The outlooks for Bermudian-based Everen Specialty Ltd and its affiliate, Ocil Specialty Ltd, have been revised to negative from stable by AM Best.

The move comes after the ratings agency noted declining risk-adjusted capitalisation and unfavourable reserve development.

The credit ratings agency affirmed the financial strength rating of A- (Excellent) and the long-term issuer credit rating of “a-” (Excellent) for the two organisations.

Concurrently, AM Best said it had revised the outlook to negative from stable and affirmed the long-term issue credit rating of “bbb” (Good) on the $200 million, 8.00 per cent deferrable subordinated debentures, due 2034 of Everen Specialty.

The agency said these credit ratings reflected Everen Specialty’s balance sheet strength, which AM Best assesses as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.

It said the revision in the outlooks to negative from stable reflects the impact of Everen Specialty’s declining risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio, which was assessed at the strong level, moving down from the strongest level in prior years.

AM Best said the deterioration in the measure was mostly due to the overall levels of capital, which have consistently declined over the past five years.

While capitalisation remained sufficient to support the company’s strategic diversification efforts, operating losses have eroded capital buffers over the past year, which further declined in 2022 due to investment losses.

In addition, reserve development over the past four years has been unfavourable, further pressuring balance sheet strength.

The agency said Everen Specialty’s operating performance was marginal, mostly driven by underwriting performance that has been volatile over the past five years, as the company experienced occasional shock losses.

However, the company does use reinsurance and limit management cover to mitigate its exposures.

AM Best said Everen Specialty’s reinsurance programme has been proven effective in reducing some of the volatility. Investment returns have hedged underwriting losses over four of the past five years; however, in 2022 rising interest rates led to net unrealised losses.

The neutral business profile is supported by a management team that is seasoned, with its members having experience in the insurance, financial and energy industries, as well as strong distribution channels.

This is further supplemented by the company’s mission to be a diversified multi-line, stable capacity provider for the energy industry, AM Best said.

However, if the diversification and growth initiatives fail to meet the company’s expectation, the business profile could be pressured.

Everen Specialty’s ERM assessment of what is appropriate reflects an established risk framework with governance committees that focus on all aspects of risk emergence, reporting and mitigation, with the added benefit of its member’s knowledge base.

AM Best said it would closely monitor the status of the company’s capital levels and its ability to meet its forecast over the short term, through year-end 2023.

Furthermore, diversification and growth initiatives will need to prove to be additive and beneficial to the group’s operating performance over the intermediate term.

Negative rating actions could result from a continued reduction in Everen Specialty’s risk-adjusted capitalisation, the agency said.