Western World Insurance Company, the US insurer acquired by Bermuda-based Validus Holdings Ltd last month, has been downgraded by ratings agency AM Best.

Best said last night that it had cut the financial strength rating of the pooled members of the Western World Insurance Group to A (excellent) from A+ (superior).

Validus completed the $690 million acquisition of Western World on October 2.

“While recognising the additional financial flexibility and the potential benefits afforded to Western World by being part of a larger, publicly traded Bermuda-based global (re)insurance organisation, these rating actions are largely based on the deterioration of Western World’s underwriting and operating results over the last five years,” Best stated.

“Although still profitable, Western World’s combined ratios have been consistently above 100 percent during this time frame and are not in line with AM Best’s expectations of companies at the superior rating level.

“In addition, net income levels have trended downward and have been heavily supported by net investment income in recent years. This deterioration has been driven in part by underperforming lines and high expense ratios.

“Management has been addressing these issues through corrective actions, but these will take some time to fully come to fruition. These actions carry execution risk as well.”

Best pointed out that despite the downgrades, Western World has a strong level of risk-adjusted capitalisation and “a strong leadership position in the US excess and surplus lines sector”.

Best added: “Post-acquisition by Validus, Western World’s current management team has largely remained intact, and Western World will continue to operate as a separate entity under Validus.

“From a strategic standpoint, this should allow Validus to enhance and expand its business profile by providing a US specialty commercial insurance distribution platform.”

The ratings apply to Western World Insurance Company, Stratford Insurance Company and Tudor Insurance Company.