Best Lowers Alea’s Ratings to ‘B++’

September 26, 2005

A.M. Best Co. announced that it has downgraded its financial strength rating of the Bermuda-based Alea Group Holdings to “B++” (Very Good) from “A-” (Excellent) and the issuer credit rating to “bbb” from “a-” of the Group’s insurance and reinsurance operating subsidiaries. Standard & Poor’s has also lowered the Group’s ratings below “A” grade (See IJ Website Sept.12).

The Group has also apparently abandoned, or at least delayed, its plans to raise an additional $210 million in capital to help offset reserve increases of $34.7 million in the second quarter (See IJ Website Sept. 1).

“This rating action removes the under review status of the rating, which occurred in June 2005,” said Best. “The rating applies to Alea London Limited, Alea (Bermuda) Limited, Alea Europe Limited, Alea North America Insurance Company, Alea North America Specialty Insurance Company, Alea Global Risk Limited and Alea Jersey Limited. The outlook for all ratings is negative.”

Best said it “believes that compound annual growth in net premiums written of 60 percent between 2001-2004 and significant reserve shortfalls from prior underwriting years, which have greatly weakened operating performance, have placed a strain on the company’s risk-adjusted capitalisation.” The rating agency also “remains concerned about Alea’s ability to significantly improve performance to the level required to sustain capitalisation going forward.”

Best indicated: “Although premium levels are expected to decline as a result of changes to Alea’s business plan and its diminished business profile, the company has insufficient capital to maintain an ‘A-‘ (Excellent) financial strength rating, taking into account the potential for further poor operating performance. The company unlikely will be able to address this issue by raising additional capital in 2005.”

Best doesn’t hold out a great deal of confidence in Alea’s future performance either. It noted that it expects it to “continue to deteriorate as a result of expenses pressure due to declining business volumes, catastrophe experience in the second half of 2005 and the possibility of further deterioration in prior year reserves. Combined, these factors could lead to performance considerably below the group’s long-term target of a 12 percent-15 percent post tax return on capital and surplus.”

Best said it “anticipates a decline in gross premiums written in 2005 of above 10 percent, reflecting restructuring of the company’s underwriting, management of exposure and withdrawal from certain poorly performing classes. Further ahead, Alea’s access to certain business classes and territories will be detrimentally affected by concerns relating to its recent performance.”

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