LONDON--(BUSINESS WIRE)--A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Casiopea Re S.A. (Luxembourg). The outlook for both ratings remains stable.
The ratings of Casiopea Re reflect its strong risk-adjusted capitalisation, which is underpinned by a comprehensive retrocession programme, as well as a good, albeit relatively volatile, financial performance.
Offsetting factors are the weaker domestic position of its parent company, Telefónica S.A. (Telefónica), which operates in a challenging macroeconomic environment and also has a high debt position.
Casiopea Re's risk-adjusted capitalisation is expected to remain very strong over the next two years benefiting from a comprehensive retrocession programme that provides good protection to its balance sheet. However, in 2012, Casiopea Re saw a reduction in shareholders’ funds of about 25%, as a result of the repatriation of previously injected capital to its parent in the amount of EUR 80 million, which was indeed in excess of capital requirements. In addition, there was a reallocation of about EUR 31 million from Casiopea Re’s free reserves into the capital of Telefónica Insurance (a sister company). The reduction in shareholders’ funds has, however, been mitigated by a decrease in risk-adjusted capital requirements.
Casiopea Re's financial performance remained good in 2012, with a return on capital and surplus of 5.1% (1.7% in 2011), mainly driven by a very good investment performance in 2012. Casiopea Re’s investment return (including realised and unrealised gains) was 7.4% in 2012. However, underwriting performance was rather weak with the first underwriting loss in the last 10 years due to a number of large losses stemming from business underwritten in Latin America. In 2013, Casiopea Re is expected to again achieve a good underwriting performance, as long as it is not affected by major catastrophic events.
An offsetting rating factor is Telefónica’s weaker domestic position combined with a challenging macroeconomic environment that is affecting its revenues and profitability. In addition, Telefónica has high debt levels that are being progressively reduced by the sale of a significant amount of assets.
Positive rating movements are unlikely at present. Negative rating actions could occur if Casiopea Re’s underwriting profitability were to continue to deteriorate and/or a significant reduction in risk-adjusted capitalisation were to take place.
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The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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