A.M. Best Co. has assigned an initial financial strength rating of A- (Excellent) to Aspen Specialty Insurance Company, the recently formed U.S. insurer that is part of the Aspen Group, which includes the ultimate parent company, Aspen Insurance Holdings Limited (AIH), a Bermuda domiciled holding company, Aspen Insurance UK Limited (Aspen Re) and Aspen Insurance Limited (AIL), another Bermuda-based insurer. Aspen Re is currently rated A (Excellent) by A.M. Best while AIL is rated A- (Excellent). The outlook for both companies at present is stable.
Aspen Specialty was formed for the purpose of allowing the group to gain greater access to the favorable U.S. excess and surplus lines market. The management team has experience writing surplus lines business emanating from the U.S. The new carrier’s strategic focus will be on writing surplus lines business within the domestic market, which is seen as complimentary to the U.S.-based surplus lines accounts that are accessible from the London marketplace.
On Sept. 5, AIH completed the purchase of Dakota Specialty Insurance Company (Dakota Specialty), a subsidiary of the Trenwick Group. The purchase included Dakota’s remaining run-off business with gross reserves, including IBNR, of approximately $14 million at closing. Dakota Specialty was subsequently renamed Aspen Specialty Insurance Company.
The rating of Aspen Specialty reflects its initial capital base of $100 million, established via the successful completion of a $200 million credit facility at the holding company level. A.M. Best has analyzed the group’s debt leverage in light of the capital raised and is satisfied that the debt leverage and interest coverage levels of AIH are adequate for the individual ratings of the group members. The facility represents the only current outstanding debt within the Aspen Group.
In A.M. Best’s view, the company’s low investment risk and conservative leverage targets will enable it to maintain capitalization that will comfortably support its risk profile.
The rating also reflects Aspen Specialty’s business plan, which includes building a well-balanced property and casualty book of business, its conservative underwriting leverage and its plans to build its premium base slowly over the first several years. The rating also recognizes its focus on middle market surplus lines business that is driven by value-added risk management and underwriting expertise, as opposed to being distribution-driven.
In order to help control underwriting leverage in its early years of operation, the company will reportedly enter into a quota share reinsurance agreement with AIL effective Jan. 1, 2004.
Additionally, the rating recognizes the higher average rate levels and tighter policy terms and conditions produced within the excess and surplus lines market over the last two years. At present, rate levels are believed to be strong, yielding solid potential for profitable results.
These strengths are partially offset by the myriad challenges that the management team will face in the company’s initial start-up phase of operation within the dynamic surplus lines marketplace. Opportunities for well-capitalized surplus lines carriers, both established and new companies, have been available over the recent term; however, some recent market indicators suggest that the market may be close to or at its peak. This possibility tempers expectations regarding new entrants and the ability to take advantage of market conditions in the near term. Competing with established carriers, some with larger capital bases, and entering a market that may be fully mature are two of the main challenges Aspen Specialty faces.
Also, the market has seen the entry of other excess and surplus lines start-up companies ostensibly focused specifically on the small to medium-sized surplus lines accounts.
A.M. Best will closely monitor the company’s initial operations to ensure that it sticks close to its stated strategic plan and targets.
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