Outlook for Everen Specialty downgraded to negative

Everen Speciality Ltd has had its ratings outlook downgraded to negative from stable due to declines in capitalisation caused by shock losses and adverse reserve development.

Everen Specialty, which insures the energy sector and was formerly known as Oil Casualty insurance, had its A- financial strength rating affirmed by AM Best.

AM Best said the ratings reflected Bermuda-based Everen Specialty’s balance sheet strength, which AM Best assessed as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.

“The revision in the outlooks to negative from stable reflects the impact of Everen Specialty’s declining risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), which was assessed at the strong level, moving down from the strongest level in prior years,” AM Best said.

“The deterioration in the measure is mostly due to the overall levels of capital, which have consistently declined over the past five years. While capitalisation remained sufficient to support the company’s strategic diversification efforts, operating losses have eroded capital buffers over the past year, which further declined in 2022 due to investment losses. In addition, reserve development over the past four years has been unfavourable, further pressuring balance sheet strength.”

Everen Specialty reported a net loss of $108 million in 2022.

The ratings agency said the mutual insurer's underwriting performance had been volatile over the past five years and the company had experienced “occasional shock losses”.

“Everen Specialty’s reinsurance programme has been proven effective in reducing some of the volatility,” AM Best said. “Investment returns have hedged underwriting losses over four of the past five years; however, in 2022 rising interest rates led to net unrealized losses.”

AM Best credited the company’s seasoned management team and said the company was working to be a diversified multi line, stable capacity provider for the energy industry.

“However, if the diversification and growth initiatives fail to meet company’s expectation, the business profile could be pressured,” it said.

“AM Best will closely monitor the status of the company’s capital levels and its ability to meet its forecast over the short term, through year-end 2023. Furthermore, diversification and growth initiatives will need to prove to be additive and beneficial to the group’s operating performance over the intermediate term. Negative rating actions could result from a continued reduction in Everen Specialty’s risk-adjusted capitalization.”