Ratings Recap: Ocean Re, RoyalStar, Echelon

January 28, 2014

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and an issuer credit rating of “a-” to Barbados-based Ocean International Reinsurance Company Limited, both with stable outlooks. Best said its ratings for Ocean Re are “based on its solid risk-adjusted capital position, favorable operating performance and liquidity measures as well as its low operating cost structure. The ratings also consider the company’s experienced management team, which is familiar with the risks and the region Ocean Re operates in.” As partial offsetting factors Best cited “Ocean Re’s limited market position and financial flexibility as a result of its private ownership structure.” Best said the stable outlook is based on its “expectation that the company will maintain its strong capitalization and operating performance. Ocean Re focuses on reinsurance and offers a diversified product mix in several countries throughout Latin America. The company also offers facultative programs that are fully funded to the expected ultimate losses by the company’s clients. Ocean Re’s management is committed to growth in capital, a well-diversified investment portfolio and a focus on its long-term stability.” Best added that it “anticipates that Ocean Re will continue to report profitable underwriting results and will maintain solid capitalization levels. Although the outlook for Ocean Re’s ratings is stable and the ratings are not expected to be upgraded nor its outlook revised within the next 12-24 months (since its performance and capital position have already been considered in the ratings).” Best added that it “could downgrade the ratings and/or revise the outlook if the company’s Best Capital Adequacy Ratio (BCAR) declines, its operating performance and risk profile deteriorate, or losses from claims or investments erode capital.”

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb+” of Echelon General Insurance Company, both with stable outlooks. Best also affirmed the ICR of “bb+” of Echelon’s publicly traded parent, EGI Financial Holdings Inc., but has revised the outlook for EFH’s ICR to negative from stable. Both companies are domiciled in Mississauga, Ontario. “The ratings and outlook for Echelon are based upon the company’s historically profitable operating results, good risk-adjusted capitalization and low exposure to catastrophic loss,” Best explained. “As primarily a non-standard auto insurer, the company has minimal property loss exposure due to a catastrophic event of any appreciable size. The ratings also consider that the parent holding company is publicly traded on the Toronto Stock Exchange, affording potential greater financial flexibility.” These positive rating factors, however, “are partially offset by Echelon’s varied underwriting results, concentration in the Ontario non-standard auto market, strong competitive market pressures and soft market pricing conditions in other lines of business,” Best said. “The ratings of EFH are based primarily on the overall financial strength of its operating insurance company, Echelon. In addition to Echelon, EFH is the parent of CIM Reinsurance Company Ltd, a Barbados captive reinsurer, CUISA Managing General Agency Corporation, a British Columbia specialty insurance agency, and Qudos Insurance A/S, a vehicle for growing non-standard auto and program business primarily in the United Kingdom and Denmark.” Best said the “revised outlook for EFH’s ICR reflects the potential challenges EFH may face given the substantial projected net premium written growth of these entities and their potential impact on the overall financial strength of the organization.” Best said it would “continue to closely monitor the progress of these companies.” In addition Best noted that the “ratings and outlook of EFH and/or Echelon could benefit from a consistently favorable earnings trend that outperforms peers in the long term while maintaining strong risk-adjusted capitalization. However, the ratings and outlook of EFH and/or Echelon may come under negative pressure if an unfavorable earnings trend develops, underwriting and financial leverage increases significantly and/or risk adjusted capital erodes.”

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating to “a” from “a-” of Bahamas-based RoyalStar Assurance Limited (RSA), both with stable outlooks. Best explained that the “rating upgrades reflect RSA’s consistent operating and overall profitability, long-term maintenance of its excellent risk-based capitalization levels and its proven risk management strategies. RSA’s risk management strategies include a prudent underwriting philosophy, which has resulted in a resilient underwriting performance that places the company among the top performers in the Caribbean region.” Best also noted that “RSA writes all of its business in the Caribbean, which exposes it to frequent and severe weather-related events. Although this makes RSA dependent on reinsurance as part of its overall risk management strategy, its panel of high quality reinsurers mitigates much of this credit risk.” As partial offsetting factors Best cited “RSA’s geographic concentration, aforementioned dependency on reinsurance and exposure to severe weather-related catastrophes, as well as sluggish economic conditions in the Bahamas. Furthermore, the Bahamas and other Caribbean insurance markets have become increasingly competitive as indigenous and outside insurers seek to gain market share in the region.” In conclusion Best said it “believes that RSA is well positioned at its current rating level, and the ratings are not expected to be upgraded and/or its outlook revised in the near term. Key rating drivers that may lead to negative rating actions include a decline in risk-adjusted capitalization or prolonged adverse operating results that are exacerbated by a series of large catastrophic events. Positive rating triggers include continued strong underwriting results in conjunction with surplus appreciation and improvements in the Bahamas’ macroeconomic environment.”

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