AM Best has removed from under review with positive implications and affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" of GBG Insurance Limited (Guernsey). The outlook assigned to the FSR is stable, whilst the outlook assigned to the Long-Term ICR is positive. GBG Insurance Limited is a wholly owned subsidiary of GBGI Limited (GBGI), its non-operating holding company, which consolidates the GBG group (GBG).
The Credit Rating (rating) actions follow the close of the acquisition of GBGI by Elm Bidco, L.P. (Bidco) on 20 February 2019, and the completion of AM Best's analysis of GBG's revised business plans and their impact on its rating fundamentals. Bidco is a Cayman Island-exempted limited partnership that is controlled by affiliates of Further Global Capital Management, L.P., a firm that manages private equity funds that invest in the financial services industry.
The positive outlook assigned to the Long-Term ICR reflects AM Best's expectation that GBG's balance sheet strength will improve in the medium term due to strengthening of its risk-adjusted capitalisation. Additionally, there have been a number of new appointments in the company's leadership team, which could lead to improvements in its enterprise risk management (ERM).
The ratings reflect GBG's balance sheet strength, which AM Best categorises as strong, as well as its strong operating performance, limited business profile and marginal ERM.
GBG's balance sheet strength is underpinned by risk-adjusted capitalisation, which AM Best expects to be maintained at the strongest level in the medium term, as measured by Best's Capital Adequacy Ratio (BCAR), supported by the retention of future earnings. Partially offsetting factors are GBG's relatively small capital base and moderate dependence on reinsurance. The company's risk-adjusted capitalisation was lower than anticipated at year-end 2018 but recovered in the first quarter of 2019 to a level comfortably above minimum requirements for the strongest assessment, benefiting from a USD 10 million capital injection by the new shareholders.
GBG has a track record of producing strong operating results, as demonstrated by its weighted average combined ratio of 92.1% and a return on equity of 17.1%, reported between financial years 2015 to 2018. The company has reported an elevated expense ratio of approximately 43% in each of the past two years, due to the impact of one-off events and non-recurring fees, some of which are expected to continue into 2019. Nonetheless, underlying profitability remains strong, and AM Best expects GBG's technical results to return to a normalised level in the medium term, with a combined ratio in the mid-90s range. Investment results are modest in view of the company's conservative asset allocation.
AM Best's assessment of GBG's business profile reflects its relatively small, but growing, size and its low-risk insurance portfolio comprising of short-tail health and life products. The company maintains good geographical diversification but faces material competition from larger international players.
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