Rating agency AM Best has revised its outlook on Bermudian reinsurer Ariel's start-up subsidiaries, Valiant Insurance and Valiant Specialty, from stable to negative, as soft market conditions in the US continue to hit the unit's premium volume.
Ariel Re bought admitted US insurer Valiant for $26mn in September 2007 from Zurich North America Commercial Group, and established a US-based insurance holding company, Valiant Insurance Group.
Softening underwriting conditions in the US are driving the sluggish results at Valiant. AM Best said its outlook downgrade reflects its view that the challenging rate environment and competitive conditions "could potentially continue to produce results below expectations".
Valiant accounted for a 1.2 percent loss of Ariel's total net income of $372.3mn in 2009.
Valiant's performance metrics have already fallen below AM Best's expectations, but the firm explained that this was due to the volatility inherent in start-up companies. However, the unit has been viewed by observers as something of a fly in the ointment for Ariel, and was cited as one of the major negatives that helped scupper the reinsurer's proposed tie-up with fellow Bermudian Aspen at the start of the year.
Meanwhile, the rating agency affirmed the financial strength rating of A- (Excellent) and issuer credit ratings (ICR) of a- for Ariel Re, Valiant Insurance and Valiant Specialty. Parent holding company Ariel Holdings saw its ICR of bbb- affirmed. The outlook for the ratings of Ariel Re and Ariel Holdings is stable.
"Since formation, Ariel Re has demonstrated a disciplined technical underwriting approach resulting in loss and combined ratios that were favourable and in line with its peer group," the rating agency said.
The class of 2005 reinsurer - formed in the wake of Hurricane Katrina with $1bn in capital - has been keen to diversify from pure catastrophe (re)insurance. In July 2007, it bought Lloyd's insurer Atrium Underwriting for £193mn.
But AM Best pointed out that its strengths as a property catastrophe writer are still offset by its exposure to high severity, low frequency events.
Nevertheless, the stable outlook on the ratings for Ariel Holdings and Ariel Re reflects the rating agency's expectation that underwriting results should benefit from an "adequate, albeit lower" pricing environment in property catastrophe reinsurance, which is Ariel's largest line of business.