Best Rates Greenlight Re ‘A-‘

August 28, 2006

A.M. Best Co. has assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to Cayman Islands-based Greenlight Reinsurance Ltd. with a stable outlook.

Best said its rating assignment is based on Greenlight Re’s “excellent capitalization, experienced management team and sound business plan.” However, Best said: “These strengths are partially offset by the untested start-up nature of the company, increased competition that will challenge some business plan tenets and an investment portfolio that is primarily composed of publicly traded equity securities.

“Greenlight Re was initially capitalized in August 2004 with $212.5 million, and its capital footprint entails 100 percent common equity with no use of debt. The rating is supported by an amount of capital that has met A.M. Best’s stringent requirements for newly formed companies.

“Greenlight Re will operate as a Cayman Islands-based reinsurer focused on writing a combination of global property, casualty and specialty business primarily through the broker market.”

Best’s timely announcement expressed some concern that “there is a reasonable possibility that Greenlight Re could be exposed at some point to a confluence of events that will test its capital strength.” The imminent arrival of Hurricane Ernesto (see related articles) would qualify as such an event. Best explained that “due to the underwriting risk assumed, coupled with the asset risk present in an equity based portfolio, there could be a multiplicative result that could adversely influence risk-adjusted capital.” Offsetting these concerns “are the low underwriting leverage contemplated in Greenlight Re’s business plan and the partially hedged nature of the equity-based investment portfolio,” Best noted.

“Greenlight Re’s assets will be managed by Greenlight Capital, Inc. (Greenlight Capital), a New York-based hedge fund with over $4 billion of assets under management,” the report continued. “Greenlight Re is not an investment of Greenlight Capital. Greenlight Re’s investment portfolio has been invested for over two years and is primarily composed of publicly traded equity securities, the returns of which are partially hedged utilizing a short and long position strategy.”

Best also indicated that “in addition to the risks presented by an equity-based investment portfolio.” Best said it “anticipates that Greenlight Re’s management will be challenged by competition from established reinsurers. Other start-up entities, as well as the addition of structured finance vehicles participating in the reinsurance marketplace, will result in additional capacity and possibly lower returns. The ability of Greenlight Re to effectively build market acceptance can only be proven over time. In the interim, A.M. Best will closely monitor Greenlight Re’s progress against its business plan, which was used to assess the initial rating. Material, adverse deviation from this plan would likely result in downward pressure on the initial rating.”

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