Somerset Reinsurance Ltd. Outlook Revised To Positive On Improved Capital Position; 'BBB+' Ratings Affirmed

The positive outlook reflects our view of Somerset's improved financial risk and capital position following an equity infusion and prospective capital commitments from its controlling partner, Aquarian Holdings (not rated), to support planned growth. The revised outlook also incorporates the company's new commitment to maintaining capital at a higher confidence level while maintaining its business growth and prudent risk management policies.
However, despite the capital adequacy improvement, we maintained our ratings because we continue to monitor the company's operating performance, which has historically been volatile and weaker than that of higher-rated peers. The positive outlook reflects our expectation that Somerset's earnings power will expand and demonstrate stability over a longer period, with capital maintained at an excellent confidence level, given new business, investment trends, and macroeconomic uncertainties.
Somerset was established in 2014 and is a relatively new entrant in the life reinsurance space. However, it has executed on its submitted business plan and has grown significantly with several new transactions in the past few years. The deal it announced with Prudential in 2023, which is now closed, diversified its liabilities and significantly increased its scale. We believe the prospective earnings at Somerset would be concentrated and reliant on this block's performance and continue to monitor its integration and contribution to the company's earnings predictability and scale.
Somerset's satisfactory competitive position reflects this record of closing new transactions with high-profile primary insurers, which is consistent with its growth strategy. The company has unique solutions for asset-intensive and interest-sensitive annuity and life blocks. Our ratings on Somerset incorporate its strong relationships with primary carriers, which have helped it gain traction and compete with the larger life reinsurance market participants. However, we view the company's focus on growth through acquisitions of blocks of business, which are largely asset-intensive, as limiting its competitiveness.
Risks persist in potential reserve volatility, earnings stability, capital and dividend management, and the company's acquisitive strategy, which makes deal volume and activity difficult to project, and the integration of acquired blocks. While the company has demonstrated disciplined underwriting, prudent risk management and investment, and deep expertise in underwriting complex liabilities, each block is subject to policyholder behavior assumptions and other market-related risks. As a result, we selected the lower of our 'a-/bbb+' split anchor to reflect our view of its financial risk.
Our positive outlook reflects our expectations that Somerset will demonstrate expanding and stable earnings while executing its business plan and growth strategy, maintaining capital at a higher confidence level, and continuing prudent underwriting and risk management practices.
We could revise our outlook to stable if the company's operating performance remained volatile and weaker than that of higher-rated peers. We could also lower the ratings if we came to view Somerset's ability to close on new transactions as impaired, if its capitalization declined below the 99.80% confidence level and was expected to remain there, or if we deemed the company's risk management practices insufficient.

Upside scenario

We could raise our ratings in the next 12-24 months if we believe the company demonstrates consistent earnings generation capabilities, as higher-rated peers have, while maintaining capital adequacy at the 99.99% confidence level of our model, continuing its growth strategy, and avoiding any aggressive investment.