Meadowbrook Insurance Group, a U.S. specialty property and casualty insurance group, has tasked itself with looking at ‘reinsurance alternatives’ in an effort to resolve a review of its ratings instigated by A.M. Best. Best has placed the financial strength ratings and issuer credit ratings of Meadowbrook subsidiaries and Meadowbrook itself’s ICR under review with negative implications due to increases in the groups ultimate net loss experience from 2011 and prior years.
The review was triggered by an announcement that Meadowbrook’s third quarter 2012 results would be impacted by increase in UNL estimates for 2011 and prior years. Best says the negative implications on the rating review reflects the likelihood that the ratings will be downgraded based on worse than expected operating results, a reduction in risk adjusted capital levels and potentially impacted earnings going forwards.
Meadowbrook and its subsidiaries operate with an intercompany reinsurance pooling agreement which may have some bearing on this. It may mean that losses have been concentrated within the group, rather than being transferred to other parties.
To attempt to ward off any rating downgrade, Meadowbrook has announced that they are looking at various ways to improve their capital adequacy including an evaluation of what they are terming ‘reinsurance alternatives’. Meadowbrook has retained Willis Capital Markets & Advisory unit to assist them with this.
Robert S. Cubbin, Meadowbrook President and Chief Executive Officer, said; “We are in the process of evaluating various reinsurance alternatives and other strategies designed to optimize our Best’s Capital Adequacy Ratio. We are cooperating and working with A.M. Best to address their concerns in a timely manner. We have retained Willis Capital Markets & Advisory to assist us in reviewing our various strategies to respond to the current situation.”
Quite what ‘reinsurance alternatives’ refers to we can’t be sure, but it is likely that Meadowbrook will be looking at ways to offload risk from their intercompany reinsurance pool or tap new sources of reinsurance as part of this exercise. That could involve retrocession, collateralized sources of reinsurance or even insurance-linked securities or catastrophe bonds. With the assistance of Willis Capital Markets team all of these options, and other financing mechanisms will likely be assessed and on the table. Given the current appetite for risk in the capital markets this may be an opportune time for Meadowbrook to tap into collateralized, capital market backed sources of risk transfer.