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FOR IMMEDIATE RELEASE
MEXICO CITY - AUGUST 26, 2016 03:38 PM (EDT)
A.M. Best has downgraded the financial strength rating to B++ (Good) from A- (Excellent) and the issuer credit ratings to “bbb” from “a-” of Istmo Compañía de Reaseguros, Inc. (Istmo Re) (Panama City, Panama), Aseguradora del Istmo, S.A. (ADISAP) (Panama City, Panama) and Liffey Reinsurance Company Limited (Liffey Re) (Dublin, Ireland). Additionally, A.M. Best has placed the ratings under review with negative implications.
The rating downgrades of Istmo Re reflect the company’s deterioration in financial flexibility derived from increasing financial leverage, limited growth prospects and a downward trend in operating performance, reaching negative levels at year-end 2015. The rating downgrades of ADISAP and Liffey Re mirror the actions taken on their parent company, Istmo Re, given their integration and strategic view for the group. Partially mitigating the previous negative rating drivers, the companies’ risk-adjusted capitalization remains strong.
The under review with negative implications status reflects the still-developing actions being executed by the group in order to diminish its financial leverage.
As of March 2016, Istmo Re’s financial leverage and interest coverage ratios continued its trend toward levels non-supportive of the previous ratings. For the past three years, there has been a constant reduction of the earnings before interest, taxes, depreciation and amortization to interest payment coverage, until it finally reached negative values at year-end 2015. Istmo Re’s operating performance has weakened, and its combined ratio deteriorated to above 100% in 2015. A.M. Best expects this indicator to continue above that level at year-end 2016, given the soft market conditions for reinsurance in the region and limited opportunities for premium growth in some of its main markets.
Istmo Re’s risk-adjusted capitalization remains strong but continues to experience pressure given the burden from its financial leverage and negative bottom-line results expected at year-end 2016.
Negative rating actions could result if the company continues to increase its financial leverage ratio or if operating performance continues to deteriorate to levels that affect A.M. Best’s assessment of risk-adjusted capitalization. Positive rating actions are not expected in the midterm; however, A.M. Best’s view of the ratings could become favorable if there are improvements in operating performance and financial flexibility while maintaining sound risk-adjusted capitalization.
ADISAP, the insurance operation of Istmo Re in Panama, maintained a profitable business in 2015, succeeding in its diversification into other segments but focusing mainly on surety products. At year-end 2015, the company increased its bottom-line results by 19.7% in comparison with the previous year, evidence of the company’s good underwriting performance, which A.M. Best expects to continue in 2016. Nonetheless, the conditions in the market are challenging as the Panama surety market has contracted 18% on a year-to-year basis as of June 2016, reflecting the slowdown of the economy in Panama.
Positive rating actions could result if ADISAP continues to improve its performance and diversification of its business portfolio while maintaining strong capitalization metrics. Negative rating actions could occur if the company’s capital is eroded to levels non-supportive of the current ratings or if there is sustained deterioration of its operating performance.
The rating downgrades and the under review with negative implications status of Liffey Re reflect the full dependence of the company on Istmo Re’s business as its captive retrocessionaire and deterioration in operating performance. Liffey Re’s ratings will move in tandem with those taken on Istmo Re.
A.M. Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.
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.
Key insurance criteria reports utilized:
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