Bermuda Runoff Reinsurer Premia Re A- Rating Affirmed by KBRA

Kroll Bond Rating Agency (KBRA) affirmed the insurance financial strength rating (IFSR) of A- of Premia Reinsurance Ltd. (Premia), a Class 4 Bermuda specialty reinsurer focused on acquiring nonlife runoff liabilities. KBRA also affirmed the issuer rating of BBB of the organization's ultimate holding company, Premia Holdings Ltd. (Premia Holdings). Premia and Premia Holdings are collectively referred to as Premia Re. Additionally, KBRA affirmed the rating of BBB of Premia Holdings' outstanding senior unsecured notes. The outlook for all ratings is Stable.

The ratings reflect Premia Re's sound capitalization, which KBRA believes is sufficient to support the company's planned acquisition strategy of runoff liabilities in the medium term. Part of Premia's capital consists of $110 million of senior unsecured notes due January 2024. Additionally, Premia Re's ratings benefit from the equity investment of Arch Capital Group Ltd. (Arch Capital), a 25 percent quota share reinsurance agreement between the companies, as well as underwriting, systems, and operational support from Arch Capital.

Moreover, Premia Re's management team has extensive experience in the reinsurance market, especially in the runoff sector, and has successfully closed on a number of runoff transactions, which highlight its differentiated approach and experience during its short operating history. Premia Re acquires companies and portfolios in less volatile lines of business, eschewing property catastrophe exposure, and will maintain conservative financial leverage—currently about 22 percent.

Balancing these strengths is the start-up nature of the company and the execution risk for Premia Re's management team as they enter a mature sector with established competitors. Although KBRA acknowledged that nonlife runoff business has demonstrated favorable return characteristics that are largely uncorrelated to the overall financial markets, the potential still exists for runoff business to experience adverse reserve development. This risk has been somewhat mitigated by the acquisition in September 2018 of Alan Gray LLC, a well-established and highly respected claim and audit service firm that will represent a second operating pillar for Premia.

Premia Re reported net income and a breakeven combined ratio in 2017, its first year of operations. KBRA expects to find that results improved in 2018. Finally, key man risk exists in that Premia Re needs to continue to build out its management team over time to develop bench strength for succession planning.

The Stable outlook reflects KBRA's expectations that Premia Re will continue to maintain sound capitalization while successfully executing its runoff acquisition strategy. Additionally, KBRA expects Premia Re to experience minimal credit losses in its investment portfolio, retain key members of its management team, and preserve financial flexibility through conservative balance sheet metrics.

An updated report will be available shortly.

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