A.M. Best Upgrades Rating of Greenlight Reinsurance Ireland

October 31, 2014

A.M. Besthas upgraded the financial strength rating (FSR) to A (Excellent) from A- (Excellent) and the issuer credit rating (ICR) to “a” from “a-” of Greenlight Reinsurance Ireland Limited.

Concurrently, A.M. Besthas affirmed the FSR of A (Excellent) and the ICR of “a” of Greenlight Reinsurance Ltd. (Greenlight Re), and it alsoaffirmed the ICR of “bbb” of Greenlight Re’s holding company, Greenlight Capital Re Ltd.

The ICR of Greenlight Capital Re is strictly based on the holding company’s methodology since it does not carry debt. The outlook for all ratings is stable. All companies are domiciled in the Cayman Islands, unless otherwise specified.

Greenlight Reinsurance Ireland Ltd.’s rating is based on its strategic and financial importance to Greenlight Re as a subsidiary and is fully integrated into its parent company’s operations. Additionally, Greenlight Reinsurance Ireland Ltd. receives support in the form of reinsurance contracts and stop loss agreements from Greenlight Re.

The ratings of Greenlight Re are based on its excellent risk-adjusted capitalization, experienced management team and the disciplined implementation of its overall business strategy. The ratings also recognize the company’s exceptional enterprise risk management as it aggressively manages risks on both sides of the balance sheet.

These strengths are partially offset by the challenges Greenlight Re faces writing profitable business in a market with increased capacity and further competition from new reinsurance companies with a similar alternative investment strategy. Also detracting from the company’s strengths is the leverage resulting from an investment portfolio that is primarily composed of publicly traded equity securities. However, this concern has been diminished as Greenlight Re’s investment portfolio has performed well over time.

Greenlight Re operates as a broker market reinsurer writing a combination of property, casualty and specialty reinsurance business. The company has been successful in building its underwriting team’s infrastructure and adding new business using a partnership-oriented approach to underwriting.

This underwriting approach allows Greenlight Re to focus on a small number of large relationships, which enables pricing and structuring on a deal-by-deal basis. Underwriting and investment assumptions are combined to develop a risk profile on both sides of the balance sheet. Catastrophe aggregate downside limits are in place and capped at the board level. Greenlight Re’s underwriting results to date are favorable, and its large surplus base supports the expected growth in premium volume. The underwriting team’s acumen was evident by the company’s very minimal catastrophe losses in 2012 and 2013.

While Greenlight Re’s capital footprint entails 100 percent common equity with no use of debt, A.M. Best is somewhat concerned with the asset risk represented by its equity-based investment portfolio. Mitigating this concern is the inherent partially hedged nature of the investment portfolio and the experience of the investment manager. More than 80 percent of the invested assets are in highly liquid investments, and generally no position can be greater than 20 percent of invested assets.

A.M. Best’s rating approach involves assessing Greenlight Re’s risk correlations across the enterprise by subjecting its capitalization to concurrent adverse stress test events. The company’s robust risk-adjusted capitalization withstands substantial amounts of strain when subjected to these various stress scenarios.

Positive rating actions may result from continued improvements in Greenlight Re’s operating results, lower adverse development, continued lack of catastrophe losses and a continued positive investment performance.

Negative rating actions may result from continued abnormal adverse development, severe negative investment results, significant loss of capital and/or poor underwriting performance.

Source: A.M. Best Company

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