A.M. Best Assigns Ratings to Palms Insurance Company, Limited
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.
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