A.M. Best Co. has assigned a financial strength rating of A (Excellent) and issuer credit rating of “a” to Palms Insurance Company, Limited (Palms) (George Town, Cayman Islands). The outlook assigned to both ratings is stable.
The ratings reflect Palms' excellent risk-adjusted capitalization, history of consistently strong operating performance, sound risk management capabilities and conservative balance sheet strategies. The ratings also recognize its history of maintaining sufficient capital and financial resources to support its ongoing obligations.
Partially offsetting these positive rating factors are Palms' limited market scope and high net loss potential stemming from a single, severe occurrence relative to surplus. Nevertheless, this is somewhat mitigated by the company’s excellent loss history, favorable geographic spread of risk and the history of support of Palms’ strong surplus position by its parent, NextEra Energy Capital Holdings, Inc. (NEECH). Somewhat offsetting these positive rating factors are the fact that Palms depends on third parties for processing, servicing and administration. Nonetheless, the senior management of its ultimate parent, NextEra Energy Inc. (NEE) [NYSE: NEE], is intimately involved in these operations.
Palms is a single parent or pure captive insurer wholly owned by NEECH, which in turn is wholly owned by NEE; hence, Palms insures select risks for NEE. Palms accepts insurance risks only from NEE and its affiliates, providing specialized direct and assumed property and casualty coverages, workers' compensation, automobile liability and employers’ liability and property risk. Although Palms participates in a range of coverages for very large risks, these risks are underwritten with tight guidelines and significant loss control measures by the insured affiliates.
Palms has consistently produced profitable net operating earnings resulting from underwriting experience and investment income in each year of the past decade through December 31, 2012. Its balance sheet strength has been bolstered through substantial retained earnings. Over the past five years, returns on surplus have averaged 18.7%, despite dividend payments in 2011 and 2010 totaling $40 million to its sole shareholder. A.M. Best believes Palms is well positioned to sustain a superior level of operating performance due to its demonstrated risk management expertise and conservative underwriting criteria, hence the assigned outlook of stable.
Positive rating actions on Palms appear unlikely at this time. The potential for future volatility is reflected in the current rating level. Nonetheless, downward rating pressure could result from weakened free cash flow, a decline in the company’s liquidity levels, an increase in underwriting leverage and/or outsized catastrophe or investment losses in conjunction with a significant prolonged decline in risk-adjusted capitalization. In addition, financial issues resulting in rating pressure on NEECH could impact Palms' ratings.
A.M. Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world.
For current Best’s Credit Ratings and independent data on the captive and alternative insurance market, please visit www.ambest.com/captive.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Alternative Risk Transfer (ART)”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding Universal BCAR”; and “Catastrophe Analysis in A.M. Best Ratings.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2013 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.
A.M. Best Co.
Alexander Sarfo, 908-439-2200, ext. 5779
Senior Financial Analyst
Steven Chirico, CPA, 908-439-2200, ext. 5087
Assistant Vice President
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
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