Ratings Roundup: Island Heritage, Patria Re

June 2, 2011

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Cayman Islands-based Island Heritage Insurance Company, Ltd., both with stable outlooks. The ratings of Island Heritage reflect its “solid level of risk-adjusted capitalization, favorable operating results, experienced management team and local market expertise,” said Best. The positive rating factors are “derived from Island Heritage’s solid underwriting results and historically positive investment income, which have led to organic surplus growth in four of the last five years, as well as a strong five-year average combined ratio. The management team at Island Heritage has extensive knowledge of each island and maintains effective risk management strategies.” Best also pointed out that the company “focuses on the unique needs of the Caribbean property owner and designs its programs to provide the depth of cover needed. In addition, the level of catastrophe risk is mitigated by Island Heritage’s reinsurance program, which was enhanced significantly following the severe events of 2004 and 2005.” Best explained that this “revised reinsurance structure protects the company’s capital from both the frequency and severity of events in a relatively more efficient and effective manner.” As partial offsetting factors best cited Island Heritage’s “geographic concentration, substantial dependency on reinsurance, competitive market and local regulatory risk. The company’s geographic concentration in the Caribbean exposes Island Heritage to storm and hurricane activity, as evidenced during 2004, 2005 and 2008, when the Caribbean was impacted by multiple hurricanes in a single season.” However, Best added, “the losses from these inevitable natural events are kept at a manageable level due to the company’s extensive reinsurance program. Although Island Heritage is heavily dependent on reinsurance, this risk is partially mitigated by the reinsurance capacity available from its majority owner, Flagstone Reinsurance Holdings S.A. Further contributing to the offsetting rating factors is the competitive landscape in the Caribbean insurance market. The outlook recognizes the expectation that Island Heritage will continue its recent trends of profitability and performance, which are supportive of its current ratings.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Mexico’s Reaseguradora Patria, S.A.B.(Patria Re), both with stable outlooks. The ratings reflect Patria Re’s “solid risk-adjusted capitalization, consistent overall underwriting performance in recent years and management’s local and regional market expertise,” Best explained. Patria Re is a reinsurer mainly in the Latin American and Caribbean markets and is “focused on the prudent management of its underwriting risk in these regions. As a result of its comprehensive domestic and regional knowledge, Patria Re has established a strong niche position in Mexico and Latin America, which allows it to selectively accept profitable business while maintaining a diversified product portfolio tailored to specific markets.” Best indicated that this “strategy has resulted in favorable overall underwriting results in recent years, and Patria Re has continued to enhance its risk-adjusted capitalization.” As partial offsetting factors Best noted Patria Re’s “limited financial flexibility, elevated expense structure, which is driven by acquisition costs associated with its portfolio mix, concentration of equity holdings in its investment portfolio and exposure to frequent and severe catastrophic losses.” In addition, Best pointed out that Patria Re’s “risk profile has changed in recent years as a result of its exposure to European and Asian risks. While this affords Patria Re some additional geographic diversification in its operations, it is accepting risk in relatively new markets.” Best said it would “continue to closely monitor Patria Re’s experience with these contracts for any adverse developments.”

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