Hedge fund style reinsurer Greenlight Re has had its outlook revised from stable to negative by A.M. Best, due to concerns about its track record of poor underwriting performances.
The revised outlooks apply to Greenlight Re, as well as its subsidiaries, Greenlight Reinsurance, Ltd. (Cayman Islands) and Greenlight Reinsurance Ireland, Designated Activity Company (Ireland).
At the same time, A.M. Best affirmed the financial strength rating of A- (Excellent) and long-term issuer credit ratings of “a-“ for the subsidiaries, as well as the long-term ICR of “bbb-“ for the parent company.
The agency said its ratings reflects Greenlight Re’s balance sheet strength, which it categorises as very strong, in addition to its marginal operating performance, neutral business profile, and appropriate risk management.
Greenlight Re has reported an average combined ratio of 105.3% over the last five years due to its poor underwriting performance, as well as a five-year average return on equity of -13.3%.
The reinsurer’s consolidated surplus has also decreased materially in recent years, to $480 million as of year-end 2018, down from $1.2 billion in 2014, primarily due to the outsized losses generated by its investment advisor.
Greenlight Re’s Board of Directors has responded to the rating downgrade by committing to conduct a strategic review.
To reduce volatility near-term, Greenlight Re has also de-risked its investment portfolio and is holding a majority of its investment assets in cash and short-term treasuries until the review is complete.
Going forward, A.M. Best expects the company to improve its underwriting profitability, although failure to do so may result in further negative rating actions.
In the medium to long term, analysts also expect Greenlight Re to stabilise its earnings and gradually replenish its capital position through internal capital generation.