AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of ‘a-‘ of Greenlight Re in Cayman and Greenlight Reinsurance Ireland.
The Long-Term Issuer Credit Rating of ‘bbb-‘ for Greenlight Capital Re, the ultimate holding company of the two reinsurers, was also affirmed.
The outlook of these ratings is negative.
The rating affirmations followed an accepted appeal by the reinsurer which provided new material information that stabilised AM Best’s opinion of the company’s business profile and forward-looking operating-performance volatility, the rating agency said.
AM Best said the ratings reflect Greenlight Re’s very strong balance sheet, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.
The negative outlooks are due to AM Best’s expectation that the group will find it challenging to improve its underwriting performance in the short term given its historical results.
However, the group’s operating performance should continue to benefit from the recent re-underwriting and investment actions taken to improve overall performance and limit volatility.
“There have been very recent indications of broad-based reinsurance rate hardening and partial investment recovery following the investment losses recorded in the first quarter of 2020,” AM Best said.
The rating agency views Greenlight Capital Re’s business profile as neutral. The company was incorporated in the Cayman Islands in 2004 and is one of the longest-tenured total return reinsurers. Through its two operating subsidiaries, it provides property/casualty reinsurance globally.
The company’s consolidated surplus has decreased over the past five years, primarily due to outsized losses generated by its investment portfolio in combination with adverse underwriting results.
Despite the losses, Greenlight Capital Re’s risk-adjusted capital position has remained at the strongest level, as measured by Best’s Capital Adequacy Ratio.
Management’s actions to limit investment volatility through de-risking the investment portfolio, including increasing the amount of cash and fixed-income securities held and meaningfully decreasing the group’s investment operating leverage, has supported the group’s risk-adjusted capitalisation, the rating agency said.
Although the company’s surplus has been impacted by COVID-19-related investment losses, AM Best expects it to maintain risk-adjusted capital levels in line with its current ratings.
Over the past five years, Greenlight Capital Re has produced weak investment returns and marginal underwriting performance, which has led to a five-year average combined ratio of 108.6%, inclusive of corporate expenses, and has contributed to a five-year average return on equity of -19.2%.
Following the hiring of a new CEO in 2017, the group has focussed on diversifying its client base and product offering to limit concentrations and improve underwriting performance.
Historically, Greenlight Capital Re was somewhat concentrated by cedant, by geography and by line of business. However, the company has taken steps to diversify its platform mainly through growing its non-US business, and underwriting more non-proportional business, AM Best said.
Negative rating actions could occur if turmoil in the capital markets negatively impacts the company balance-sheet assessment and investment performance. The underwriting performance, which remains relatively adverse compared with most peers, could also create negative rating pressure.
Conversely, AM Best said, rating actions that stabilise the ratings may occur if Greenlight Capital Re bolsters its shareholders’ funds through a sustained level of internal capital generation, driven by improved underwriting and investment performance, which would indicate an improving business profile.
The company expects to release financial results for the second quarter ended 30 June after the market closes on Wednesday, 5 Aug.
Greenlight Capital Re announced 29 Oct. 2020, as the date for this year’s annual general meeting of shareholders, to be held at the company’s offices in Camana Bay.