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AM Best Affirms Ratings of Third Point Re While Revising Outlook to Negative

May 17, 2019

AM Besthas revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” of Bermuda-based Third Point Reinsurance Co. Ltd. (TPRE) and Third Point Reinsurance (USA) Ltd.

AM Best also has revised the outlooks to negative from stable and affirmed the Long-Term ICRs of “bbb-” of Wilmington, Del.-based Third Point Re (USA) Holdings, Inc. and its ultimate holding company, TPRE.

The ratings reflect TPRE’s balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.

The negative outlooks reflect AM Best’s concern over the company’s business profile given its prolonged inability to generate an underwriting profit, which has resulted in an average combined ratio of 105.6% for the five years from 2014 to 2018, which means the company has not reported an underwriting profit since inception.

In addition, AM Best said TPRE’s investment results have been volatile and below AM Best’s expectations over the cycle.

Furthermore, recent changes in senior management will need to prove beneficial to TPRE’s market profile over the medium to long term, said AM Best in its ratings commentary.

(TPRE announced on May 9 that Daniel Malloy was appointed CEO, effective on May 10. He succeeds J. Robert Bredahl, who resigned to take on the role of chief operating officer of the re/insurance broker TigerRisk Partners. Bredahl steps into his new job in mid-June).

“We are pleased to note AM Best’s recognition of our significant balance sheet strength and their confidence in our ability to maintain the strongest level of risk-adjusted capitalization,” commented TPRE’s new CEO Malloy, in response to AM Best’s credit rating press release.

“Having announced record first quarter profits, we remain focused on improving underwriting profitability to complement our investment returns, a key driver of shareholder value in our model,” he added.

“We are encouraged that our recent expansion into property catastrophe and specialty lines reinsurance is being well supported by brokers and clients who understand our approach and appreciate our innovation, expertise, and responsiveness,” Malloy affirmed.

AM Best noted that TPRE will need to enhance its business profile gradually and achieve a core portfolio of business that can deliver a sustainable level of technical profitability going forward.

TPRE’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), was categorized as strongest as of year-end 2018. Although surplus has trended down over the past five years (2018-2014), AM Best expects the company to continue to run its operations while maintaining the strongest BCAR level.

An offsetting factor in AM Best’s balance sheet strength assessment is TPRE’s high-risk investment appetite, which exposes its capital to potential short-term volatility. However, AM Best said it believes the company’s investment adviser, Third Point LLC, has begun to take appropriate actions to mitigate this risk and stabilize investment earnings going forward.

TPRE has a diversified reinsurance portfolio that historically focused on quota shares of lines of business with lower volatility, said the ratings agency.

The company recently hired senior underwriters with extensive experience and began expanding into higher margin lines of business, including property catastrophe and specialty reinsurance, explained AM Best.

TPRE has established strong relationships with reinsurance brokers and progressively grown its business footprint despite challenging market conditions. Additionally, AM Best considers risk management capabilities to be appropriate for TPRE’s risk profile.

Source: AM Best

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