KBRA Affirms Ratings on Somers Group and its Operating Subsidiaries

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, 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 continued improvement in risk-based capitalization, strong and evolving enterprise risk management framework, strong liquidity profile, very manageable financial leverage, as well as strong drivers of profitability with consistent underwriting profitability beginning to emerge. At the end of 2023, Somers Group’s Bermuda Solvency Capital Requirement (BSCR) coverage ratio was 186% (2022:150%; 2021:135%) while Somers Re’s BSCR coverage ratio was 186% (2022: 150%; 2021: 141%). The improvement in the BSCR coverage ratios was driven by the growth in available capital significantly exceeding the growth in premium and reserve risk as well as ongoing derisking of the investment portfolio. Across the organization, Somers Group has robust risk management processes and procedures. With the onboarding of a Chief Risk Officer in July 2024, the entire risk management framework will be reviewed and enhanced to ensure it remains appropriate for the evolving risk profile of Somers Group. Through the end of 2023, Somers Re has maintained strong liquidity and has benefited from increased operating cash flows over the past three years. Somers Group’s debt/capital was 17.5% at the end of 2023, down from 23.4% at the end of 2022. Underwriting results have continued to improve, culminating in a combined ratio of 95.2% for 2023. Balancing these strengths are investment risk which remains elevated while derisking efforts continue and key person risk. At the end of 2023, 20% of the portfolio consisted of non-investment grade fixed income securities, down from 37% at the end of 2022. KBRA expects non-investment grade fixed income securities to represent ~10% of the portfolio over the medium term as market conditions allow for exiting certain positions and new monies continue to be invested in investment grade fixed income securities. As most activities are outsourced, the group has a lean management team and staff even with the addition of two key roles in 2023 and 2024.

Rating Sensitivities

Consistent calendar year combined ratios under 100% over the medium term, a sustained increase in risk-based capitalization and exceeding forecasts provided to KBRA without a material adverse change in overall risk profile could result in positive rating action. A material negative variance of actual results to forecasts provided to KBRA, a significant decline in risk-based capitalization, breach of covenants under the letter of credit facilities or event of default under the senior or subordinated notes, or a loss of a member of the management team without a suitable replacement could result in a negative rating action.

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Methodologies