KBRA Assigns A Rating to Hamilton Re

Kroll Bond Rating Agency (KBRA) assigned an insurance financial strength rating of A to Hamilton Re, Ltd. (Hamilton Re), a Bermuda Class 4 property-casualty reinsurer. KBRA also assigned an issuer rating of BBB+ to Hamilton Insurance Group, Ltd. (Hamilton Group), the Bermuda-based holding company for Hamilton Re. The outlook for both ratings is stable.

According to KBRA, the ratings for Hamilton reflect its sound financial condition, diversified risk profile, and seasoned management team. Hamilton is a diversified global (re)insurance company that embraces data science and technology on both the asset and liability sides of the balance sheet. Investments are managed by Two Sigma, a technology and data company focused on investment management and data science, via the TS Hamilton Fund. The TS Hamilton Fund is a diversified fund focused on liquid strategies in global equity, futures, and foreign exchange markets. Liabilities emanate from the disciplined underwriting of a balanced portfolio of property, casualty, and specialty risks. Hamilton's internally developed, proprietary software—Hamilton Analytics and Risk Platform (HARP)—provides a single, comprehensive view of the portfolio across the enterprise that allows for the assumption and pricing of underwriting risk in a measured way.

KBRA said Hamilton has consistently generated net income since its inception in 2013, largely due to the strong performance of the TS Hamilton Fund compared to its benchmarks. KBRA believes Hamilton Re's current capital position can adequately support multiple stress scenarios on both its investments and losses through underwriting risk tolerances that are lower than its peers. Hamilton Re maintains low underwriting leverage as management recognizes the need to take underwriting risk and investment risk in a balanced and measured way. Additionally, Hamilton has excellent financial flexibility with good interest coverage on its credit facilities. The group has both unsecured facilities and facilities in place supported by pledged assets. Moreover, Hamilton has access to additional sources of capital, if needed. KBRA expects Hamilton Re to remain prudent with premium growth relative to capital and investment risk.

Operations are supported by a well-thought-out business plan that is being methodically executed and a robust risk management framework with embedded risk tolerances in HARP, which can provide management with daily changes to its risk profile. Hamilton Re maintains a conservative risk profile, limiting probable maximum loss (PML) to 15 percent of shareholder's equity in the United States and 10 percent for the rest of the world. Operations are further supported by strong liquidity that is able to accommodate unforeseen cash demands without the need to liquidate invested assets.

Balancing these strengths is significant execution risk for planned business initiatives, including further development of Hamilton's capital markets capabilities and the launch of Hamilton Re U.S., planned for first quarter 2019, KBRA said.

In addition, KBRA added, Hamilton Re’s combined ratio exceeded 100 percent in 2016 and 2017. In 2017, Hamilton Re experienced underwriting losses in excess of $100 million due to severe catastrophes, notably Hurricanes Harvey, Irma, and Maria. However, these underwriting losses were within their risk tolerances and were lower than most of their peers, relative to the 100-year PML. A significant underwriting loss is expected again in 2018. However, investment income during these periods has been sufficient to offset underwriting losses, resulting in net income.

According to KBRA's analysis of the TS Hamilton Fund, the underlying investments, on a weighted average basis, are weighted towards globally listed equity securities with the balance focused on futures, futures options, and foreign currency options. KBRA believes that funds comprised of these asset classes tend to be vulnerable to market fluctuations. However, KBRA's assessment is that the overall quality of the TS Hamilton Fund is supportive of the ratings due to its strong liquidity profile as well as meaningful allocations to government securities, cash, and fixed-income securities.

The stable outlook reflects KBRA's expectation that Hamilton will continue to maintain sound capitalization while prudently executing its business plan. Additionally, KBRA expects Hamilton Re to maintain sufficient liquidity to cover projected liability cash flows. The ratings are based on KBRA's Global Insurer & Insurance Holding Company Rating Methodology published on October 10, 2017.

A full report will soon be available on the Kroll Bond Rating Agency, Inc. website.