Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on Oil Casualty Insurance Ltd. (OCIL) to ‘A-‘ from ‘A’, while maintaining a stable outlook.
“The rating action reflects the potential for future increases in loss exposure from OCIL’s growing, diversified membership base as well as the low-frequency, high-severity nature of the risk that OCIL underwrites,” said S&P. “OCIL’s elevated attachment points and use of reinsurance have mitigated the past increases in OCIL’s loss exposure. Although OCIL’s heavy dependency on reinsurance has effectively cushioned the company’s capital base, it has also limited the company’s ability to produce strong operating earnings.”
S&P also noted that “OCIL’s investment portfolio has historically included a meaningful level of equity securities (currently about 50 percent of the invested assets) that continues to present a risk that market volatility will depress capital levels at a time when underwriting losses are incurred. Capital — in terms of both absolute levels and risk-adjusted levels — is considered strong.”
S&P said it maintains a stable outlook on OCIL “because the company anticipates pursuing various forms of conventional reinsurance, securitized reinsurance, and other capital management strategies that have the desired aggregate objective of offsetting additional net retained risk from a growing membership base by strengthening the capital position.”
The major rating factors cited by S&P are summarized as follows:
— Competitive position. OCIL offers high excess-of-loss protection on general liability and, to a lesser extent, director and officers coverages for a select group of companies that are also its shareholders.
— Limited risk retention. OCIL’s umbrella general liability reinsurance program improved in lowering its net retention in 2004 from 2003 and decreased its reinsurance cost.
— Aggressive investment philosophy. OCIL pursues a total return strategy, allocating half of its investment mix to equity securities.
— Volatile operating performance. Although reinsurance has provided effective capital protections, the high and variable costs of reinsurance have been a major source of volatility in underwriting results over the last several years.
— Strong capital adequacy. OCIL’s capital adequacy ratio, stressed for large losses, was an estimated 135% as of May 31, 2004, which is considered strong.
— Strong financial flexibility. OCIL enjoys strong financial flexibility, using modest amounts of leverage (14.6 percent as of May 31, 2004) to support short-term cash needs.
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