OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of Colonnade Insurance S.A. (Colonnade) (Luxembourg), a member of Fairfax Financial Holdings Limited (Fairfax) [TSX: FFH] group of companies. The outlook of these Credit Ratings (ratings) is stable. The existing ratings of Fairfax and its other subsidiaries are unchanged.
The ratings reflect Colonnade’s balance sheet strength, which AM Best categorizes as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
Colonnade’s balance sheet strength benefits from the explicit and implicit support provided by Fairfax. This support includes a track record of maintaining capital in the form of contributions and a legally binding guarantee, investment management services and ERM expertise. Fairfax’s commitment to Colonnade’s strong risk-adjusted capital position was evident in multiple capital contributions over its operating history, the most recent of which was a EUR 10 million contribution made in 2019. Colonnade’s risk-adjusted capitalization has been reliant on support from Fairfax over the past few years. Going forward, AM Best expects that the company will be able to support its business needs though organic capital generation, as it implements growth plans and continues to absorb startup costs.
Colonnade’s premium volume grew rapidly from 2016 through 2018, its first three years under Fairfax ownership, as a result of the rollover of books of business previously written by the operations of QBE Insurance Group Limited and American International Group, Inc. The risk associated with Colonnade’s premium growth in its first few years of operation was moderated by Colonnade’s high retention level of the management and staff that wrote the business under the former owners. The pace of growth has moderated in 2019, which is the first calendar year to reflect year-over-year comparisons representing Colonnade’s complete underwriting portfolio.
Colonnade’s adequate operating performance has been driven by its favorable loss performance, which was offset by the initial costs incurred in its developmental stage with expenses outpacing premium. This performance was in line with the company’s business plan and has steadily improved as start-up costs have subsided. Colonnade generated a modest underwriting profit in 2018 and was on pace to improve upon this result through the first nine months of 2019, due to continued improvement in loss and underwriting expense ratios.
The company’s neutral business profile reflects its concentration in the Central and Eastern European region, with the three largest countries (Poland, Hungary and the Czech Republic) representing about 75% of the premium written. Concentration risk is offset by the dispersion of the remaining 25% of its business in three other central European countries, and Colonnade’s diverse product offering.
AM Best considers the company’s risk management capability to be in-line generally with its risk profile, which is supported by its focus on maintaining geographic and by-line diversity of its business, conservative reserving and per risk reinsurance limits. In 2018, the company reduced its 1-in-500 years all perils probable maximum loss, which supported the improvement in the ERM assessment to appropriate. The company also has enhanced its internal ERM capabilities, with less reliance on parental support in this area.
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