A.M. Best Co. announced that it has assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating (ICR) of “a-” to Luxembourg-based Casiopea Re S.A., the reinsurance captive of Spanish communications provider Telefonica S.A. The outlook on both ratings is stable.
“Telefonica is a leading telecommunications operator based in Spain and with operations in Latin America and other European countries,” said Best. “Casiopea Re provides reinsurance cover to Telefonica, its subsidiaries and affiliates predominantly for property and liability risks. Additional risk acceptances include motor and a small amount of financial insurance and life.
“The ratings reflect Casiopea Re’s solid current and prospective risk-adjusted capitalization and strong operating performance. The offsetting factor is the company’s aggressive investment strategy.”
Best said it “believes that Casiopea Re’s current risk-adjusted capitalization is solid and is likely to remain at similar levels in 2006 and 2007, supported by the strong absolute level of capital and surplus (€209.6 million ($248.3 million) in 2005) which is expected to grow by an average of approximately 5-7 percent over the next two years through full earnings retention. The capital base is mainly composed of equalization reserves, which accounted for €130.8 million ($154.9 million) in 2005.
Additionally, in A.M. Best’s opinion, Casiopea Re benefits from low reinsurance credit risk associated with its outwards reinsurance program. However, the company has a moderate counterparty credit risk concentration emanating from a loan to the group, as well as shares in Telefonica and its subsidiaries.”
The rating agency also expects the reinsurer to “have a strong operating performance with pre-tax profits likely to be approximately €13-14 million ($15-17 million) over the next two years. The main drivers are likely to be good forecasted underwriting results and strong investment returns (including gains) of approximately 5 percent. A.M. Best believes that the company’s combined ratio is likely to be good and within the range of 90-95 percent in 2006 and 2007, compared to 89.8 percent in 2005.
In A.M. Best’s view, Casiopea Re’s investment strategy exposes the company’s assets to stock market volatility as approximately 30 percent of the overall portfolio was composed of equity in 2005.”
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