Ratings Recap: Third Point Re, Sava Re, NEWGT

February 7, 2014

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Bermuda-based Third Point Reinsurance Company Ltd. (TPRCL). The outlook for both ratings is stable. Best also assigned an ICR of “bbb-” to TPRCL’s holding company, Third Point Reinsurance Ltd. (TP Re) with a stable rating outlook. “The ICR of TP Re is strictly based on the holding company’s methodology since it does not carry any debt,” Best noted. The ratings of TPRCL are based on its “excellent risk-adjusted capitalization, continued successful implementation of its business plan, which includes adherence to financial projections, measured growth, acceptance in the marketplace (as witnessed by the initial public offering of the holding company) and the above-average performance of its investment portfolio,” Best explained. “The ratings also consider TPRCL’s seasoned management team and the dynamic and evolving enterprise risk management that is in place.” As partial offsetting factors Best cited the “start-up nature of TPRCL, the greater investment risk associated with its alternative investment strategy and the increasing competition and capacity in the reinsurance marketplace.” Best said “TPRCL 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, TPRCL’s low underwriting leverage, experienced underwriting team and its investment manager’s 19-year successful investment track record help to alleviate its concerns. The assets of TPRCL are managed by Third Point LLC, a New York-based SEC-registered investment manager with over $12.1 billion of assets under management. TPRCL’s assets are in a separate portfolio managed by Third Point LLC, which are not combined with assets of other investors at Third Point LLC.” In addition, Best said it “anticipates that TPRCL’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 TPRCL meeting and/or exceeding its business plan over the long term, maintenance of robust risk capital levels and positive operating performance through market cycles. Key rating triggers that could result in negative rating actions would be TPRCL not executing its business plan over the long term, significant adverse reserve development, outsized investment losses and/or a departure of key management.”

A.M. Best Europe – Rating Services Limited has removed from under review with negative implications and affirmed the financial strength rating of ‘A’- (Excellent) and issuer credit rating of “a-” of Slovenian reinsurer Pozavarovalnica Sava d.d. (Sava Re), and has assigned a stable outlook to both ratings. Best explained that in December it had placed both of Sava Re’s ratings under review with negative implications following the group’s announcement of a €27.6 million [$37.44 million] write-down of its subordinated bonds issued by domestic banks. “These investment losses were in addition to the €5.4 million [$7.325 million] experienced as at the third quarter of 2013, due to the liquidation of two domestic banks,” Best explained. “The additional write-downs in investments followed an external audit of the domestic financial sector undertaken by the Slovenian government, which suggested that subordinated financial investment in Slovenian banks would be permanently impaired in return for the full bail-out of the banking system. With the above-referenced investment losses, coupled with the integration of Zavarovalnica Maribor d.d. into Sava Re during 2013,” Best said it “became concerned with the combined impact of these events on Sava Re’s consolidated risk-adjusted capitalization.” Best’s report confirmed that it has “reviewed Sava Re’s preliminary financial results for the full year 2013, and expects consolidated risk-adjusted capitalization to be maintained at an appropriate level. Factors supporting Sava Re’s capital adequacy, as measured by A.M. Best’s capital model, include lower capital requirements (compared to original expectations) to support the group’s underwriting and investment risk exposure relative to its diminished capital position.” Best indicated, however that “there remains uncertainty with regard to the stability of the Slovenian banking sector.” Best said it “considers there to be a sufficient margin within Sava Re’s consolidated risk-adjusted capitalization to cushion against further impairments. There are currently no upwards ratings pressure. Negative rating actions may occur if there is a decline in Sava Re’s risk-adjusted capitalization to a level beyond A.M. Best’s expectations. Additionally, any further deterioration in the economic fundamentals of Slovenia could put negative pressure on the ratings.”

A.M. Best Asia-Pacific Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Bermuda-based NEWGT Reinsurance Company Limited, both with stable outlooks. The ratings reflect NEWGT’s “adequate risk-adjusted capitalization, stable operating profitability, aided by its retrocession coverage, and the support from its parent company, Japan’s Itochu Corporation,” Best explained. The report noted that “NEWGT is a single-parent captive of Itochu and Class 3 general business reinsurer, and is registered under the Segregated Accounts Company Act 2000 in Bermuda. The parent is one of the major trading companies in Japan engaging in a wide range of global businesses. NEWGT reported favorable operating performance over the past five years, mainly driven by its major line of marine cargo business, which is diversified globally due to the broad range of trading activities conducted by Itochu. Performance has been aided by the company’s strong retrocessional coverage with a diversified panel of global reinsurers. Additionally, the ratings recognize NEWGT’s strategic importance to Itochu, which has demonstrated its commitment through capital support as appropriate.” As a partial offsetting factor Best cited “NEWGT’s expansion into third party business, which brings more potential volatility to the operating result. This expansion includes the Lloyd’s Market, which accounts for a significant proportion of its total net premium income in the forecast periods. While there is no positive movement in the ratings considered in the short term, negative rating actions could occur if there is a sharp decline in NEWGT’s risk-adjusted capitalization caused by a deterioration in its operating performance. In addition, deterioration in Itochu’s credit profile could impact NEWGT’s ratings.”

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