AM Best Affirms Credit Ratings Of Lumen Re

January 11, 2019

AM Best has affirmed the Financial Strength Rating of A [Excellent] and the Long-Term Issuer Credit Rating of “a” of Lumen Re Ltd. [Lumen Re] [Bermuda]. The outlook of these Credit Ratings is stable.

A statement from the ratings agency said, “The ratings reflect Lumen Re’s balance sheet strength, which AM Best categorizes as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management [ERM].

“Lumen Re writes reinsurance and retrocession contracts [industry-loss warranties, excess of loss, etc.] with a focus on providing excess of loss property catastrophe reinsurance risk coverage to various ceding companies. According to Lumen Re’s business plan, a majority of its written reinsurance limits/exposures will be retroceded to third parties.

“All protection retroceded will be fully collateralized through a trust account for the benefit of Lumen Re. Assets within the trust account are invested in highly rated money market funds or short-term treasury bills. The remaining limits/exposures not retroceded will be retained and supported by the equity. The leverage, as measured by a ratio of retained limits to equity, is very low.

“Based on its business plan shared with AM Best, Lumen Re’s risk-adjusted capital, as measured by the Best’s Capital Adequacy Ratio [BCAR], is projected to remain at the strongest level over the near term [i.e., one to three years]. Its liquidity, asset/liability management, quality of assets and use of internal capital models provides ample support of its balance sheet assessment.

“Partially offsetting these rating factors is Lumen Re’s relatively high dependency on third-party retrocession. However, all retrocession ceded limits will be written on a fully-collateralized basis, thus dramatically minimizing its exposure to losses and third party credit risk. Consequently, AM Best has assessed the company’s overall balance sheet strength as strongest.

“Lumen Re’s overall operating performance is assessed as adequate based upon projected results in its business plan. The company’s pricing strategy is to focus on underwriting profits and not on asset return. Investment income related to its investments is projected to be minimal, which tracks its overall investment guidelines of having funds invested in short-duration, high quality assets.

“Lumen Re’s business profile is assessed as limited as the company predominantly writes catastrophe excess of loss contracts and limited reinsurance protection programs with well-established cedants in highly developed markets. Its line of business is low frequency, high severity non-proportional treaty business with well-diversified primary insurance companies.

“The geographical spread and diversification of coverage is positive. Product concentration is somewhat mitigated due to spread of coverage, the number of cedants and the number of contracts contained in its portfolio. Pricing sophistication, modeling capabilities including reliance on the use of vendor models, and coverage exclusions for start-up companies and those with unrealistic growth plans create a strong environment for management to execute its pricing strategy.

“Lumen Re’s ERM is assessed as appropriate, based on the company’s projected size and risk profile, which is supported by its focus on maintaining geographic and diversity of its risk exposures. AM Best considers Lumen Re’s risk management capabilities to be largely aligned with its risk profile.”

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