Ratings agency raises re/insurer’s rating after investment firm takes controlling interest
Ratings agency KBRA has upgraded the insurance financial strength rating to A from A- on Somerset Reinsurance after New York investment firm Aquarian Holdings closed its acquisition of a controlling interest in the Bermuda-based re/insurer.
KBRA revised its outlook from positive to stable and assigned a financial strength rating of A with a stable outlook to Somerset Reinsurance Company, a newly established Florida domestic reinsurer that will provide a US platform for the group.
KBRA said: “The upgrade reflects Somerset’s improved capital position, increased financial flexibility and access to capital after Aquarian’s acquisition of a controlling interest, greater diversification of liabilities from structured and pension risk transfer transactions executed in 2022, launch of its US platform and recent announcement of the Prudential ULSG transaction which brings the company in line with its business plan previously provided to KBRA.”
The agency noted that Somerset, led by chief executive officer Jeffrey Burt (pictured), did not have financial leverage in its capital structure and the Aquarian acquisition provided Somerset Re with a substantial amount of immediate and committed new capital to further drive growth and fortify its market position.
“During 2023, Somerset raised additional capital commitments from Aquarian to support planned growth,” KBRA said. “Somerset Re added material asset-intensive life and pension liabilities to its reserves during 2022.
“The closing of the recently announced Prudential ULSG deal later in 2023 will further diversify and more than double total reserves.”
KBRA also said the ratings reflected Somerset’s predominantly high-credit quality, liquid investment portfolio, strong liquidity profile, strong drivers of profitability, and sound governance structure and risk management framework.
KBRA added: “Balancing these strengths are volatile reported results, exposure to financial market event risk and key person risk.
“For 2022, Somerset reported a net loss of $681 million (2021: $43 million net loss; 2020: $93 million net income) driven by the net change in embedded derivatives in funds withheld. To assess the underlying economics of Somerset’s results, KBRA adjusts reported results to exclude the impact of the net change in embedded derivatives resulting in a net loss of $42 million in 2022 (2021: $44 million net income; 2020: $24 million net income).
“As the net change in embedded derivatives is unrealized and KBRA expects Somerset to hold the impacted securities until maturity, KBRA believes that viewing results without the reported impact of embedded derivatives is more representative of the group’s earning power.
“Somerset’s market-neutral, primarily long-short hedge fund strategy managed by an affiliate potentially exposes earnings to volatility and capital to erosion from equity market event risk. This was evident in 2022 when the fund underperformed relative to plan and was the main driver of the adjusted net loss for the year. Success remains highly dependent on the senior management team while the group continues to build bench strength.”
