A.M. Best Co. has assigned a financial strength rating of “A-” (Excellent) and issuer credit rating of “a-” to Grafton (Europe) Insurance Company Limited, which is based in Malta. The outlook for both ratings is stable.

The ratings reflect Grafton’s “proposed innovative solutions aimed at improving the capital efficiency of insurance captives,” Best explained. However the “potential lack of financial flexibility in an adverse claims development environment and the implementation risks associated” with this strategy are seen as offsetting factors.

Best said it “believes that Grafton’s business model “identifies an untapped market opportunity for the niche insurance captive industry (specifically liability risks).

Grafton’s proposed solution is expected to provide capital relief to captives and their parent groups through the use of innovative solutions and the release of the captives’ run-off liability insurance portfolios.”

In Best’s opinion, Grafton is also “likely to take advantage of being the first participant in its market and having the support of internationally recognised third parties. Best also indicated that the “run-off nature of the insurance portfolios to be targeted and the prudent margins expected to be included in the pricing process are likely to reduce the volatility of results.

Grafton’s initial capital injection amounts to £50 million (app. $80 million). Grafton also has put into place a 50 per cent quota share agreement and an adverse development cover with a top rated international reinsurer (National Indemnity Company) that supports the company’s risk-adjusted capitalisation minimising its credit risk."

Best said it expects Grafton to maintain its capitalisation levels comfortably above the minimum required to support the ratings assigned under a pessimistic scenario. Nevertheless, given the implementation risks associated with start-up companies and the fact that under exceptional adverse claims circumstances, the company’s financial flexibility could be severely restricted, Grafton will be under considerable A.M. Best scrutiny as it strives to meet its business plan.