AM Best has assigned a Financial Strength Rating of B++ (Good) and a Long-Term Issuer Credit Rating of 'bbb+' to Compania Reaseguradora del Ecuador S.A. (Ecua Re) (Ecuador).
The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect Ecua Re's balance sheet strength, which AM Best categorizes as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The stable outlooks are based on the company's good growth prospects given its access to Ecuador's market through related companies.
Ecua Re was established in 1977 and is the only domestic reinsurer operating in Ecuador. The company provides reinsurance solutions for the country's domestic insurers. Its business portfolio is mostly comprised of property risks, mainly fire and auto, with a small component of casualty and life risks.
The company's largest shareholder is Hannover Re with a 30% ownership stake via its wholly owned subsidiary, FUNIS GmbH & Co. KG; eight local insurers hold 63% of the company. Ecuador's economy performed unfavorably during 2019 and 2020, but this did not affect insurance industry growth or profitability; however, AM Best will continue to assess the impact of economic conditions in the insurance market. Partially mitigating AM Best's concern over this economic environment is that Ecua Re's business profile benefits from its ownership, which provides access to quality business, while at the same time maintaining reinsurance capacity through its main shareholder.
Ecua Re's balance sheet strength is considered very strong, as risk-adjusted capitalization reflects the company's ability to manage its risk exposures, supported by a comprehensive reinsurance program led by Hannover Re. Furthermore, the company gains financial flexibility through an Ecuador law that requires shareholders with stakes higher than 12% to assume additional financial responsibility in the event of insufficient shareholders' funds.
Nevertheless, AM Best's view of the company's capitalization is limited given the volume of its capital and the substantial amount of dividends paid in relation to net income in past years. ERM practices are considered appropriate given the company's comprehensive and appropriate risk framework.
AM Best considers the company's operating performance as strong, given its consistent positive technical performance during the last five years. Additionally, its retrocession profile provides revenue from ceding commissions and mitigates claim costs, as experienced in the 2016 earthquake. As of August 2020, the company posted a return-on-premium of 14%.
Positive rating actions could take place if the company can increase its capital base in a stable manner while achieving the strongest level of risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR). Negative rating actions could take place if the company's business growth or available surplus limits AM Best's view on capitalization, either through an abrupt business increase without capital contributions or a decline in equity either through payment of dividends or negative results. Negative rating actions could also take place if the company's operating performance deteriorates in a sustained manner due to constant losses from underwriting.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of AM 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.
Key insurance criteria reports utilized:
Evaluating Country Risk (Version Oct. 13, 2017)
Understanding Universal BCAR (Version Jun 11, 2020)
Catastrophe Analysis in AM Best Ratings (Version Oct. 13, 2017)
Available Capital & Holding Company Analysis (Version Oct. 13, 2017)
Scoring and Assessing Innovation (Mar 5, 2020)
View a general description of the policies and procedures used to determine credit ratings. For information on the meaning of ratings, structure, voting and the committee process for determining the ratings and monitoring activities, please refer to Guide to Best's Credit Ratings.
Previous Rating Date: Not Rated.
Date Range of Financial Data Used: Dec. 31, 2014-Aug. 31, 2020.
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