noted that its ratings of Lion Re “acknowledge its strong initial capitalization, conservative operating strategy and the explicit parental support. The ratings also consider Lion Re’s strategic role as a captive reinsurer of ASSA CompaƱia Tenedora S.A. Also inuring to Lion Re’s ratings is its sound business plan, upon which the profitability and liquidity measures of these ratings are based.” Best added that the ratings are supported by an amount of capital that meets its “requirements for newly formed companies as measured by Best’s Capital Adequacy Ratio (BCAR). Lion Re operates as a Bermuda-based reinsurer focused on writing a combination of property, casualty, health and group life business from affiliated insurers.” However best also indicated that these “positive rating factors are partially offset by execution risk due to the unproven start-up nature of the company. Drivers that could lead to a positive outlook or rating upgrades for Lion Re are a stable underwriting performance, as well as reduced overall net exposure over the next few years and successful implementation of its business plan. Factors that could lead to a negative outlook or rating downgrades are a material loss of capital from either claims or investments, a reduced level of capital that does not support the ratings or an increase in net retention. Lion Re’s ratings are tied to Best’s internal assessment of Grupo ASSA; therefore, an unfavorable operating performance or material loss of capital could result in changes to the captive’s ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based Third Point Reinsurance Company Ltd. (TP Re), both with stable outlooks. TP Re’s ratings are based on its “excellent risk-adjusted capitalization, the successful first year implementation of its business plan including the build-out of its management team, as well as the above average performance of its investment portfolio,” Best explained. As partial offsetting factors Best cited the “start-up nature of TP Re, the greater investment risk associated with its alternative investment strategy and the increasing competition and capacity in the reinsurance marketplace.” The report added that TP Re “could be exposed to a convergence of events that could test its capital strength. The underwriting risk along with significant investment risk could have a duplicative adverse effect on its risk-adjusted capital. However, TP Re’s low underwriting leverage, experienced underwriting team and its 18-year successful investment track record” help to alleviate these concerns. In addition Best noted that the “assets of TP Re will be managed by Third Point LLC, a New York-based SEC-registered investment manager with over $10.1 billion of assets under management. TP Re’s assets will be in a separate portfolio within Third Point LLC and will not be combined with other investors at Third Point LLC. Best also indicated that it “anticipates that TP Re’s management will be challenged by competition from established reinsurers as well as other start-up entities. The addition of more capital to an already overcapitalized reinsurance marketplace could pressure underwriting margins. Key rating triggers that could result in positive rating actions would be TP Re meeting and/or exceeding its business plan over the long term. Key rating triggers that could result in negative rating actions would be TP Re not executing its business plan over the long term.”