Fitch Ratings – London – 08 Dec 2023: Fitch Ratings has published Warwick Re Limited’s (Warwick) Insurer Financial Strength (IFS) Rating of ‘BBB’ (Good) with Stable Outlook.
The rating reflects Fitch’s conservative forecast of key financial metrics over a two-year rating horizon. This assessment is then weighed against Warwick’s limited history as a new reinsurer, which constrains the rating.
KEY RATING DRIVERS
Untested Business Profile: We assess Warwick’s business profile as ‘Less Favourable’ compared with other UK insurers’, primarily due to its limited record. Although Warwick’s operating history is limited, it has progressed significantly in building its relationships with potential counterparties over the last year, which supports our business profile assessment.
We expect Warwick to secure institutional business with UK and US cedants on profitable terms, benefiting from growing demand for capital-efficient solutions from insurers operating in the pension risk transfer (PRT) and annuity sectors. We also expect it to provide asset reinsurance solutions to US fixed annuity writers, including multi-year guaranteed annuity (MYGA) and indexed annuity products, following strong growth in this market over the last year.
Successful realisation of its business strategy in UK and US PRT and fixed annuity segments could improve Warwick’s diversification from its currently ‘Less Favourable’ assessment, in line with other UK annuity writers.
Strong Capital Adequacy: Warwick’s strong capital position is driven by an ‘Extremely Strong’ score on Fitch’s Prism Factor-Based Capital Model (Prism FBM) over the two-year projection period. However, the Prism FBM score is sensitive to the amount of capital available to support growth, specifically the disbursement of committed capital from investors, and to the fully invested fixed-interest asset allocation by credit rating. In addition, we expect Warwick’s Bermuda solvency capital requirement (BSCR) to remain above 300% under Scenario Based Approach framework. The company has no financial leverage, which we see as credit-positive.
‘Good‘ Financial Performance and Earnings: We expect Warwick’s financial performance and earnings to be ‘Good’ over the first two years with net income return on equity (ROE) of 10%-15% in the second year. Financial performance is largely a function of business volumes and net-spread assumptions. The latter is a function of sourcing appropriate credit assets in sufficient volumes. We also view positively the fairly low fixed expense base, which reduces sensitivity of financial results to lower sales volumes.
Investment Risk Manageable: We assess investment and asset risk as ‘Good’, based on Warwick’s targeted average rating of ‘A-‘ to ‘BBB+’ on its credit risk exposure. However, we expect a fairly high portion of ‘bbb’-rated assets in the portfolio, broadly in line with UK bulk purchase annuity (BPA) writers. We view positively that Warwick’s investment activity will be governed by the limits set by the investment mandate from the cedant.
‘Very Strong‘ ALM: We assess Warwick’s assets/liabilities mismatch (ALM) policy as ‘Very Strong’, and expect cash flows from assets and liabilities to be closely matched, minimising interest-rate risk. We also expect Warwick to match its assets and liabilities by duration.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
–The ratings could be upgraded if Warwick is able to achieve its business plan over a sustained period
However, we view an upgrade as unlikely within the next two years
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–Failure to complete new business transactions over the two-year projection period at a level broadly in
line with Warwick’s long-term business plan
–A substantial weakening in Warwick’s capitalisation as indicated by a fall in its Prism FBM score to
below ‘Very Strong’
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.