KBRA Affirms All Ratings for Somerset

KBRA affirms the A Insurance Financial Strength Ratings (IFSRs) for Somerset Reinsurance Ltd. (Somerset Re) and Somerset Reinsurance Company. KBRA also affirms the BBB+ issuer rating for Somerset Reinsurance Holdings Ltd. (Somerset Re Holdings). The companies are collectively referred to as Somerset. The Outlook for all ratings is Stable.

Key Credit Considerations

The ratings reflect Somerset’s high-quality capital, strong risk-based capitalization, predominantly high credit quality, liquid investment portfolio, access to additional capital to execute its business plan, strong liquidity profile, strong drivers of profitability, balanced reserve mix, seasoned management team, and sound governance structure and risk management framework. Somerset Re Holdings maintains no financial leverage in its capital structure. KBRA views Somerset Re’s 2023 BSCR coverage ratio of 253% as strong and notes that it compares favorably to other Bermuda long-term reinsurers. At the end of 2023, over 90% of Somerset’s portfolio was invested in well-diversified, liquid fixed income securities with an average credit quality of A-. Over 95% of the fixed income portfolio was comprised of publicly traded securities, while the remainder consisted of less liquid, investment grade private debt instruments. Aquarian has contributed significant amounts of capital to support Somerset’s business growth. KBRA believes that Aquarian will continue to demonstrate strong commitment to Somerset and to provide Somerset a platform to access additional capital as needed to execute its business plan. In conjunction with available corporate liquidity, modest exposure to collateral calls and tight asset liability matching, KBRA views Somerset’s liquidity profile as strong. Net operating income of $64 million in 2023 was driven by all key P&L components: insurance service result, net investment income and net insurance finance income. KBRA believes that Somerset’s prudent underwriting, disciplined approach to pricing and focus on bilateral and diversification opportunities are fundamental to the group’s long-term profitability. With the closing of the Prudential ULSG transaction in Q1 2024, reserves have become more balanced between life and annuity business. Somerset has an experienced, highly qualified senior management team and has demonstrated that it is able to attract top-tier talent as it grows its bench strength. KBRA views Somerset’s governance structure and risk management framework as sound and evolving appropriately to keep pace with the group’s growth and enhanced regulatory requirements.

Balancing these strengths are exposure to interest sensitive liabilities and an evolving competitive and regulatory landscape. Somerset Re’s business is predominantly spread based, exposing it to potential spread compression during periods of falling interest rates and disintermediation risk during periods of rising interest rates. KBRA believes that the group has adequate controls in place to manage this risk. While Somerset has demonstrated a strong position in its targeted sectors, it will likely continue to face competition as capital continues to flow into the Bermuda market to vie for business from a diverse population of cedents. In addition, ongoing changes in local and international regulatory regimes have fostered greater uncertainty in an increasingly complex integrated business environment.

Rating Sensitivities

Results above forecasts provided to KBRA, further diversification of the group’s earnings, and successful development of the group’s US platform could result in positive rating action.

Results materially below forecasts provided to KBRA, decrease in risk-based capitalization below the group’s targets, elevated operating leverage and material adverse change in risk profile could result in negative rating action.

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Methodologies