Standard & Poor’s Ratings Services announced that it has assigned its “BBB/A-2” counterparty credit and financial strength ratings to GuaranteedWeather Re Ltd. with a stable outlook.
“The ratings on GuaranteedWeather Re reflect its very strong risk control, very strong market acceptance, experienced management team, and broad capital support, partially offset by its modest absolute levels of capital,” S&P said.
The rating agency also indicated that it “expects substantial (20 to 30 percent) growth in GuaranteedWeather Re’s net written premiums in the next three years, primarily through geographic expansion and greater utilization of weather management outside the utility sector. The company’s capital adequacy (when combined with the working capital and contingent risk capital commitments of its three risk partners) is very strong and is expected to remain so over the next three to five years.”
S&P also cited the following “Major Rating Factors” (in summary form):
— Experienced, lean management team. The management team members managed the same business at Aquila Inc., the first entrant in the weather risk-management business, and are part owners of GuaranteedWeather Re.
— Robust history of sophisticated risk management. The legacy infrastructure (models, management, etc.) from Aquila Inc. is enhanced by the capital support, systems support, and risk partnership of Ramsey Quantitative Systems Inc. (RQSI) of Louisville, Ky. RQSI is a subsidiary of Ramsey Financial Inc., an SEC-registered investment adviser specializing in highly systematic and automated trading systems.
— Highly rated risk partners. Mitsui Sumitomo Insurance Co. Ltd. (AA-/Stable/A-1+) and Hannover Rueckversicherung [Hannover Re]-AG (AA-/Stable/–) provide not only contingent risk capital to support the trading of weather derivatives but also access to a global roster of customers.
— High-quality risk-model development. GuaranteedWeather Re deals only in high frequency, low-severity weather business, which affords it a wealth of pertinent data with which the company has been able to develop structural models with a high degree of explanatory power. A portion of the business is originated by GuaranteedWeather Trading and then reinsured by GuaranteedWeather Re. Both entities are domiciled in Bermuda.
— Capitalization. GuaranteedWeather Re’s GAAP equity of $15 million as of Sept. 30, 2004 is small in absolute terms, but when combined with the working capital and contingent risk capital commitments of its three risk partners, it is considered to be very strong on a risk-adjusted basis.
— GuaranteedWeather manages risk to a seasonal value-at-risk limit agreed to by its risk partners, at a very strong 99.5 percent confidence level. Although the seasonal value-at-risk is the basis for managing risk, the support of both Mitsui and Hannover Re are uncapped, value-at-risk limits notwithstanding. Currently, GuaranteedWeather has extended total notional limit of $200 million for the winter 2004 season. However, on a value-at-risk basis, including offsetting positions, the net exposure is less than half of its current seasonal limit.
— GuaranteedWeather Re and GuaranteedWeather Trading combined generated $24.7 million in gross written premiums in the last season (summer 2004) compared with $5.5 million in its first operating season (summer 2003). Gross written premiums in winter 2003 were $46.8 million. GuaranteedWeather Re has a total client base of about 125 clients, though it has quoted business to more than 500 potential customers since its inception in April 2003. Of the nearly $1 billion in notional risk limit that GuaranteedWeather Re has underwritten since inception (about 20 percent of the entire weather market during that period), 65 percent has been in heating degree day derivatives (winter season), and 24 percent were in cooling degree day trades (summer season). The remaining 6 percent of the trading has been in mean temperature derivatives, 4 percent in precipitation derivatives, and 1 percent miscellaneous, none adhering to either season especially.
“Geographically, by risk limit, GuaranteedWeather has transacted about 60 percent of its business with U.S. counterparties, 32 percent with European customers, and 8 percent with Asian customers. The winter 2004 portfolio has achieved the most balanced geographic diversification to date,” S&P concluded.
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