KBRA Affirms All Outstanding Ratings of Somers Group and its Securities and Subsidiaries
11 Oct 2023 | New York
KBRA affirms the A insurance financial strength ratings (IFSRs) of Somers Re Ltd. (Somers Re) and its wholly owned direct and indirect subsidiaries: Watford Insurance Company Europe Limited, Watford Specialty Insurance Company, Watford Insurance Company and Axeria IARD. Additionally, KBRA affirms the BBB+ issuer rating of Somers Group Holdings Ltd. (Somers Group), the BBB+ debt rating on Somers Group’s senior unsecured notes due 2029, and the BBB debt rating on Somers Group’s subordinated unsecured notes due 2032. The Outlook for all ratings is Stable.
Key Credit Considerations
The ratings reflect the group’s strengthened risk-based capitalization, strong enterprise risk management framework, very strong liquidity profile, manageable financial leverage with solid interest coverage, conservative reserve position, and improving drivers of profitability. At end-2022, the group’s BSCR coverage ratio was 150% (2021: 135%). Gross written premium increased 27% to $1.6 billion during 2022, while net written premium increased 17% to $1.2 billion during the same period. KBRA believes that Somers Group continues to have comprehensive, robust risk management processes and procedures across the organization. During 2022, Somers Group undertook a full review of its risk register, metrics, and risk tolerances to ensure complete alignment with its revised business strategy. Cash, cash equivalents and highly liquid short-term investments (money market funds and T-bills) comprised approximately 43% of Somers Group’s investment portfolio at end-2022. High credit quality investment grade bonds constituted another 12%, further supporting KBRA’s view of the company’s very strong liquidity profile. At end-2022, Somers Group’s financial leverage was 23.4% (20.9% ex-AOCI) with ample dividend capacity from Somers Re to cover debt service. KBRA believes that Somers Group sets reserves conservatively and views favorably the group’s proactive approach to continuously incorporating inflationary assumptions in both reserves and pricing. Since mid-2021, the drivers of profitability for Somers Group have been the group’s strategic repositioning of its underwriting portfolio to assume more stable, better quality underlying business, in combination with strong execution in several key focus markets. The strategic repositioning of the investment portfolio has benefited from the rising interest rate environment during 2022 through 1H2023 that has allowed further de-risking, while simultaneously increasing yield and interest income, as well as from the appointment of John Patin IV to the newly created position of Chief Investment Officer, demonstrating the group's commitment to driving the investment strategy's success. At end-2022, the group’s combined ratio was 100.1% and KBRA expects further improvement in 2023 reported metrics. Balancing these credit strengths are execution risk, continued elevated investment risk, reduced financial flexibility and key person risk. While Somers Group has made much progress in de-risking and repositioning its investment portfolio, the current interest rate environment may challenge the viability of the non-investment grade strategy and planned return metrics over the medium term, partially offset by the group’s recent tactical moves to grant waivers to investment guidelines to temporarily permit the non-investment grade managers to invest in short duration, high credit quality positions. While shrinking as a percentage of the overall investment portfolio, lower credit quality legacy investments are taking time to unwind and are exposed to further event risk in the current financial market environment. Until the non-investment grade portfolio is fully repositioned, underwriting capacity may be somewhat constrained. With fewer options at its disposal, Somers Group has somewhat limited access to additional capital. Until a strong pattern of consistent internal generation of capital emerges, the group’s ability to capitalize on underwriting opportunities is limited to available capital which is subject to volatility from the group’s investment strategy. As most activities are outsourced, the group has a lean management team and staff. The loss of a key member of the management team could present significant challenges for the group.
Consistent calendar year combined ratios under 100%, improved risk-based capital ratios and materially exceeding forecasts provided to KBRA without a material adverse change in risk profile could result in positive rating action. A material variance in actual results to forecasts provided to KBRA, a significant decline in risk-based capitalization, breach of any covenants in letter of credit facilities or outstanding securities, or a loss of a member of the management team could result in a negative rating action.
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