Safepoint under AM Best ratings review, a potential cat bond candidate

Florida headquartered and coastal property focused U.S. primary insurer Safepoint has had its ratings placed under review with negative implications by AM Best, who cited leverage related pressures from the holding company.

AM Best said that both the Financial Strength Rating of B- (Fair) and the Long-Term Issuer Credit Rating of “bb-” (Fair) of Safepoint Insurance Company have been placed under review with negative implications.

Further explaining that the success of a near-term capital management plan for its holding company, Safepoint Holdings, Inc, which should alleviate some of the pressures is vital, or the insurer could find itself downgraded.

Safepoint’s surplus is down this year and we’re told that the carrier has faced some challenges at its mid-year reinsurance renewal as a result.

In fact, the carrier is among those cited by market sources as possibly considering the issuance of an additional catastrophe bond, or the purchase of some additional reinsurance, as part of its plans to restore surplus and reduce financial pressures.

As we’ve been explaining in our writing recently, sources tell us that a number of Florida based insurers remain under severe financial pressure, largely due to reduced surplus and inadequate financing.

Some are said to have failed to secure as much reinsurance as desired, or needed, at the June 1st renewal, as they faced particularly onerous terms, and we’re told this could lead to additional purchases, or even some higher-layer catastrophe bonds being launched in the coming weeks, as they try to make up surplus.

With the cat bond market seen as particularly attractive for sponsors right now, due to elevated investor demand, adding top-layer cat bonds to reinsurance towers that have fallen short is seen as a viable option for carriers under surplus pressure, our sources said.

Safepoint is one of the companies that have come up in relation to these discussions, although we must highlight we cannot be certain of its plans to remedy the financial situation and whether more reinsurance or potential cat bonds are part of it.

AM Best explained that, with Safepoint, “Unfavorable pressure from the holding company, as it relates to the insurance company’s overall balance sheet strength, has increased due to equity erosion and outstanding debt, which exceeds AM Best’s threshold for what is considered a neutral level of financial leverage.”

The rating agency went on to say that the proposed capital management plan is “expected to alleviate the aforementioned pressure.”

But added that, “Should these plans not materialize within the expected timeline, negative rating action may follow.” Saying that, “The ratings will remain under review until management finalizes and executes this plan and AM Best evaluates the impact on the overall organization.”

Safepoint had $240 million of reinsurance limit from catastrophe bonds, provided by the $40 million Manatee Re III Pte. Ltd. (Series 2019-1) transaction and its $200 million Manatee Re II Ltd. (Series 2018-1) cat bond.

However, the Manatee Re II 2018-1 cat bond is scheduled for maturity this month, reducing the carriers’ capital markets backed reinsurance considerably.

As a result, a return trip to the cat bond market could be on the cards. Although we would normally have anticipated that happening in advance of the expiration of its in-force cat bond deal.

But if reports that Safepoint was among those facing a little more challenging reinsurance renewal conditions are correct, we could well see thee carrier returning given attractive cat bond pricing conditions.

Interestingly, rating agency Demotech affirmed an A, Exceptional rating for Safepoint Insurance Company back in December 2020, citing “exceptional financial stability related to maintaining positive surplus as regards policyholders, liquidity of invested assets, an acceptable level of financial leverage, reasonable loss and loss adjustment expense reserves (L&LAE) and realistic pricing.”

However, Safepoint’s policyholder surplus has declined through the first quarter of 2021, dropping roughly 7% from the end of the previous year.

That could be a sign of the pressure from the holding company financing, eroding surplus somewhat and perhaps now leading to a need for remedial actions to restore the levels of leverage etc that AM Best deems appropriate for its rating to be maintained.