AM Best Removes From Under Review With Negative Implications and Affirms Credit Ratings of Aegis Security Insurance Company

OLDWICK, N.J.–(BUSINESS WIRE)–AM Best has removed from under review with negative implications
and affirmed the Financial Strength Rating of A- (Excellent) and the
Long-Term Issuer Credit Rating of “a-” of Aegis Security Insurance
Company (Aegis) (Harrisburg, PA). The outlook assigned to these Credit
Ratings (ratings) is negative.

The rating actions reflect Aegis’ balance sheet strength, which AM Best
categorizes as very strong, as well as its adequate operating
performance, neutral business profile and marginal enterprise risk
management. The rating actions also reflect the company’s unfavorable
trend in balance sheet strength, as well as the pending bifurcation from
the current ownership organization, K2 Insurance Services LLC (K2).

The assigned negative outlooks reflect the unfavorable trends in balance
sheet strength, stemming from elevated growth in recent years. While
risk-adjusted capitalization has remained supportive of the very strong
assessment, in recent years, the company has experienced rising
underwriting leverage ratios due to premium growth outpacing surplus
growth. In 2018, the company experienced elevated catastrophe losses
from the California wildfires, which were mitigated ultimately by
subjugation right sales and capital contributions by the ultimate parent
company, K2. While the management team was able to reduce the losses
substantially through creative deal sourcing, the large losses following
periods of elevated growth bring uncertainty to the future profitability
of the business. Operationally, prior to 2018, the company reported four
consecutive years of combined ratios below 100% mainly due to net
investment income.

Management has implemented a number of corrective actions to improve
risk management and underwriting within its book of business. These
actions include enhanced modeling, exposure mitigation efforts, new
underwriting restrictions and non-renewal of some higher-risk business.
In May 2019, the ownership group announced the sale of majority
ownership in K2 to Lee Equity Partners. This sale does not include
Aegis, which will be spun off under the current owners of Patrick
Kilkenny and Endevour Capital. Going forward, Aegis will continue to
provide premium capacity at pre-specified levels for K2. AM Best will
monitor the company’s results closely, and resolution of the negative
outlooks is contingent upon the company’s ability to demonstrate a
reversal of the current balance sheet strength trends, primarily the
growth in underwriting leverage ratios.

This press release relates to Credit Ratings that have been published
on AM Best’s website. For all rating information relating to the release
and pertinent disclosures, including details of the office responsible
for issuing each of the individual ratings referenced in this release,
please see AM Best’s Recent
Rating Activity web page. For additional information
regarding the use and limitations of Credit Rating opinions, please view Understanding
Best’s Credit Ratings. For information on the proper media
use of Best’s Credit Ratings and AM Best press releases, please view Guide
for Media – Proper Use of Best’s Credit Ratings and AM Best Rating
Action Press Releases.

AM Best is a global rating agency and information provider with a
unique focus on the insurance industry. Visit www.ambest.com
for more information.

Copyright © 2019 by A.M. Best Rating Services, Inc. and/or its
affiliates. ALL RIGHTS RESERVED.

Contacts

Dan Hofmeister, CFA
Financial Analyst
+1 908
439 2200, ext. 5385
dan.hofmeister@ambest.com

Joe Burtone
Director
+1 908 439 2200, ext.
5125
joseph.burtone@ambest.com

Christopher Sharkey
Manager, Public Relations
+1
908 439 2200, ext. 5159
christopher.sharkey@ambest.com

Jim Peavy
Director, Public Relations
+1 908
439 2200, ext. 5644
james.peavy@ambest.com